Markets face the end of Mays

Global markets will be happy to see the back of May on several fronts as the central-bank led global recovery play ran into severe turbulence with the unexpected disintegration of the US-China trade talks. Global stock markets and energy markets have run into serious headwinds at these pumped-up levels as both stubbornly refused to re-price a trade war’s likely effect on global growth. To some extent, that process has begun, as both equities and oil face their worst month of the year as we enter the last week of May. That process, however, has only just started and their respective tentative rallies on Friday show the optimists won’t go down without a fight.

The United Kingdom saw its own end of May with the Prime Minister officially tendering her resignation, finally accepting defeat in her attempts to push a Brexit agreement through a fractured Parliament. This led to an impressive 100-point rally in Her Majesty’s British pound (GBP) back up through 1.2700, but this is but a small proportion of its overall losses in May.

The European elections over the weekend have seen the separatist Brexit Party trounce both the Conservative and Labour parties into European Parliament oblivion, although elsewhere in Europe, the moderates have got off their sofas and turned out in record numbers, albeit from a very low base. This highlights the problems that Theresa May faced will not go away with a new leader. In fact, they may get worse, because this weekend’s election shows a large proportion of voters out there are still adamant they want a Brexit and don’t seem minded to negotiate with Brussels. Sterling rallies should be treated with caution – something I have been saying all year.

Wall Street rallied slightly on Friday, driven by unexpected resilience in Asian and European markets earlier and a marginally weaker dollar after an unexpected fall in US durable goods. The climb had a rear-guard-action feel about it though, as the optimists stubbornly refuse to accept our new global growth reality. The no-news-is-good-news strategy has never been sustainable past the short-term.

Asia has a quiet day ahead data-wise, and indeed, the week globally is relatively quiet on significant data points. The exception being the US Personal Consumption and Expenditure figures due on Thursday. Headlines and geopolitics will, therefore, be the major drivers of ebbs and flows on global markets.

On the headline and political front, Asia is well served this week. US President Donald Trump and his social media account are visiting Japan for four days until Wednesday. Although many would have wished that a Sumo had fallen on the President yesterday, I take a more positive view. We will almost certainly see some interesting “comments” to drive volatility in Asia this week. Forgotten by many, Japan and the US have been conducting their own trade talks over the past months, and these will continue in Tokyo in between Abe and Trump’s rounds of golf. Some might say fighting a trade war on two fronts is crazy, but stranger things have happened over the last few years.

 

FX

The US dollar fell on durable-goods data on Friday, but not by much. The pullback was probably as much to do with profit taking and weekend position lightening as anything else. We can likely expect regional currencies to move tentatively higher against the greenback in early trade. Nothing in the bigger picture has changed though, nor the reasons for the dollar being so strong in 2019. Therefore, any sell-off in the dollar is likely to be modest and short-lived this week, all other things remaining equal.

GBP was a notable mover on PM May’s resignation, rising from 1.2600 to 1.2720 at the end of the week. That said, the Brexit Party’s storming of the gates of the European elections over the weekend should highlight how fractured both Parliament and the British electorate remain. The new Prime Minister will face the same issues – including a non-majority in Parliament – as his or her predecessors. GBP may enjoy a few days in the Benidorm sun, but like a week-long holiday there, the feel-good factor will soon fade.

 

Equities

Wall Street staged a dead-cat bounce on Friday as the dollar fell. The S&P 500 rose 0.15%; the Nasdaq was up 0.10%, and the Dow Jones jumped 0.40%. Both Tokyo and Sydney markets have moved gently higher in early trading with the rest of the region likely to cautiously follow suit as the day progresses.

With President Trump in Japan and the US closed for Memorial Day, volumes are likely to be lower than usual with traders presumably happy to stay on the sidelines watching social media and news tickers.

 

Oil

Oil made an impressive correction on Friday with Brent Crude jumping 2.05% to USD69.25 a barrel and WTI rising 1.70% to USD58.90 a barrel. Impressive as it was, the corrective rally did not cover even half of the losses of Thursday with short-term profit-taking rather than a sentiment change responsible for the bounce.

Sentiment remains fragile and vulnerable to any deterioration in US-China trade frictions or a breakdown in US-Japan talks. With the US on holiday, oil volumes will be lower than normal as traders will likely be content to rest on the sidelines.

 

Gold

Gold survived an initial sell-off on Friday to end the session flat at USD1,284.60 an ounce. The fightback is still rather unconvincing in my mind, driven entirely by risk aversion in other markets rather than a sea change in the perception of gold itself. Initial resistance is at USD1,290.00 an ounce and support at USD1,270.00 an ounce. Unless we have some sort of headline-driven price action, gold will likely have a quiet day in Asia.