May in Figures

May 31, 2012

May was an ugly month in financial markets.  The fine risk-on/risk-off balance in investor psychology lurched decisively in favor of safety over investment return after inconclusive Greek elections on the first weekend of the month increased the possibility that Greece would leave the common currency area.  Voters there and in other countries in the currency union are deserting the main political parties for extremist groups on both the left and right that have staked out positions opposing fiscal austerity, even if that means returning to national currencies.  Market players fear that the potential exit of Greece will expose the currency union as a house of cards, unleashing forces of contagion from which no nation would be immune.  A second perceived danger involved Spanish banks, whose assets are slipping away.  While Europe was at the epicenter of the maelstrom, worries about the outlook for economic growth jumped to emerging markets like China, Brazil and India.  The U.S. economy also looked more fragile.

In most respects, areas of uncertainty that have hung over markets like a stationary front for the past five years became more pronounced during May, but there was a notable exception involving U.S. politics.  The nomination of Mitt Romney as the Republican nominee was formally secured by delegates captured in the Texas primary.  Romney is moreover emerging as a very formidable challenger, a candidate with many of the teflon qualities of Ronald Reagan.   The Democrats tried in vain in many ways during May to make Romney’s Brahman persona the main election issue, but the contest instead is shaping up as a report card on the fragile economy.  Polls point to a close vote in the electoral state-weighted count, but Romney has the all-important momentum and should win if his campaign continues to avoid big mistakes.  It is strange, therefore, that even U.S. markets should have performed so poorly in May.  Conventional wisdom states that the investment community prefers Republican pro-capitalist stewardship, and yet the level of anxiety about the U.S. economy’s outlook instead ratcheted sharply upward during May.

The botched IPO of Facebook produced separate concerns about the future of capital markets as a major source of corporate funding. From end-April to end-May, share prices recorded sharp losses, and long-term sovereign debt yields in Germany, Britain, Switzerland and the United States tumbled, setting record lows in certain instances.  The dollar and yen benefited from the scramble for safety, and the Swiss franc required heavy intervention and a threat of capital controls to defend the Swiss National Bank target ceiling of 1.2000 per euro.  Gold failed to capitalize on the chaos and instead became another object of the sell-everything craze.  Oil prices tanked 17.5%.

10-Yr Yield 04/30/12 05/31/12 Chg vs End-April
U.S. 1.92% 1.56% -36 Basis Points
Germany 1.66% 1.20% -46
Japan 0.90% 0.82% -12
U.K. 2.11% 1.52% -54
Canada 2.05% 1.73% -32
Switzerland 0.71% 0.55% -16
3-month euros     Chg vs End-April
U.S. 0.47% 0.47%   0 Basis Points
Euroland 0.64% 0.59% -5
Japan 0.20% 0.20% 0
U.K. 1.01% 0.99% -2
Canada 1.36% 1.31% -5
Swiss 0.11% 0.10% -1
FX     Pct Chg in USD
EUR/USD 1.3229 1.2356 +7.1%
USD/JPY 79.84 78.39 -1.8%
USD/CHF 0.9079 0.9720 +7.1%
GBP/USD 1.6233 1.5401 +5.4%
AUD/USD 1.0427 1.0332 +7.2%
NZD/USD 0.8163 0.7526 +8.5%
USD/CAD 0.9875 1.0332 +4.6%
USD/CNY 6.2823 6.3691 +1.4%
Equities     Chg vs End-April
S&P 500 1398 1310 -6.3%
Nasdaq 3046 2827 -7.2%
Djia 13214 12393 -6.2%
Dax 6761 6264 -7.4%
Nikkei 9521 8543 -10.3%
Ftse 5738 5321 -7.3%
Canada TSE 12393 11513 -6.3%
Swiss SMI 6096 5850 -4.0%
Commodities     Pct Change
Oil, $ per brl 104.87 86.53 -17.5%
Gold, $ per oz 1663.40 1564.20 -6.0%

Copyright Larry Greenberg 2012.  All rights reserved.  No secondary distribution without express permission.

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