Although the price of iron ore retreated from its all-time high of $233 per tonne, resources stocks remained strong and the ASX 200 reached an all-time high on May 31st with gains of (+1.9%). That is eight months in a row that the index has posted positive capital gains
The Financials sector had a particularly strong month at +4.4%. The consumer discretionary and health sectors posted 3.5% capital gains over May.
However, we do not estimate that the index is significantly over-priced and market volatility has fallen almost back to average levels.
The S&P 500 experienced a short-lived pull back in May but returned to within a whisker of the all-time high. Gains in May were +0.5%.
Emerging markets were all but flat on the month. However, the German DAX posted a healthy gain of +1.9%. The Shanghai composite did even better at +4.9%.
Bonds and Interest Rates
The steepening of the US yield curve was halted in May and, indeed, 10-year treasury yields retreated a little towards the end of May.
The market chatter about the Fed moving to taper its bond buying program and short-term rate hikes had all but vanished towards the end of the month. Markets seem settled that ‘lower for longer’ remains the Fed’s view and most probably reality.
The RBA also kept rates on hold in May but upgraded its economic forecasts for the country. We think that the bank was just a tad slow to catch up with market views.
Bitcoin and other cryptos made repeated headlines throughout May but for all of the wrong reasons. Elon Musk, the CEO of Tesla and SpaceX, seems to playing to the crowd as he moved prices up and down by over 20% on single tweets. We find it hard to take cryptos seriously as a viable asset or currency. And the complex tax implications may come back to bite some ‘investors’ though we think ‘speculators’ is a more appropriate description.
The answer to the question, “How much of my portfolio should I allocate to cryptos?” perhaps should be, “About the same as your allocation to lottery tickets. Prudent investors should aim for modest, consistent returns!
Gold prices rose by 7.7% over May with iron ore, copper and oil prices following closely behind. Iron ore did retreat from $US 233 per tonne during May to just over $US 200 at the end of the month.
Our dollar, against the $US, lost a little ground. There is speculation that China may ‘do something’ about the price of iron after it reached $233 a tonne. It was less than half of that just a year ago. Since the $A is widely thought to be a commodity currency, its plight might worsen if, indeed, commodity prices push back. However, in the opposite direction, lax monetary policy in the US might send our dollar higher. Currency forecasting is very difficult at best – and even harder right now.
The unemployment rate fell again for April (the latest data) to 5.5% but 30,600 jobs were lost when +15,000 were expected. The numbers do bounce around quite a lot so we are not immediately perturbed by this outcome.
The Westpac and NAB confidence indexes all performed well indicating that the nation is quite comfortable with the way the pandemic and the economy are being managed.
The vaccination rate is certainly too low but there is currently little danger to our population as there is limited opportunity for locals to be infected from outside the country.
Morrison has ordered 25 million Moderna shots (which is based on the same technology as the Pfizer vaccine). He has also said that the over 50s who are hesitant about getting the AstraZeneca shot will be able to get Pfizer from October.
The fresh outbreak in Melbourne was met with a swift seven-day lockdown. This outcome might be frustrating for many but the alternative seems a lot worse. We suspect there will be occasional such responses around the country over at least the remained of 2021. Regular international travel seems unlikely before the middle of next year.
China’s retail sales missed expectations at 17.7% (24% was expected) but when big numbers are expected – because of the influence of lock-downs a year ago – the margin of error has to be given more latitude. The industrial output and fixed asset investment accorded with expectations at about 10%.
The China manufacturing PMI came in at 51.0 against an expected 51.1; the services index variant came in at 55.2 against an expected 54.9. Both statistics confirm that the Chinese economy continues to flourish.
President Biden seems to be in control of the vaccination programme and he is certainly pushing hard for fiscal stimulus. There is some concern that he is pushing too hard on that front and problems may occur further down the line. Wanting to run the budget deficit at one trillion dollars a year for the next decade does seem a little excessive.
The $6 trillion budget he handed down at the end of May actually included the previously announced American Jobs Plan and the American Families plan (totalling about $4 trillion but is still under negotiation). Only $300 billion of the new part of the $6 trillion is proposed to be spent this year!
The jobs data, which were a big miss for April were even worse than the headline when the revision to the previous month is taken into account. The March data were revised down from 916,000 to 770,000 while the latest month was a mere 266,000 – a number that would not have been unreasonable in a pre-COVID month.
There are many reports of certain types of workers being hard to find and/or attract. Childcare problems and possible exposure to COVID in customer-facing jobs might be worrying some potential workers from returning to jobs.
While these job-matching problems might have caused – or be causing – localised wage hikes, we do not think the effect will be strong enough to pass through into significant consumer price hikes – hence inflation and rate hikes may be avoided.
Europe continues to struggle with the economy and the pandemic. Internal politics in Britain are undermining Boris Johnson’s handling of the pandemic at its start. Whether he is guilty of ineptitude or incompetence or not, decent sized crowds were allowed back into English Premier League football matches and other big sporting events. They even staged a ‘rave’ for 3,000 kids in Liverpool under strict controls but so far there is no reported major downside from these crowds.
Rest of the World
India continues to struggle with COVID, though its daily infection rate had declined from recent record highs, but major nations are offering help in medical supplies and vaccine supplies.
Japan is running down to the wire over the Olympics. There are still lock-downs in the country and the majority of the residents do not want the games to go ahead.