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Friday, June 1, 2018

May 2018 - Monthly Market Commentary

May was a very mixed month for global risk assets. Developed market equities were mixed, with the US small cap Russell 2000 index hitting an all-time high while southern European indices were down sharply, emerging market equities were also mixed with a very large spread between winners and losers, the USD strengthened, the US yield curve flattened, oil and gold moved lower, and credit spreads widened. The biggest macro news in May was the political uncertainty in Italy amid concern over a euroskeptic coalition government; this reignited concerns over the stability of the Eurozone and led to a sharp selloff in Italian sovereign debt and other related risk assets. Earlier in the month, the Federal Reserve kept rates unchanged and minutes from the meeting indicated a high likelihood of a June rate hike; towards month end, however, market expectations of four or more rate hikes in 2018 fell sharply from 45% to 10% on Itexit fears. The US job report showed that 164,000 non-farm jobs were added in April (the 91st consecutive month of job creation), the unemployment rate fell to 3.9%, the labor force participation rate fell slightly to 62.8%, and average hourly earnings rose 2.6% from a year earlier.

Notable corporate transactions announced in May included the $1 billion acquisition of Cisco’s service provider video software business by Permira, the $4.3 billion purchase of KLX by Boeing, the $2.1 billion acquisition of the electrical and automation business of Larsen & Toubro by Schneider Electric, the purchase of several children’s entertainment assets by Hasbro from Saban Entertainment for $522 million, Blackstone’s $7.6 billion purchase of Gramercy Property Trust, the $3 billion acquisition of ZPG by Silver Lake, the $10.5 billion acquisition of Williams Partners by Williams, the $5.4 billion purchase of Techem by a consortium led by Partners Group, Walmart’s $16 billion purchase of a 77% stake in Flipkart, the $500 million purchase of Tate’s Bake Shop by Mondelez, the $7.1 billion acquisition of Frutarom by IFF, the $3 billion purchase of Financial Engines by Hellman & Friedman, the $1.9 billion sale of a majority stake in Baidu’s financial services arm to TPG and Carlyle, Vodafone’s $23 billion purchase of assets in four European countries from Liberty Global, the $1.2 billion acquisition of Glassdoor by Recruit, the $1.6 billion acquisition of ARMO BioSciences by Eli Lilly, Paypal’s $2.2 billion purchase of iZettle, the $2 billion purchase of Abaxis by Zoetis, the $5 billion merger of Saudi British Bank and Alawwal Bank, the $11 billion acquisition of GE’s rail division by Wabtec, the $1.7 billion purchase of Magento Commerce by Adobe, the $1.9 billion purchase of Ipreo by IHS Markit, the $1.1 billion acquisition of PowerPlan by Roper Technologies, the $4.7 billion acquisition of MB Financial by Fifth Third Bancorp, Blackstone’s $3.7 billion purchase of LaSalle Hotel Properties, KKR’s $8 billion acquisition of BMC Software, and the $2 billion sale of Pret A Manger to JAB Holdings.

Developed market equities were mixed in May (see page 8), with the largest gains in Canada (+3.2%), UK (2.6%), and S&P 500 (+2.3%). The largest losses were in Italy (-9.7%), Spain (-6.1%), and Japan (-1.7%). US small caps outperformed large caps, with the Russell 2000 up 6.1% and the Russell 1000 up 2.6% (see page 3). IT (+7.4%), Energy (+3.0%), and Industrials (+3.0%) were the best performing sectors in May; Telecom (-2.3%), Consumer Staples (-1.5%), and Utilities (-1.1%) were the worst performing sectors (see page 2). Large cap growth (+4.4%) outperformed large cap value (+0.6%) in May (see page 3). Emerging market equities were mostly lower in May (see page 9), with losses in Argentina (-21.9%), Brazil (-10.7%), and Mexico (-8.0%); China (+1.8%) and Taiwan (+1.1%) were the best performing. 

In currencies, the USD Index was up 2.3% in May (see page 10). The Australian Dollar, Swiss Franc, and Japanese Yen were up +0.5% against the USD, while the worst performing currencies were the British Pound (-3.4%), Euro (-3.2%), and Norwegian Krone (-2.0%). Emerging market currencies were mostly lower against the USD, with the largest losses in the Turkish Lira (-10.3%), Mexican Peso (-6.0%), and Brazilian Real (-6.0%); the Russian Ruble (1.0%) was the best performing.

US interest rates flattened in May (see page 12). 10 year rates closed the month at 2.86%, down from 2.95% at April month end. Investment grade and high yield spreads widened in May (see page 13).

In commodities, the GSCI index was up 1.4% in May (see page 11), with gains in Livestock (+2.2%), Industrial Metals (+2.1%), Energy (+1.5%), and Agriculture (+1.3%), and losses in Precious Metals (-1.2%). Within individual commodities, Cotton (+11.3%), Sugar (+9.0%), and Nat Gas (+6.2%) saw the biggest gains, while Cocoa (-13.0%), Soybeans (-2.7%), and Crude Oil (-2.0%) saw the biggest losses. Gold was down 1.4% for the month.

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