|Monthly Market Update, May 2011||Posted May 6, 2011|
Equity markets enjoy a strong April
Investors in international markets also saw positive returns. The MSCI EAFE Index returned 5.98 percent in dollar terms for the month. Gains for U.S. investors came mostly from currency fluctuations. The greenback lost 4.23 percent against the euro in April and has fallen 10.63 percent this year. While European investors in the EAFE index have lost money year-to-date, U.S. investors in the index have gained 9.54 percent—mostly as a result of currency appreciation. The weakening dollar has also benefited U.S. exporters, who experienced gains when overseas profits were translated back into dollars. The MSCI Emerging Markets Free Index returned 2.83 percent in April and has gained 4.57 percent year-to-date. Similarly, U.S. investors in emerging markets saw the bulk of their gains from the impact of a weaker dollar.
Bond markets also saw gains
Anticipating the end of QE2
The end of QE2 may also affect equity markets, given that markets have moved higher in lockstep with the Fed’s security purchases. One potential result could be heightened volatility, particularly if equity markets stall at current levels. There is also significant concern over the potential for the end of QE2 to exert negative pressure on markets. Although unlikely, the Fed could still take further measures to stem market losses should they occur.
The economy continues to chug along, as debt worries persist
A few signs of inflation have cropped up, particularly in prices paid by producers of goods. This has resulted in a slight slowing of the extremely robust growth in the manufacturing sector; the April Institute for Supply Management report lost some steam, and some regional manufacturing indices have also slowed. While oil prices have put upward pressure on input prices, an unemployment rate of 8.80 percent and a weak housing market reduce the likelihood of sustained inflation in the U.S.
The European Central Bank (ECB) raised interest rates to 1.25 percent in April, following the lead of many emerging markets nations, which have been aggressively raising rates to combat inflation. The ECB’s hike leaves the U.S. as one of the few countries actively continuing to ease monetary policy. Japan and Switzerland are the only other major countries offering rates at or below 0.25 percent; Brazil and China, for example, have set nominal interest rates at 11.75 percent and 6.31 percent, respectively.
The European debt situation is still worth monitoring, even though it has had little to no impact on markets recently. It seems likely that Greece will default or need additional bailouts. Interest rates on its 2-year paper recently shot up to more than 24 percent, signaling a likely default, unless the country receives assistance or can reschedule debt payments. This situation has proved divisive among eurozone nations, as anti-bailout sentiment has grown. It also has renewed concerns that Ireland and Portugal may soon need additional help.
Easing into the second half of the year
Authored by Simon Heslop, CFA®, director of asset management, at Commonwealth Financial Network.