Global markets lost over $4 trillion in equity value in the month of May. Investors will be rejoicing the end of May, as many markets record their worst performance in over six months. Asian stock markets were some of the worst performers, recording some of the biggest monthly drops since the GFC in October 2008.
US stock markets fell modestly overnight, ruling off the worst month since September, with investor sentiment continuing to weigh as the eurozone debt crisis worsens. The month of May was terrible for investors with the Dow Jones and S&P 500 indexes plunging -6.2% and the tech-heavy Nasdaq plummeting -7.2% for its worst monthly decline in 2 years. In the broader markets the falls were led by growth sensitive sectors including Materials, Energy and Technology, though the Financials stocks saw some bargain hunting as fund managers did their end-of-month rebalancing.
The Volatility Index (or Fear Gauge) has risen 47% in May, which highlights investor fears over the worsening euro zone debt crisis and the concerns over the impact of slowing global growth.
Commodity prices fell again overnight as the euro dollar is at 23-month lows against the US dollar, but the US dollar weakened sharply against the yen – a sign that investors are looking for safe havens. Crude-oil is down -17% for the month, its worst performance since December 2008, while the Gold price has fallen -6.8% in May and is trading at 10-month lows. Copper has also suffered and was down -12.5% for the month and is trading at 6-month lows.
European stock markets ended May with the biggest monthly loss since August 2011. The Stoxx Europe 600 index dropped -0.5%, and for the month the index lost -7%. Across the region trader sentiment has been weighed down by the ongoing eurozone banking system crisis. These problems have prompted European Union leaders to investigate solutions to prevent similar crises in the future, and the European Commission has called for the creation of a banking union, which was has been backed by European Central Bank President Mario Draghi. There have also been suggestions that the EFSF be used to bail out failing banks. Markets across the region have been battered in May, with Germany down -7.3%, London’s FTSE 100 down -7.8% and the French market down -6.2%.
Asian stock markets had a terrible month, with the benchmark regional gauge the MSCI Asia Pacific Index sliding another -0.6% yesterday, and recording its biggest monthly drop since the GFC in October 2008, down -10% as the European debt crisis threatens to spill over from Greece and Spain to the other PIIGS economies. According to Bloomberg stocks in the Asian Pacific Index benchmark are valued at 11.6 times estimated earnings on average, compared with 12.5 times for the S&P 500 and 10 times for the Euro Stoxx 600.
The Chinese market finished the month in the red and was down a modest -1% for the month of May, as recent Chinese data has shown growth is slowing in the world’s second-biggest economy and amid concern European debt crisis is worsening. The Hong Kong market has been slammed in May, down -11.6%. Japanese stocks have also suffered, down -10% for the month.
In our market the defensive sectors continue to outperform, with Telstra, gambling and health-care stocks holding ground, as investors seek out stocks that can deliver consistent yield in this low rate environment. The materials sector continues to underperform on the back of continued lower commodity prices. The banks are under selling pressure in sympathy with their global counterparts, but appear to have found some short-term support after having been sold down significantly since their April peaks.
The Aussie market has seen continued selling pressure this week, holding below its 50- and 200-day moving averages, and hovering around the key 4280 level. On the S&P/ASX 200 the 4180 level will now be a crucial resistance level and the 4080 level is again a pivotal level for the week. Stock prices continue to be under pressure, but appear to be finding some short- term support, with the banks and the materials and energy sectors holding above the lows of the week.
So what’s in store for investors in June? Typically we see some support coming into the markets in the first few trading sessions of the month, however traders are holding their breath as they prepare for tonight’s US Non-Farm Payrolls employment report. European investors will be looking to the Greek elections scheduled for June 17 and for some resolution for the Spanish banking system recapitalisation program. In Australia we will be getting the RBA rate decision next week, which is expected to be a 25 basis point cut.
Investors should be looking to protect their capital, and can look to reduce their risk in any investments for the near-term by using options and warrants strategies. Our clients had another successful hedge trade in their NAB bank positions this week, using MINI warrants. We discussed this type of strategy, in the article on Hedging/Shorting with Limited Risk Using MINIs. The D2MX Financial Advisory Services team can help with these trades. Call me on 1300 610 024 for further information. Options remain an excellent form of insurance and speculation, but volatility has risen recently.
Remain attuned to the news from overseas, particularly from the eurozone and China in relation to easing policies, and the US, as the US markets test their 200-day moving averages. Monitor the performance of Greece, Spain, China and the US dollar for a guide to the future direction of commodities and equities prices.
The S&P/ASX 200 index is currently trading at 4044 and is testing break-even levels for the year. Key levels for the index next week will be 3950 and 4200, with 4120 the key short term pivot level.
By Michael Hevern
DMX Trading Desk
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This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.
