BNP AM

The official blog of BNP Paribas Asset Management

Developments in financial markets in May 2017

Equity markets extended their rally in May

Not only did the old market saying (which, by the way, is a little simplistic and rather poorly backed) “sell in May and go away” not prove true, but equities gained 1.9% (MSCI AC World index in US dollars) over the month of May.

Equity markets extended their rally in May

Not only did the old market saying (which, by the way, is a little simplistic and rather poorly backed) “sell in May and go away” not prove true, but equities gained 1.9% (MSCI AC World index in US dollars) over the month of May.

Emerging equities continued to outperform developed markets (with a 2.8% gain for the MSCI Emerging in US dollars), driven by strength in Asian markets.

Exhibit 1: Both developed and emerging equities extended their rally in May (performance as of 31 May 2017) with emerging equities outperforming their developed peers

Index 100 = 1 January 2016

financial markets

Source: Bloomberg, BNP Paribas Asset Management, as of 31/05/17

Temporary nervousness

Nevertheless, markets were on edge for most of the month, as reflected in a spike in the VIX index (Chicago Board Options Exchange Volatility Index) which measures volatility on S&P 500 options to close to its 2017 highs (the VIX reached 15.6% on 17 May before falling back to end the month below 10%).

Exhibit 2: Performance of a selection of asset classes in May 2017 (%)financial markets

Source: Reuters Datastream, BNP Paribas Asset Management, as of 31/05/17

Exhibit 3: Performance of a selection of asset classes since the start of 2017 (%)

financial markets

Source: Reuters Datastream, BNP Paribas Asset Management, as of 31/05/17

A rich month for politics, in every sense of the term

During the month of May major equity markets were pulled in different directions by a number of factors. The influence exercised by political events was changeable - initially rather reassuring for investors (Emmanuel Macron’s victory after the second round of the French presidential election on 7 May), then uncertain (UK opinion polls in the run-up to 8 June general elections and an increased likelihood of early elections in Italy) or downright worrisome.

In the US, the firing of FBI Director James Comey and the circumstances surrounding it, have, some observers believe, increased the likelihood that the president will be impeached. This overreaction was the cause of the 17 May dip in equity markets (-1.8% by the S&P 500).

Subsequently, it became clear that impeachment is unlikely, given that it would be, above all, a political act requiring the assent of the Republicans who control both Congress and the White House.

Other political events, whose implications are harder for investors to fathom, had a rather short-lived impact on the markets. These events included the latest revelations on the financial scandal in Brazil, which is threatening President Temer and caused a drop of 9% in the Bovespa index and 7% in the real on 18 May, followed by a steady rally.

Economy: is perception really reality?

On the macroeconomic front, economic surprise indices continued to decline, particularly in the United States, where they moved back into negative territory, suggesting that economic data has mostly disappointed in recent weeks. Although conditions in the global economy do not appear to have worsened significantly, the slippage in momentum fed doubts as to how sustainable economic growth will be.

Against this backdrop, equity investors were less afraid that central banks would be moving rapidly to wind down their highly accommodative monetary policies.

Exhibit 4: Surprising to the downside - economic surprise indices indicate that economic data has been below expectations in recent weeks

financial markets

Source: Bloomberg, BNP Paribas Asset Management, as of 31/05/17

A strong earnings season

On the corporate front, momentum remained favourable, with solid quarterly results leading analysts to maintain their positive views on the outlook for earnings.

What are markets telling us?

Current concerns do not appear to be priced fully into the main equity markets. Political risk and growth concerns have dominated discussions in the US but have not kept US indices from outperforming their European peers (+1.2% by the S&P 500 vs. -0.1% by the EuroSTOXX 50). Relative performances appear to have been driven mainly by currency markets. European indices were hit by the 3.1% gain in  the euro vs. the dollar, while the Tokyo market benefited from a weaker yen in the first half of the month to generate a 2.4% gain on the month (as measured by the Nikkei 225). Meanwhile, the 4.4% gain in the FTSE-100 should be seen against the backdrop of sterling’s 3.4% decline against the euro.

Exhibit 5: Sectorial performance of the MSCI EMU index in May 2017 financial markets

Source: Reuters Datastream, BNP Paribas Asset Management, as of 31/05/17

Exhibit 6: Sectorial performance of the S&P500 index in May 2017

financial markets

Source: Reuters Datastream, BNP Paribas Asset Management, as of 31/05/17

Equity gains in May, which brought the year-to-date increase in the MSCI AC World index to almost 10% (in US dollars), might suggest that optimism has carried the day. But the simultaneous outperformance of defensive sectors (in Europe and Japan in particular) is sending the opposite message. We feel this configuration fully reflects the tentativeness that has characterised trading in recent weeks.


Written on 2 June 2017

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