The key drivers for the week ahead

At the start of a new month there are some key questions that investors need to ask themselves. Firstly, will the sell in May/ go away strategy work in this most unusual of years? Secondly, what will the impact be of a potential delay to fully reopening the UK economy be for asset prices? We will also look at why the future could be bright for Deliveroo. An Opec meeting and a hotly anticipated Non-Farm Payrolls report for May ensures that there will be plenty of action in financial markets this week.

Why it may not be a good idea to head off to the sunshine this year 

Firstly, sell in May/ go away is an oft quoted feature of financial markets, but it is questionable if it actually works in real life. As the summer finally kicks off, investors need to decide if they cash in or if they stay invested while they enjoy the sunshine. The main argument for cashing out at the start of the summer is that stocks have done well, and some worry that they are looking richly valued. US stock indices are up on average up 11% YTD, while European indices are up 12% over the same time period. In Asia, stocks have had a more modest start to the year and are up only 4% YTD. This has pushed valuations for many indices above their long-term averages, which can be a sell signal. However, before you push the sell button, it is worth looking at the other side of the argument. Firstly, historical analysis suggests that if you do want to sell in May and go away, you might be better off distinguishing by region. For example, in the last 15 years, equities have delivered a negative return over the summer months four times in Europe, compared with only once in the US. Thus, statistically, you could boost your returns, particularly in US equities, if you remain invested during the summer months. European stocks are more of a risk, however, huge amounts of global central bank support, economies opening up as covid restrictions are eased and a reflation trade could keep European equities buoyant this summer, so sell in May at your peril.

Why the June 21st deadline is not that big a deal for the UK economy 

Fears of a new hybrid covid variant, concerns of a third wave of the virus coming to Europe and threats to delay the reopening of some economies in Europe as covid infection rates rise, although death rates remain stable, will also be digested as we start a new month. However, unlike other periods of this pandemic, we do not think that fears about a third wave of this virus will have the same fear factor for financial markets. Over the weekend there were reports that stage 4 of reopening England’s economy on June 21ast could be delayed. The end of stage 4 restrictions will include the end of mask wearing, the majority of workers returning to the office, the reopening of nightclubs, the end of restrictions for live events and the end of current limits on social contact. We do not think that any delay to ending stage 4 restrictions will derail the UK’s economy recovery, which was upgraded by the OECD last week, for a few reasons. Firstly, as mentioned above, the death rate has not increased and remains low and stable even though the UK’s infection rate has risen “exponentially” according to some scientists. The Indian variant is now the dominant variant in many counties in the UK, however, vaccines seem to be successful in reducing the number of people who require ICU and critical care. This shows that the vaccine has been a success, also, as long as hospitals are not overrun, then any further lockdowns may not be necessary. Secondly, the economy has rebounded strongly even with stage 4 restrictions remaining in place. Thus, it is disingenuous to say that delaying the end of stage 4 restrictions could knock the economic recovery in the UK off course. Lastly, although there will be some businesses that could suffer from a delay to the end of stage 4, mostly in the hospitality industry, but there is always the option of more targeted support for these businesses, especially as the economic upgrade in the latest BOE Monetary Policy Report suggests that the Chancellor could see a large reduction in the deficit this year compared with earlier projections. Thus, the Treasury has cash to support companies if the end of Covid restrictions does not happen on June 21. We think that UK asset prices, especially stocks in the FTSE 350, could continue to perform well, even if infection rates rise and the June 21stdeadline to end stage 4 restrictions is pushed back. 

The future for Deliveroo 

Another UK stock that we are watching closely is Deliveroo. This stock has massively underperformed since its IPO on the LSE earlier this year. We have mentioned before that while it has some domestic issues to sort out and competition from other sources, it continues to be treated harshly compared to its US counterparts. A Wall Street Journal article this weekend could give hope to the remaining Deliveroo bulls out there who are either waiting for their holding to start to move north, or who are waiting for an opportunity to dive in. The article states that DoorDash and Uber Eats’ ambitions are bigger than food delivery. Instead, they have their eyes on “next hour commerce”, which will lead to speedier and more convenient deliveries for products ranging from prescriptions to consumer discretionary goods, that beats Amazon Prime for service. This is one way to hang on to consumers that delivery apps have gained over lockdown now that economies are opening back up. If Deliveroo joins its rivals and goes down this route, then it could give their stock price a boost. While there are concerns about the logistics of “next hour” delivery, it could help boost delivery apps’ slim profit margins and help to bring profits that have so far proved elusive. If Deliveroo joins the next hour delivery revolution, then it could be just what financial markets ordered. 

Economic data to watch closely 

Elsewhere, this week sees some major economic events. European inflation is scheduled for release across the currency bloc on Tuesday. The market is expecting a decent jump in prices for April, which is expected to push the overall rate in the Eurozone to 1.9%, just below the ECB’s target rate of inflation. Although the ECB has said that it will look through this period of high inflation, calling it an adjustment period for prices due to bottlenecks caused by the pandemic, there could be some upward pressure on European bond yields and the euro as we head towards the middle of the week. EUR/USD rose from $1.20 to $1.2260 in May. A short-term break of $1.2260 opens the way to $1.2325 – the high from January. Overall, there may be some expectation that the ECB will need to react to this rise in price pressures when they meet on 10th June, thus, upward momentum for the euro could be maintained for the next week or so. 

Why US payrolls could be bad news for stocks 

US payrolls are also in focus this week. After the disappointment of the April numbers, the market is expecting more than 600k jobs to be created and for the unemployment rate to fall to 5.9%. Interestingly, the decline in jobs growth in April is the main reason why bond prices/ yields have remained stable in the US in May, even as price growth was stronger than expected. For example, the 10-year US Treasury yield fell from 1.70% to 1.58% at the time of writing. Thus, a strong payrolls report could see a sharper rise in Treasury yields and a decline in risk sentiment, along with a longer-term boost for the dollar. Due to this, Friday afternoon could be an interesting time for financial markets.