Sell in May? Far from it – global indices and the US dollar have bounced back after the tumultuous first quarter and are showing renewed signs of strength. The question is whether the shape of policy actions by central banks will stoke further gains or if there are further risks ahead for investors.
Week ahead overview
Looking ahead to the coming week, markets are watching developments in Italy as the country seeks a new government; progress on trade negotiations between the US and China, and of course Brexit talks as we approach a key top-level summit of European leaders in June.
On the data front, markets are primed for the FOMC meeting minutes on Wednesday as it should help shed more light on the path of US monetary policy. Elsewhere we have some important UK inflation and retail salesreleases likely to affect the outlook on Bank of England policy. Finally, Eurozone PMIs are sure to be parsed closely after a run of softer economic readings that has cast doubt on how quickly the ECB can exit its extraordinary monetary stimulus.
In commodity markets, the major focus remains on oil following the US decision to slap Iran with sanctions. Following last week's bullish OPEC monthly crude report, expectations that the cartel and Russia could step up production again are starting to rise. Gold bugs are assessing whether last week’s move below the 200-day moving average is a sign of prolonged downtrend.
In equities, earnings season on Wall Street is virtually over, however we do have Hewlett Packard (HPE) quarterly earnings to look forward to. In the UK, struggling high street retailer Marks & Spencer (MKS) reports full year results.
FX: Can King Dollar reign much longer?
The strongest theme in forex markets so far this year has been the ascent of the US dollar. King Dollar is back, but can its reign last?
From its lows around 89, the dollar index (DXY) has risen to around 93 by the middle of May. Certainly, the slide in USD looked a trifle overdone but the recovery also has its doubters.
Key to the recovery seems to be the FX market finally catching on to the rise in yields. With the Fed tightening policy and growth steady in the world's largest economy, US and German spreads have reached record highs, fuelling demand for USD. Firm retail sales figures in the US last week sent bond yields spiking higher, dragging the dollar with them.
With markets having sold USD for much of last year, many think that there is further for the rally to go. But can it really recover to the levels seen in 2016 when DXY was above 100? Yields may rise but what really matters for USD (and other assets like gold that are linked to the strength of the dollar), are real yields – or those that take inflation into account.
The question for traders is whether we get more US inflation that pushes the Fed to raise rates more quickly. If that happens, it may not be as positive for USD as it would have been in many of the year immediately after the crisis, when Fed policy moves were inextricably linked to the dollar's strength. They must also consider whether this show of dollar strength is nothing more than a pullback from the extreme dollar short positioning that had been built up over recent months.
We must look at the Eurozone too, as the euro accounts for by far the greatest chunk of USD-cross trades. Perceived weakness in some of the data in Q1 and into Q2 has sent the euro off its recent peaks. Last week German GDP growth came in below expectations, cementing the view among many that the forth has well and truly come off the Euroboom. Many believe that the slowing in growth and continued lack of inflation growth means the European Central Bank (ECB) could have to wait longer before it can exit QE and raise interest rates. It's this hypothesis – strong US growth and rising yields alongside weaker sentiment around the EZ economy – that has driven the dollar rally. Some concern about Italy’s political situation appeared to put some further pressure on the EUR last week, but the risk of contagion for the Eurozone seems limited with the fallout from any political troubles contained within Italy.
But US bears beware – the rally in Treasury yields and USD last week off the back of the firm retail sales figures suggests there may be life in the rally yet.
So this week's data releases will be closely watched. Minutes from the Fed's last policy meeting are likely to shed more light on how members believe the economy is performing and whether they are comfortable to let inflation run above target for an extended period of time.
Across various assets the 200-day moving average has been in view a lot lately. Last week saw USDJPY rise through its 200-day moving average, while GBPUSD dropped below as the dollar steamroller showed no signs of slowing down. EURUSD seems to remain contained by its 200-day moving average having fallen through at the start of May.
For GBP, Brexit negotiations remain the chief risk both in terms of upside and downside risk. A white paper is being prepared to clarify Britain’s position.On Friday we got news that the Cabinet had agreed the UK will remain in the Customs Union after 2021 until a solution to the Irish border was found. Progress on the home front, but Brussels may not be convinced.
Investorsmay become increasingly sensitive to news around Brexit as we head towards the key June summit, which could make for greater volatility. The other unknown is the Bank of England. Its backsliding on a May hike has left markets uncertain about when or if it will increase rates again this year. UK CPI figures out this week will be important in shaping expectations. Whilst the slowdown in inflation has helped to push back rate hike expectations and saw the Bank cut its inflation forecast, rising oil and energy prices could push the CPI higher and get the markets talking about a summer hike all over again.
