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Blog Posts — June 6, 2019

Market Rebound Cracks in May on Trade Concerns Market Rebound Cracks in May on Trade Concerns

A rebound in global stocks this year faltered in May as negotiations for a trade truce between the US and China appeared to break down and concerns emerged that the global economic expansion may hit a snag.

The STOXX® Global 1800 Index tumbled 5.7% in dollar termsduring the month, its first monthly retreat this year. Through April, the gauge had jumped 16.3% in 2019, its strongest start to a year since data begins in 1992.   

All major regions fell. The STOXX® Europe 600 Index lost 4.9% in euros from a record and the Eurozone’s EURO STOXX 50® Index declined 5.5%. 

The STOXX® USA 900 Index and the STOXX® North America 600 Index fell more than 6% from respective all-time highs. The STOXX® Asia/Pacific 600 Index lost 3.6%, in dollars.

After months of talks to end a trade stand-off between Washington and Beijing, US negotiators accused China of backtracking on earlier pledges, abruptly casting doubts on the two nations reaching an accord. The US followed by increasing tariffs on about $200 billion worth of Chinese imports to 25% from 10%, and President Donald Trump announced even higher levies would be set soon. China retaliated with its own tariff hikes.    

On the month’s last day, Trump shook markets further after he threatened on Twitter to impose a 5% tariff on Mexican imports unless the Latin American country stemmed the flow of illegal countries going north. 

Slowdown in US private sector output growth

US business data during the month only helped bolster investors’ concerns that trade uncertainty may be hurting the pace of investments and economic activity.

The initial IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) reading for May fell to 50.6 from an April score of 52.6.Although readings above 50 signal expansion, May’s increase was the narrowest since September 2009. 

A composite reading of US manufacturing and services, which has shown strong correlation with economic growth, slowed to a three-year low in May, IHS Markit said.  

Real estate gains as automobile shares plunge

Only one among the 19 supersectors in the STOXX Global 1800 Index rose during the month. The STOXX® Global 1800 Real Estate Index climbed 0.2% in dollars, helped by a decline in bond yields that improved the relative appeal of real-estate income.

At the other end, the STOXX® Global 1800 Automobiles & Parts Index was hit the hardest, losing 11.3%, on concern about disruptions in the global car trade. 

Developed and emerging markets

All but two of the 25 developed markets tracked by STOXX fell during the month when measured in euros. Australia and Switzerland bucked the trend. The STOXX® Developed Markets 2400 Index slipped 5.2% in euros, from a record high, and 5.7% in dollar terms.

Fifteen of 21 emerging-markets national indices dropped when measured in dollars. The STOXX® Colombia Total Market Index paced losses with a 9.2% decline. The STOXX® Emerging Markets 1500 Index lost 4.1%. 

Minimum variance performs amid market swing

On a relative basis, minimum-variance strategies had a strong performance during May as the broader sell-off prompted investors to favor shares that tend to register the smallest drawdowns. 

The STOXX® Global 1800 Minimum Variance Index fell 1.2%, and its unconstrained version lost 1.3%. May’s performance helped both low-volatility measures narrow their year-to-date underperformance.

New indices track standard responsible policies

In May, STOXX launched an entire family of market-capitalization-weighted indices that observe standard responsible policies of leading asset owners.

The ESG-X Indices incorporate basic norm- and product-based exclusion criteria to comply with environmental, social and governance (ESG) principles. Companies are removed when data provider Sustainalytics determines they are non-compliant with the United Nations Global Compact principles, are involved in controversial weapons, are tobacco producers, or either derive revenues from thermal coal extraction or exploration or use thermal coal to generate at least a quarter of their power output.

The ESG-X Indices are designed to keep a similar risk-return profile to their respective benchmarks. The STOXX® Global 1800 ESG-X Index lost 5.6% during May and the STOXX® Europe 600 ESG-X Index retreated 5%.

Featured indices

All results are total returns after taxes.
IHS Markit, Flash U.S. PMI, May 23, 2019.