Europe

  • Economic data in Europe over the month weren’t nearly as sanguine as its stock markets. In the Eurozone, GDP fell 2.5% in the first quarter to be 4.8% down on a year earlier. Germany’s economy was the worst casualty; it shrank close to 7% while Italy’s declined 6%. The French and Spanish economies were also at least 3% smaller. Meanwhile, industrial output in the single currency zone was nearly 20% down on the year before.

  • As expected, the European Central Bank (ECB) delivered a further 0.25% cut to take headline European rates to 1%. Meanwhile, European inflation also continued to rise with consumer prices adding 0.6% in the year to the end of April.

  • This contrasted with the position in the UK where lower energy and food bills helped inflation to drop from 2.9% in March to 2.3% in April. However, other UK data echoed the wider malaise. UK GDP fell 1.9% in the first three months of the year with manufacturing taking the worst hit. Output declined by 6.2% over the period as industrial production suffered its biggest quarterly fall since 1974.

  • Outside of the Eurozone, Norway’s central bank cut rates by 0.5% to a record low of 1.5%.

  • Most European equity markets continued to rally in May, albeit at a more restrained pace than in previous months. Europe underperformed global markets, with the FTSE All-World Europe ex UK Index returning 5.7% versus the FTSE All-World return of 6.7%, in local currency terms.

  • Of the larger Eurozone markets, France was the top performer, delivering 5%, while Germany managed 3.3% in euro terms. Elsewhere, Italy’s stock market rose 6% while Spain’s gained 5.7%. Meanwhile the region’s largest market, the UK, returned 4.4%, in local currency terms.

  • Outside the Eurozone, Norway returned 15.9%, while Sweden gained 1.7% and Denmark made 8%. The performance of Eastern European countries was more of a mixed bag. The Russian market was by far the top performer in Europe overall, returning 28.4% after rising oil prices sparked a boom in the shares of the energy giants OAO Gazprom and Lukoil, which together account for over half the local market. By contrast, the only markets to lose ground over the month were the Czech Republic and Poland, which fell 0.5% and 1.4% respectively.

  • Sector leadership continued to be dominated by those areas previously most wounded by the economic downturn. Oil and gas stocks benefited from hardening commodity prices, as did mining companies and metals producers. Elsewhere, banks perceived by investors to be “healthy” relative to the sector overall did well, while those perceived as being vulnerable to further financial shocks were generally punished by the market.

  • The European Central Bank may have cut interest rates but it continued to resist pressures to adopt quantitative easing measures (increasing the amount of money in circulation). In the absence of such measures, bond yields in the Eurozone rose sharply. Long-dated German bonds lost 6.6% as a result. Meanwhile, UK government bond yields rose most sharply in the middle of the yield curve, with 10-year government bonds delivering a loss of 1.6%.




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