Global Update

Volatility returned to global equity markets with a vengeance during May. Despite some encouraging economic data, sentiment was dominated by pessimism over prospects for economic growth in Europe, political uncertainty in the UK and worries about the possibility of slower-than-expected growth in China. Europe’s problems continued to dominate global investor sentiment amid ongoing concerns that, despite a €110bn (£93bn) aid package, Greece’s debt crisis might extend to other European nations. Unpopular austerity measures in Greece led to civil instability and raised concerns harsh spending cuts could stifle prospects for a sustainable economic recovery. Elsewhere, Germany caused surprise and controversy by announcing a ban on naked short selling (in which securities are sold that are not already owned or borrowed) without consulting fellow European nations, exacerbating fears of growing divisions between European leaders. In the UK, news was dominated by the general election, which led to Britain’s first hung parliament since 1974. A coalition agreement between the Conservatives and Liberal Democrats generated some relief, but the coalition’s pledge to cut the UK’s budget deficit led to renewed fears of stringent spending cuts that might impair prospects for economic growth. As with other major markets, UK share indices experienced some volatility resulting from Europe’s debt crisis. Meanwhile, shares in oil giant BP, one of the largest companies in the FTSE 100 index, continued to come under pressure amid ongoing controversy surrounding a major leak into the Gulf of Mexico. The US did not escape the fallout from the European crisis and share prices experienced significant volatility during May, exacerbated by fears that slower-than-expected economic growth in Europe might adversely affect US exporters. These worries were not helped by uncertainties surrounding the financial services reform bill and an alleged computer-trading error that led to sudden, massive intraday falls early in the month. Concerns over the outlook for Europe and fears of contagion also dogged Asian markets during May, and share prices of Japanese exporters were dragged down by concerns over the possibility of lower demand from European markets. Nevertheless, investors were cheered by the news Japanese exports had soared during April by more than 40% year on year, boosted by strong global demand for cars and semiconductors. Elsewhere, China’s central bank announced a third increase in banks’ reserve requirements, fuelling fresh worries that slower-than-expected economic growth could hamper corporate profits.