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CurAlea Associates LLC is an independent risk and due diligence advisory firm focused on hedge funds and family offices.

Monday, June 2, 2014

May 2014 - Monthly Market Commentary

May saw near record low volatility across all major asset classes.  Global equity markets continued their relentless climb, while bonds also rallied strongly, confounding many market participants.  With US stocks reaching new highs, the fall in the US 10 year bond yield below 2.5% led many traders to wonder if perhaps the bond market was pricing in an economic slowdown that the equity market was overlooking.  The rotation out of growth and small caps into value and large caps slowed and began to reverse by month end.  As has been the case for many months, the US April jobs report showed mixed trends, with 288,000 new jobs created, the unemployment rate falling 0.4% to 6.3% largely on the back of workforce exits, and the labor force participation rate falling to 62.8%.
Global M&A activity continued apace in May.  Notable deals announced in May included Bayer AG’s purchase of Merck’s consumer unit for $14.2 billion, Mondelez’s agreement to combine its coffee business with DE Master Blenders for $5 billion and a 49% stake in the combined entity, Encana’s $3.1 billion acquisition of Freeport McMoran’s Eagle Ford assets, Freeport’s acquisition of Apache Corp’s stakes in deep-water Gulf of Mexico projects for $1.4 billion, Valley National Bancorp’s $312 million purchase of Florida’s 1st United Bancorp, Hilshire Brand’s $4.3 billion offer for Pinnacle Foods, which was quickly followed by a $5.5 billion offer for Hilshire by JBS’ Pilgrim’s Pride and shortly thereafter by Tyson Foods’ $6.1 billion bid for Hilshire, Darden Restaurants’ sale of its Red Lobster chain to Golden Gate Capital for $2.1 billion, Abbot Laboratories’ $2.9 billion acquisition of CFR Pharmaceuticals, AT&T’s $49 billion purchase of DirecTV, Marathon Petroleum’s acquisition of Hess’ retail arm for $2.6 billion, Unilever’s $2.15 billion sale of its Ragu and Bertolli brands to Japan’s Mizkan Group, Koch Industries’ $2.1 billion purchase of PetroLogistics, Nestle’s $1.4 billion purchase of rights to five skin care products from Valeant Pharmaceuticals, Apple’s $3 billion acquisition of Beats Electronics, and Steve Ballmer’s $2 billion purchase of the LA Clippers.  Two large potential cross border deals that unraveled in May were Pfizer’s proposed acquisition of Astra Zeneca for over $100 billion and the $35 billion merger of Omnicom Group and Publicis Groupe.
Developed market equity markets mostly rose in May (see page 6), as Hong Kong (+4.8%), Spain (+4%), and Japan (+3.6%) led gains; the S&P 500 rose 2.3%.  US small caps continued their recent underperformance with the Russell 2000 up 0.8% (see page 3).  IT (+3.8%), Telecom (+3.4%), and Materials (+3%) were the best performing US sectors (see page 2), while Utilities (-1%), Financials (+1.4%) and Energy (+1.5%) were the worst performing.  Large cap growth (+3.1) outperformed large cap value (+1.5%) in May (see page 3).  Emerging Market equities were mostly higher in May (see page 7), with the biggest gains in Russia (+10.2%), India (+7.3%), and China (+4.7%) and losses in Thailand (-1.8%) and Brazil (-1.4%).  
In currencies, the USD Index strengthened 1.1% in May (see page 8).  Gains against the USD were led by the Canadian Dollar (+1.1%) and the Japanese Yen (+0.4%), while the Swedish Krona (-2.8%) and Euro (-1.7%) weakened.  The USD was mostly weaker against emerging market currencies with the biggest gains in the Russian Ruble (+2.1%), Mexican Peso (+1.7%), and the Indian Rupee (+1.7%); the Thai Baht (-1.3%) and Indonesian Rupiah (-0.9%) weakened against the USD.
US Treasuries rallied in May (see page 10).  10 year rates closed the month at 2.48%, down from 2.65% at April month end.  Investment grade and high yield credit spreads tightened in May (see page 11), while European sovereign spreads continued to grind lower (see page 12).
In commodities, the GSCI index was down slightly (-0.2%) in May (see page 9), with gains in Industrial Metals (+2.6%) and Energy (+1.4%) and losses in Agriculture (-8.1%), Precious Metals (-3.7%), and Livestock (-1.2%).  Within individual commodities, Feeder Cattle led gains (+5.1%), followed by Crude Oil (+3.7%), Copper (+3.5%), and Cocoa (+3.1%); Coffee (-13.8%), Wheat (-13.1%), Corn (-1.3%), and Cotton (-8.5%) weakened; Gold fell 3.9%.
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