June 2016

Financial Market Roundup

Produced by Fifth Third's Investment Management Group

Trends at a Glance

Global Trends

Central Bank Policy

Equity Performance

Interest Rates and Growth

Political and Regulatory Trends

Investment Trends

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of May. I hope you find this Financial Market Roundup helpful and informative.

Global Trends

Recent polls suggest Brexit risk (the possibility that Britain will withdraw from the European Union) is on the rise again, currently at about 30 percent. The probability of Britain leaving the EU is subject to sharp swings depending on which issue is currently grabbing headlines. Those focusing on the economy tend to favor a “Remain” vote, while those who see immigration as the greater risk will likely favor a “Leave” vote. Voters on both sides of the issue expect polls to remain relatively close up until the vote itself on June 23.

Central Bank Policy

The idea that global markets are healthy enough to sustain another Fed rate hike this summer is gaining momentum. As incoming data provides more evidence of a rebound in second quarter GDP growth, the likelihood of a rate hike in the June or July Federal Open Market Committee (FOMC) meeting will increase. Fed officials are doing all they can to more closely align the market’s expectation with their own.

Equity Performance

May was another volatile month for U.S. equities. A lackluster April jobs report depressed risk appetite in the first half of the month, though investors welcomed the pickup in wage growth embedded in the report. However, stocks were able to recoup all their losses and finish the month in positive territory, as signs of a stronger economy (factory orders and retail sales surprised to the upside) spurred speculation that the U.S. economy can withstand higher interest rates.

Interest Rates and Growth

The yield on the 10-year Treasury moved modestly higher for a third straight month, finishing May at 1.85 percent. Global bond investors, chasing yield, are weighing on long-term interest rates that would otherwise move higher in line with Fed rate hike expectations. The second estimate for first quarter gross domestic product (the value of all goods and services produced in the U.S.) came in better than previously reported (from 0.5 percent to 0.8 percent expansion), increasing the likelihood of a second quarter rebound in economic activity.

Political and Regulatory Trends

The U.S. Republican presidential candidate Donald Trump has reached the number of delegates needed to secure the party’s nomination. However, while Mr. Trump has the required amount of delegates, his nomination by a divided party is not a foregone conclusion. Former U.S. Secretary of State Hillary Clinton has a commanding lead over Vermont Senator Bernie Sanders in the Democratic primary, and though the nomination is not yet secure, she is increasingly looking ahead to her likely showdown with Trump.

Investment Trends

Oil has surged about 85 percent since touching a 12-year low in February and is up for the fourth consecutive month, finishing May just short of $50 per barrel. Steady global demand, coupled with falling production (specifically in the U.S.), is finally starting to bring the market for crude back into balance. Global stockpiles could diminish further if OPEC can reach an agreement on limiting production, though many are skeptical that Saudi Arabia will bend on its stipulation that Iran be part of the pact.

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