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Wednesday, June 1, 2016

May 2016 - Monthly Market Commentary

May was a mixed month for global risk assets.  Developed market equities were mostly higher, emerging market equities were mixed, the US dollar strengthened, oil continued its rebound, while other commodities were mixed, credit spreads were little changed, and the US yield curve flattened.  In the minutes from its April meeting, the Federal Reserve indicated that an interest rate increase was a distinct possibility in June, surprising many investors who had assumed that a June rate hike was off the table.  On the second to last trading day of May, Chairwoman Yellen suggested that a rate increase would be appropriate “probably in the coming months”.  The US job report showed 160,000 jobs were added in April, while the unemployment rate was steady at 5% and the labor force participation rate fell from 63% to 62.8%. 
Notable corporate transactions announced in May included the $1.9 billion acquisition of Weyerhauser’s pulp business by International Paper, the $3.8 billion purchase of Air Products & Chemicals’ performance-materials division by Evonik, JAB Holding’s $1.35 billion acquisition of Krispy Kreme Doughnuts, Nissan’s $2.2 billion purchase of a 34% stake in Mitsubishi Motors, Apple’s $1 billion investment in Didi Chuxing Technology, Pfizer’s $5.2 billion acquisition of Anacor Pharmaceuticals, Range Resources' $3.3 billion purchase of Memorial Resource Development, the $13 billion merger of FMC Technologies and Technip, the $3.4 billion acquisition of American Capital by Ares Capital, the $8.5 billion spin off of Hewlett Packard Enterprises’ technology services business and subsequent merger with Computer Sciences, Great Plains Energy’s $8.6 billion purchase of Wester Energy, and Jazz Pharmaceuticals’ $1.5 billion acquisition of Celator Pharmaceuticals.
Developed market equity markets were mostly higher in May (see page 8) led by Australia (+2.8%), France (+2.7%), and Japan (+2.6%).  US small caps outperformed large caps, with the Russell 2000 up 2.3% and the S&P 500 up 1.8% (see page 2).  IT (+5.6%), Health Care (+2.2%), and Financials (+2.0%), were the best performing sectors in May, while Energy (-0.6%), Industrials (-0.5%), and Materials (-0.3%) were the worst performing (see page 2).  Large cap value (+1.6%) underperformed large cap growth (+1.9%) in May (see page 3).  Emerging Market equities were mixed in May (see page 9), with the biggest gains in the Philippines (+4.2%), India (+3.3%), and Taiwan (+2.9%); Brazil (-9.9%), Russia (-4.0%), and Malaysia (-2.1%) were the worst performing. 
In currencies, the USD Index gained 3% in May (see page 10).  The weakest developed market currencies against the USD were the Australian Dollar (-4.9%), Canadian Dollar (-4.1%), and Japanese Yen (-4.0%).  The USD was also stronger against emerging market currencies with the biggest gains against the South African Rand (-9.4%), Mexican Peso (-7%), and Turkish Lira (-5.2%).
The US Treasury yield curve flattened in May (see page 12) as yields at the shorter end of the curve increased.  10 year rates closed the month at 1.83%, unchanged from April month end.  Investment grade and high yield credit spreads were little changed in May (see page 13).
In commodities, the GSCI index was up 2.2% in May (see page 11), with gains in Energy (+4.6%), Livestock (+3.2%), and Agriculture (+1.3%), and losses in Industrial Metals (-7.1%) and Precious Metals (-6.3%).  Within individual commodities, Sugar (+7.2%), Heating Oil (+7.2%), and Live Cattle (+5.7%) saw the biggest gains, while Palladium, (-12.9%), Silver (-10.2%), and Platinum (-9.1%) saw the biggest losses.  Gold was down 5.8% in May.

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