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Monday, July 1, 2019

May 2019 - Monthly Market Commentary

May was a difficult month for global risk assets as the US/China trade dispute deepened, and the US announced new tariffs on Mexico (to begin to take effect on June 10), in an attempt to force Mexico to slow the flow of migrants. Global equities fell sharply, led by losses in China, credit spreads widened, the US yield curve inverted further, the US dollar strengthened, and the oil complex sold off. The Federal Reserve made no change to interest rates at its May 1 meeting, and indicated that slowing inflation could become a concern. Minutes from the meeting stated that “a patient approach” to adjusting the federal funds rate would “likely remain appropriate for some time”. US retail sales unexpectedly fell in April, and industrial production dropped. In Germany, the latest reading on factory orders showed a below forecast increase of 0.6%, and business sentiment dropped in May; yields on the German 10 year bond fell to a record low of -0.21%. In China, growth in both factory output and retail sales decelerated in April, while the Purchasing Managers’ Index fell below 50 in May, indicating a contraction from the prior month; in an effort to stimulate the slowing economy, the People’s Bank of China reduced the reserve requirement for regional banks. In Japan, meanwhile, first quarter GDP grew at a faster than expected rate of 2.1%, boosted by falling imports and a strong increase in public investment. The US jobs report showed that 263,000 jobs were added in April (the 103d consecutive month of job creation), the unemployment rate fell to 3.6% (a 50 year low), the labor force participation rate moved lower to 62.8%, and average hourly earnings rose 3.2% from a year earlier.

Notable corporate transactions announced in April included the $1.2 billion sale of Keebler and other brands by Kellogg to Ferrero, a $38 billion bidding war for Anadarko Petroleum by Chevron and Occidental culminating at month end with a $10 billion investment by Berkshire Hathaway in Occidental, the $4.4 billion purchase of Alliance Data’s Epsilon unit by Publicis, the $1.2 billion acquisition of Paragon Bioservices by Catalent, DSV’s $4.6 billion purchase of Panalpina, the $1.2 billion acquisition of Tranzact by Willis Towers Watson, the $3.6 billion purchase of Oryx by Stonepeak Infrastructure Partners, the $2.8 billion acquisition of DenizBank by Emirates NBD, the $750 million sale of Trilogy Education to 2U, the $8.6 billion purchase of a 90% stake in Transportadora Associada de Gas by a group led by Engie, the $850 million acquisition of Axoima by Deutsche Borse, the $1.2 billion acquisition of Wells Fargo’s retirement and trust unit to Principal Financial, the $1.7 billion purchase of Electronics for Imaging by Siris Capital, Waste Management’s $4.9 billion purchase of Advanced Disposal Services, Nippon Paint’s $2.7 billion acquisition of DuluxGroup, the $2.7 billion purchase of ConocoPhillips’ North Sea assets by Chrysaar, Canopy Growth’s $3.4 billion acquisition of Acreage Holdings, the $1.4 billion purchase of CapeOmega by Partners Group, the $1.4 billion purchase of JR Automation by Hitachi, and the $3.7 billion acquisition of Lord by Parker Hannifin.

Developed market equities rose in April (see page 8), with the biggest gains in Germany (+7%), France (+4.8%), and Spain (+4.4%). US small caps underperformed large caps, with the Russell 2000 up 3.4% and the Russell 1000 up 4% (see page 3). Financials (+9%), Communication Services (+6.5%), and IT (+6.4%) were the best performing sectors in April; Healthcare (-2.6%), Real Estate (-0.5%), and Energy (+0.1%) were the worst performing sectors (see page 2). Large cap value (+3.5%) underperformed large cap growth (+4.5%) in April (see page 3). Emerging market equities were mostly higher in April (see page 9), with the largest gains in Taiwan (+4.2%), Korea (+3.3%), and Mexico (+3.2%), and losses in Argentina (-7.9%).

In currencies, the USD Index was higher (+0.2%) in April (see page 10), with the biggest gains against the Swiss Franc (-2.3%), New Zealand Dollar (-1.9%), and Swedish Krona (-1.8%). Emerging market currencies were mixed, with the largest gains in the Mexican Peso (+2.6%), Russian Ruble (+1.8%), and South African Rand (+1.4%), and the largest losses in the Turkish Lira (-6.7%), Korean Won (-2.3%), and Malaysian Ringgit (-1.3%).

The US interest rate curve steepened, but remained somewhat inverted in April (see page 12). 10 year rates closed the month at 2.50%, up from 2.41% at March month end. US investment grade and high yield spreads tightened in April (see page 13).

In commodities, the GSCI index was up 2.8% in April (see page 11), with gains in Energy (+6.4%), and losses in Industrial Metals (-3.5%), Agriculture (-3.4%), Livestock (-2.6%), and Precious Metals (-0.8%). Within individual commodities, Gasoline (+11.6%), Brent Crude (+7.5%), and Crude Oil (+6.5) saw the biggest gains, while Wheat (-6.9%), Aluminum (-6.5%), and Soybeans (-4.6%) saw the biggest losses. Gold was down 0.8% for the month.

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