US:
US stocks rose with S&P 500 ending above the 1,600 level for the first time ever and the Dow Jones closing above 15,000 as non-farm payrolls increased by 165,000 jobs in April and the unemployment rate fell to a four-year low of 7.5%. The consumer price index fell by 0.4% in April following a 0.2% drop in March; a soft inflation reading means that the Federal Reserve has room to continue the aggressive monetary policy.
But indices shed some gains towards the latter half of May as investors worried that the Federal Reserve will soon scale back its stimulus program as the economy improves. Losses came after the Fed Reserve Chairman, in a speech to the Congress, said that a premature withdrawal of quantitative easing would put the economic recovery at risk. But he added that the Fed could “step down” the pace of asset purchases in the next few meetings if the labour market continues to improve, thus confusing participants. Further, the FOMC meeting minutes showed that some officials were ready to start limiting the Fed’s quantitative easing as early as next month.
Before the Fed Chief’s comments, Federal Reserve Bank of Philadelphia President Charles Plosser had said that he favours scaling back the central bank’s pace of stimulus as early as the next FOMC meeting. Among other negative news, US GDP increased at an annual rate of 2.4% in the first quarter compared to the previously reported 2.5% growth.
Europe:
European markets gained for May as the European Central Bank reduced the main refinancing rate by 25 bps to a record low of 0.50%. The previous change in euro area interest rates was a quarter-point reduction in July 2012. Further, the ECB President said that policy makers are ready to cut interest rates again if needed. Also, the political situation stabilized in Italy after a new government was named under the leadership of Enrico Letta, ending months of uncertainty. Positive sentiment prevailed after the Bank of England raised its growth forecast for the UK and ECB Executive Board member Joerg Asmussen said that expansive monetary policy will continue for as long as necessary.
But in the latter half of the month, markets reduced gains on concerns that the Federal Reserve may scale down the stimulus program in the coming months. A reduction in the OECD's outlook for Euro zone GDP was also negative; it forecast the region’s economy to contract 0.6% in 2013 compared to the prior estimate of 0.1% drop. Further, Euro zone unemployment rose to a record 12.2% in April and the region’s GDP fell 0.2% in the first quarter after having contracted 0.6% in the final three months of 2012. Weakness in China’s manufacturing sector, which contracted for the first time in seven months in May, also affected markets here.
Asia:
Nikkei had breached and the 15,000 mark in May, the first time since December 2007, as sentiment was buoyed by a weaker yen. It surged nearly 7% after the yen breached the 100 yen to the US dollar mark for the first time since April 2009. Markets were also buoyed by an encouraging GDP report; Japan's gross domestic product expanded 0.9% in the first quarter of 2013 following a flat reading in the previous three months.
But the index gave up all its gains and ended lower for May. It had fallen over 7% on May 23 as yields on the benchmark 10-year Japanese government bonds jumped to as high as 1.0%, its highest level in over a year, prompting the Bank of Japan to announce a 2 trillion yen fund-supplying operation to curb volatility.
Shanghai Composite gained on hopes that the government will take supportive measures in the near term to stabilize the economy. Upbeat trade data also helped; Chinese exports increased 14.7% YoY in April while imports rose 16.8%, both higher than anticipated. But the upside was capped after the Premier said the economy is facing relatively strong downward pressure.
