Equities Rally Fizzles out on Fears that Quantitative Easing Coming to an End

Most global equity markets continued to advance in May, although there was a major loss of momentum towards the end of the month, as investors became increasingly concerned that the Federal Reserve was preparing to "taper" its asset purchase programme.

United States

The month began brightly enough on Wall Street as a robust Employment Situation Report-including a substantial rise in non-farm payrolls-triggered a wave of bullishness.

Although the strength of the jobs report also enhanced perceptions of an earlier than previously expected withdrawal from its monthly bond buying programme, investors were initially calmed by hints from the Fed that any such action would be based upon the "evolution of economic conditions.

Consequently, and with sentiment further boosted by positive earnings news and upbeat economic data releases-including consumer confidence hitting its highest level in more than six years-the Dow Jones Industrial Average powered to a succession of record highs.

However, with the Dow at 15,409, sentiment suddenly disintegrated as uncertainty over the Fed's monetary policy was rekindled by "confusing" Federal Open Market Committee (FOMC) meeting minutes and a spike up in Japanese government bond yields.

This prompted fears that the Bank of Japan would have to modify its own "aggressive policy easing" and subsequently sparked a plunge in Japanese share prices.

At the same time disappointing economic data induced fresh concerns about the outlook for the Chinese economy.

Reflecting this, the Dow fell some 300-points from its high, although it still managed to end the month a net 1.9% above its end-April level, whilst the S&P500 was 2.1% higher.

United Kingdom

Meanwhile the rally on the London market continued in May with the MSCI large-cap index posting a record-breaking twelfth successive monthly gain.

However, as with its US counterpart, the advance was heavily concentrated in the first three weeks of the month, as the uncertainty surrounding the Federal Reserve's asset purchase programme increasingly took its toll on sentiment.

An encouraging US purchasing managers' report for manufacturing and robust jobs figures got the month off to an excellent start, with blue chip stocks posting a succession of six year highs.

BT Group shares put in a particularly strong performance (up 12%) as it raised its dividend and presented an upbeat outlook, whilst banking stocks were well supported following bullish broker comments and the strength of Wall Street. Indeed, such was the ongoing sense of optimism that at one stage the large-cap index found itself less than 1½% beneath the all-time high set on the very last day of the 20th century.

Unfortunately, from there a hefty fall from HSBC proceeded to drive share prices lower, with fears over an earlier than expected "tapering" of the Fed's asset purchase programme following the release of the FOMC meeting minutes and sharp falls in Tokyo exacerbating the decline.

As a result, and with the buying momentum that had characterised much of the previous twelve months evaporating rapidly, the index proceeded to lose some 4% if its value over the last six sessions of the month. Despite this, it still managed to end the period 2.0% above its end-April level, whilst the MSCI overall UK index was up 2.3%.

Europe

With the notable exception of Spain, most European equity markets continued to advance in May, with, in a reversal of April, the core markets tending to outperform those in the region's periphery. Collectively, European equities enjoyed an unprecedented twelfth successive monthly gain.

Fresh optimism about the outlook for the US economy (following an upbeat jobs report) and ECB's decision to cut its repo rate to an all-time low of 0.5% got the market off to a robust start, with the major benchmark indices hitting their highest levels in more than five years, whilst Germany's Xetra Dax posting a record closing high on the back of rampant healthcare and telecoms stocks.

At the same time, news that car sales in April had improved for the first time in 18 months saw large gains for car makers.

Unfortunately, the rising trend couldn't be sustained as nerves set in over the scale of the recent gains and uncertainty grew about when the Fed might start scaling back its monetary stimulus. Disappointing data out of China-suggesting that growth in Asia might be starting to wain-also weighed heavily on sentiment.

Despite this, the German FAZ Aktien index still managed to end the month up a net 3.6%, whilst the French CAC All Tradable and Italian BCI indices were up 2.6% and 2.0% respectively.

By contrast, Spain's Madrid SE index fell 8.5%.

John Clarke is the Chief Economist at GHC Capital Markets