Monthly Economic Update May 2012
Tension in Europe set a decidedly negative tone for global markets in May. Disastrous Greek elections on May 6th kicked off fears of a Greek exit from the euro zone and the potential for contagion and fallout to other fragile European governments and their banks. Following fruitless negotiations, fragmented political parties in Greece failed to agree on a governing coalition. For now, the country is left in political limbo until new elections on June 17th. These elections, seen effectively as a Greek referendum on whether to stay with the euro and accept associated bailout terms, have the potential for highly polar, and extremely consequential, outcomes.
Although Europe dominated headlines, investor attention was also focused on evidence of slower domestic and global growth. U.S. economic growth in the first quarter was revised down to 1.9%. Recent regional factory surveys suggest manufacturing activity is slowing and labor market statistics have deteriorated markedly over the past three months. It now appears clear, as many postulated, that early-year employment gains were the result of unseasonably mild weather conditions rather than the economy shifting to a higher gear.
U.S. and European concerns were accompanied by challenges to key emerging market economies as well.
China, still at risk of a hard landing, is looking for ways to boost growth. Brazil, the slowest growing BRIC country, continued to implement aggressive expansionary monetary and fiscal policies. And India, faced with the unfortunate confluence of both flagging growth and high inflation, has limited policy options. Meanwhile, the Indian rupee is Asiaâ€™s worst performing currency and the countryâ€™s problems are growing. In response to the tenuous global backdrop, investors shunned risk in favor of safe havens. The U.S. dollar gained strength, Treasury yields hit all time record lows, and world stock markets gave up about $3.9 trillion during the month.
Mayâ€™s Economic Releases
The S&P 500 index lost 6.0% for the month and is now up 5.2% for the year. Developed international equity markets, as defined by the MSCI EAFE index, were down 11.5% in May and the MSCI Emerging Markets index gave up 11.2%. Year-to-date, international developed markets have lost 3.8% and emerging markets are now flat.
In the fixed income market, the Barclays US Aggregate index gained 0.9% for the month and the yield on the 10-year U.S. Treasury bond fell 36 basis points to end with a yield of 1.59% – a record low dating back to at least 1798! For the year, the Barclays U.S. Aggregate is up 2.3%. Credit spreads widened fairly significantly during the month on growth concerns and the debt crisis in Europe. The Barclays High Yield index lost 1.3% in the process. International bonds were also challenged in May, largely due to U.S. dollar strength, losing 2.3% for the period.
The Dow Jones UBS Commodity index lost 9.1% in May while the Dow Jones U.S. Real Estate index gave up 4.2%.
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