VIDEO: Market Snapshot May 2021
Our Market Snapshot provides an overview of key events that influenced financial markets over the course of May 2021.
Global equity markets were positive in May amid signs of a broad-based economic recovery, with the Organization for Economic Cooperation and Development reporting that the global economy is expected to expand 5.8% in 2021 and 4.4% in 2022. Increased fiscal spending in the US helped support sentiment, largely offsetting concern over the disparity of vaccination rollouts across major developed economies, as the number of new infections continues to rise. On the local front, equity markets recorded positive gains in May in line with global peers, however, currency strength weighed on non-rand investor returns.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 1.6% for the month. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index delivering 2.3% and the MSCI World Index returning 1.5%. The Bloomberg Barclays Global Aggregate Bond Index (US$) returned 0.9%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 1.3%.
The spot price of Brent crude oil closed May 3.1% higher from the previous month at around US$69 per barrel. Commodity prices were mixed: the gold price gained 7.0% on inflation fears and copper was up 2.1%, but platinum lost 1.5%, aluminium was down1.7% and palladium fell 4.9% for the month.
In the US, President Biden announced a $6 trillion budget plan to run over the next decade that would see increased spending on infrastructure and education. If approved, the plan will likely take the nation to its highest sustained levels of federal spending since WWII. Despite a number of new tax increases, the budget proposal is expected to run a $1.8 trillion federal government deficit.
Meanwhile, the annual inflation rate in the US soared to 4.2% in April from 2.6% a month earlier, well above market forecasts of a 3.6% increase and marking the highest reading since September 2008. The surge, however, was largely on the back of a base effect following sharp declines in economic activity at the start of the pandemic, which saw the inflation rate decline to 0.3% in April 2020. The Federal Reserve reiterated this notion, stating that Personal Consumption Expenditure (PCE) inflation would move above 2% due to very low readings from early in the pandemic and transitory effects.
In other news, investors welcomed a string of positive data after all major PMI indicators reached new records in May: manufacturing PMI jumped to 62.1, beating market forecasts 60.2; Non-Manufacturing PMI increased to 64 from 62.7 in April, while Services PMI jumped to 70.1 from 64.7 in the previous month, well above market expectations of 64.5.
Equities closed the month broadly higher, with the S&P 500 returning 0.7%, the Dow Jones Industrial 30 posting 2.2%, and the technology-heavy Nasdaq 100 closing the month 1.2% lower (all in US$).
President Ramaphosa announced the reintroduction of a national level 2 lockdown amid a surge in new Covid-19 infections, stressing that the vaccination programme needs to be stepped up dramatically to meet the government’s vaccination target of 16.6 million people by November. As at the end of May, just under 1 million South Africans had received the vaccine following the commencement of Phase 2 of the rollout earlier in the month.
Meanwhile, the South African Reserve Bank kept its benchmark interest rate unchanged at a record low of 3.5%, warning that slow progress on vaccinations, limited energy supply and policy uncertainty continue to pose downside risks to the economic outlook. The central bank raised its growth forecasts for 2021 from 3.8% to 4.2% but lowered its projections for 2022 and 2023 to 2.3% and 2.4% respectively. Inflation is expected to increase to 4.2% in 2021, with two 25bps interest rate hikes forecast for 2021, one in Q2 and the other in Q4.
Global credit rating agencies S&P and Fitch reaffirmed South Africa’s long-term sovereign credit rating at BB-, citing an upturn in near-term economic performance and improved public finances as contributing factors. Moody’s, however, postponed its review on South Africa’s credit rating, which currently sits at Ba2 with a negative outlook.
Turning to economic indicators, inflation rose to 4.4% y/y in April, well above the 3.2% increase posted in March and edging closer to the SARB’s midpoint target range of 3-6%. Retail sales unexpectedly declined 3.7% m/m in April from the previous month’s high of 6.9%. Mining production was the standout performer after increasing 21.3% y/y in March, significantly beating market expectations of a 3.9% rise and marking the sharpest expansion since March of 2015.
The FTSE/JSE ALSI returned 1.6% in May. The standout performer was Financials with 9.3%. Listed Property (FTSE/JSE All Property Index) returned -3.2%, Resources -1.2% and Industrials 1.6%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.9%. SA bonds were positive at 3.7% (as measured by the FTSE/JSE All Bond Index), SA inflation-linked bonds returned 3.4% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand appreciated notably against the major currencies for the month, gaining 5.4% against the US dollar, 2.9% versus the pound sterling and 3.9% against the euro.
UK AND EUROPE
In the UK, the Bank of England kept its monetary policy unchanged, however, announced that it would slow down its purchase of British government bonds from £4.4 billion per week to £3.4 billion, as the government begins to wind down its emergency support programme. In other news, the UK economy contracted by 1.5% q/q in Q1 2021, broadly in line with market expectations. Retail sales surged 9.2% m/m in April, beating market expectations of a 4.5% rise and marking the 3rd highest growth rate on record, as the easing of lockdown restrictions continued to sustain economic activity within the region. Annual inflation increased 1.5% y/y in April, well above the 0.7% posted in March and marginally outpacing market forecasts of a 1.4% increase. Meanwhile, manufacturing PMI surprised on the upside after preliminary estimates showed a sharp increase to 66.1 in May, well above market forecasts of 60.5 and pointing to the largest growth in factory activity on record.
Elsewhere, the Euro Area economy entered a double-dip recession after contracting 0.6% q/q in Q1 2021, as larger constituent countries in the region again imposed strict lockdown measures to help curb the spread of the coronavirus pandemic. Among the bloc's largest economies, Germany, Italy and Spain fell into contraction territory, while France's economy returned to growth after the government delayed the implementation of lockdown. Meanwhile, European Central Bank (ECB) President Christine Lagarde surprised investors after announcing that the ECB was not considering winding down its €1.85 trillion Pandemic Emergency Purchase Programme, reiterating that it will continue to run until at least March 2022.
For the month, the UK’s FTSE 100 returned 3.8%, the German DAX 3.5% and France’s CAC 40 5.7% (in US$).
CHINA AND JAPAN
In China, risk sentiment improved after delegates from China and the United States met for the first time under the Biden administration, with both parties agreeing to the importance of bilateral trade. Traders also welcomed the news that a US court had removed Xiaomi’s designation as a Communist Chinese Military Company, lifting all restrictions on Americans buying the stock. On the pandemic front, a surge of new infections in the south of the country saw authorities implementing lockdown restrictions in Guangdong province. Turning to economic indicators, China's annual inflation rate jumped to 0.9% in April from 0.4% a month earlier. The People's Bank of China left its benchmark interest rates steady for the thirteenth consecutive month, while unemployment continued its downward trajectory, easing to 5.1% in April from 5.3% in the previous month.
In Japan, preliminary GDP figures showed that the Japanese economy had shrunk 1.3% q/q in Q1 2021 amid a resurgence of Covid-19 cases and slow vaccine rollout The Bank of Japan reassured investors that the economy would likely recover, although the level of economic activity is expected to be lower over the short term than before the start of the pandemic. Retail sales declined 4.5% m/m in April from 1.2% in March, while services PMI remained in contraction territory after declining to 46.5 in May from 49.5 in April. In other news, inflation declined for the seventh consecutive month, dropping to -0.4% y/y in April after a 0.2% decline in March. On the pandemic front, the Japanese government extended its Covid-19 state of emergency in Tokyo, Osaka and seven other prefectures, but insisted that the Olympics would go ahead as scheduled.
Japan’s Nikkei 225 delivered 0.1%, the MSCI China 0.8% and Hong Kong’s Hang Seng 2.1% (in US$).