With one day to go before another month comes to a conclusion; the major developed equity markets in Europe, the US, and the UK look like finishing the month approximately where they started them. Bond investors have seen yields rise in May, causing some nervousness in equity markets, but as the month has worn on bond prices stabilized, yields retreated and equities regained some poise. The Vix, or fear and greed gauges it is affectionately known, started the month in what would be considered greed territory, and aside from the odd spike during the month likewise remains close to the bottom of its trading range.
The topics that seem to dominate the headlines in the past months continued to do so in the month of May, that of Greece and US interest rates. Greece persists in stumbling along with no money, in a viscous circle of having to borrow to pay back what it has already borrowed. Eventually a solution needs to be found that allows Greece to default, however this event is unlikely to ultimately mean the expulsion of Greece from the euro, in our opinion.
If there is one economy in Europe that many feared was heading the same way as Greece a couple of years ago was Spain. There does seem to be quite a turn around as economic data released on Thursday as that economy reported a year on year growth rate for the first quarter of 2.7%, along with retail sales growth year on year in April of 4%.
The release of the latest ECB financial stability report, they highlighted that in their view a sharp selloff in financial markets is the biggest risk to the bloc’s financial stability. It begs the question, which would come first a derailment of the global economy leading to a crash in financial markets, or a crash in financial markets derailing the global economy? This rather feels a little like the chicken and egg question. Either way it goes to highlight that central bankers are still firmly of the view that they want market participants to feel they have the support of central banks.
We often point out at this time, the summer months can be a volatile time for capital markets; a lack of liquidity can often be a factor. June was the month many economists started the year expecting to see the first US rate rise in 7 years, that now looks highly unlikely.
One gets the feeling the headlines that have dominated the previous months will continue to dominate the coming months. Equities have performed in a world of low rates, low growth and low inflation, for now that appears to remain in place. These rises have seen bouts of volatility testing everyone’s nerves particularly after such a long run in equity prices. The crash often comes when everyone least expects it that currently does not feel the case.