Europe
It’s been a lacklustre end to a choppy month for European markets with the FTSE100 looking to eke out its fourth successive monthly gain, while European equities posted their third monthly gain in a row. It’s still been a wall of worry with concerns about weak manufacturing data from China, Japan, the UK and the US, weighing on sentiment, though recovering commodity prices and improving consumer spending patterns have helped maintain the prospect that we could be starting to see a little bit of a pickup in consumer confidence, and by definition consumer spending.
Economic data continues to come in mixed with German unemployment hitting a post-unification low of 6.1%, though retail sales slid 0.9% on the month. Italian unemployment on the other hand jumped sharply to 11.7%.
Mining stocks are the worst performers today slipping back despite a more positive week for metals prices last week than had been the case in the rest of May, with BHP (LON:BLT) and Antofagasta (LON:ANTO) on the slide.
Oil prices have also slipped back from their recent highs ahead of this week’s OPEC meeting dragging oil and gas stocks down with them.
Satellite communications group Inmarsat (LON:ISA) is also slipping back on speculation that it might well find itself relegated back to the FTSE 250 in the quarterly reshuffle which is due tomorrow.
On the company front Volkswagen (DE:VOWG_p) shares dropped sharply after reporting that pre-tax profit for Q1 declined nearly 20% year on year, as the fallout from the emissions testing scandal continues to make itself felt. Revenues also fell to €51bn and though profits came in slightly ahead of expectations the shares have slid back having risen over 25% since their February lows.
On the plus side at least the company returned to profit after last year’s eye watering loss, when they set aside €16.2bn to cover the costs of the diesel crisis. There were pockets of positivity with Audi cars enjoying a record quarter, while VW branded cars had a disappointing quarter. May be there’s something to be said for brand diversity, though the company retained a slightly downbeat outlook for the remainder of 2016 on some of its more mainstream models, with its China joint ventures also showing some signs of weakness. There was no confirmation on plans to invest €10bn in a battery factory to help boost the company’s position in the burgeoning electric cars market.
It is clear that automakers are continuing to feel the effects of the various problems facing the industry with respect to not only emission and fuel economy scandals, but also product recalls due to various safety issues from faulty airbags to seatbelts on Toyota (NYSE:TM) vehicles.
US
US markets opened slightly higher today after some fairly decent economic data showed that sentiment was improving in the consumer part of the US economy. Personal spending for April showed an increase of 1%, up from 0% in March and its highest level since August 2009. This was largely driven by an increase in energy spending, and followed on from a big increase in home sales data last week.
The big puzzle remains as to why retail sales and durable goods numbers continue to lag behind. Also on the plus side the Fed’s preferred inflation measure remained steady at 1.6%, with the question now being posed being what the catalyst would be to stop the Fed looking to raise interest rates at its June or July meeting. For an answer to that question you could start by looking at the manufacturing sector which continues to struggle with Chicago PMI following on from other regional surveys by contracting in May. If ISM manufacturing misses tomorrow it’s highly dubious that the Fed can hike in June.
Ultimately the Fed will have to weigh up the risks of hiking when there is so little evidence of a pickup in a sector that is one of the more highly waged and skilled parts of the US economy. June seems way too soon.
In company news Verizon (NYSE:VZ) has released the details of its latest wage deal with pay rise of 10% and the announcement of 1,400 new jobs. As wage growth inflation that’s a good start for a US economic recovery that has been stunted by a lack of decent wage growth.
FX
The pound and the US dollar have been the best performers in May, the greenback rising on renewed expectation that the US Federal Reserve could be on the verge of its second move on interest rates in seven months as recent hawkish rhetoric from various Fed policymakers has brought expectations forward to a possible summer rate rise.
The pound has also bounced back strongly posting its best month since October last year ahead of the UK referendum vote in just under four weeks’ time. Some of the rebound could well be an expectation that for all the heat being generated by both sides of the referendum campaign that voter reluctance to disrupt the status quo will trump everything else with a vote to stay in.
In a welcome respite for Japanese officials the Japanese yen has been amongst the biggest losers this month, helped in no small part by a more hawkish Federal Reserve, however it still remains one of the best performing currencies year to date after the Bank of Japan dented its credibility by cutting rates into negative territory a matter of days after insisting they wouldn’t.
Commodities
Since the multi-year lows of earlier this year crude oil prices have gone on their best run of monthly gains since 2010 rising four months in a row to $50 a barrel on an expectation that the supply and demand imbalances that have characterised the declines over the past two years could be starting to move back into the demand side of the equation.
Recent Canadian wildfires as well as production disruptions in Nigeria, Venezuela and Libya along with increasing demand has seen inventories star to show signs of declining in the past few weeks. With this week’s OPEC meeting due in a couple of days any further upside could well be difficult to sustain given the ongoing disagreements between the biggest oil producers, with Iran reluctant to cut back given that its production levels still remain below their 4m barrel a day peak.
Gold prices have given up all of their April gains, sliding back towards the $1,200 an ounce level on the back of a firmer US dollar and a rising expectation that a US rate rise could well be around the corner. This month’s decline isn’t that dissimilar to the decline seen in November last year, which, as it turned out predated the first US rate hike in 9 years a few weeks later in mid-December.
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