Indices: What’s yield got to do with it? Tina’s not singing anymore
For the major stock market indices, the big themes remain geopolitics and yields.
On yields, the selling of bonds is feeding through to equity markets. What has been dubbed Tina – There Is No Alternative – was the driver of equity returns since crisis: artificially low rates meant returns on cash were so poor that the only option was to buy stocks. But Tina is not singing anymore.
The US 10-year spiked above 3% but it’s at the shorter end of the curve that the real action is happening. The yield on 3-month Treasury notes jumped to a ten-year that equalled the return on the S&P 500 – the first time it has done so since 2008. If you can get 2% on ultra-safe 3-month Treasury notes, why risk your cash in stocks? And if stronger economic data and rising inflation pushes the Fed to hike more this year, it suggests pressure on equities could intensify unless earnings growth can continue to defy gravity.
Looking at geopolitics, the ebb and flow of tensions on the Korean peninsula remains front and centre for investors. Relations have thawed but the off-again, on-again summit between North Koreaand the US has left investors a little uncertain as to just how much progress is really being made. Last week the North Korean leadership said it could pull out the talks following US-South Korean military drills. There is a long time until the planned Trump-Kim summit in June and there is likely to be more noise to come.
In Europe, markets are sensitive to political developments in Italy, where the leaders of the country’s two main populist parties struggle to reach a power-sharing deal and for a government. Italian assets and bonds took a hit last week as investors turned cautious.
Among the best performers lately is the FTSE 100, which seems to be enjoying an uplift from a weaker GBP as well as a general upgrade on UK equities by Morgan Stanley. The blue chip index heads into next week having just notched a fresh record closing high.
Stocks: Earnings to watch and will Apple hit $1 trillion?
Investors love round numbers: just look at the interest each time the Dow chalks up another 1,000 points. It’s less of a theme for stocks – prices are a factor of the number of stocks on the register. But market cap is something we can get excited about and when we’re talking about $1tn companies, the round number interest is high.
The race has been on for the first firm to achieve a market value of $1tn and Apple has pulled out a lead. After a bit of a selloff this year, news that Warren Buffet once again bought the stock coupled with some robust earnings and forecasts boosted the price to a fresh record high. A move beyond $200 a share could signal it’s ready to hit the milestone.
Elsewhere, earnings season is definitely winding down but there are some large-caps still to report.
Stocks to watch this week
Ryanair (RYA)
Ready for take-off? Europe's biggest airline Ryanair (RYA) reports full year results on Monday with investors looking to see whether the group has shrugged off its recent troubles. Results last week from EasyJet suggest an easing in the price pressures that has dogged the sector for years as capacity growth slows. Ryanair operates with materially better margins than peers but there are concerns that labour rulings and unionisation will raises costs. Share have skidded c20% lower since the rostering and cancellation debacle of last summer. But as capacity growth cools thanks to the failure of three European airlines last year, will Ryanair shares be able to take off again?
Hewlett Packard Enterprise (HPE)
Hewlett Packard Enterprise (HPE) updates the market with Q2 earnings on Tuesday, May 22nd. In February,HPE shares jumped by a fifth after first quarter results blew away expectations and guidance for the full year also beat consensus. Earnings per share came in at $0.34 versus $0.22 expected, on revenues of $7.67 billion vs. $7.07 billion expected.EPS for the second quarter was guided at $0.29 to $0.33 and analyst consensus is once again for the company to deliver robust earnings growth. According to Zacks Investment Research, the consensus EPS forecast for the quarter is $0.31.However,despite these positive numbers the stock has given up most of the gains registered since the last earnings announcement.
Marks and Spencer (MKS)
UK retail is proving a very tough business for the traditional high street groups, not least Marks and Spencer (MKS). We’ve not heard anything since the third quarter results in January pointed to weakening sales in both Food and Clothing. Although the results were not quite as bad as some had feared, total UK sales fell 1.4% on a like-for-like basis and further deterioration in both sales and profits are anticipated in Q4.
The stock, which was in steady decline for years, has been on something of a comeback of late, bouncing more than 10% off its April lows. But warnings that consolidation in the grocery market (Tesco-Booker, Asda-Sainsbury) will leave Marks in the slow aisle has seen the shine come off the rally a touch.
Commodities: Can Brent stick it at $80?
Oilis the main focus after hitting $80 and with markets looking to see to what extent fresh sanctions on Iran will dent the outlook for supply. Prices have rallied since the US decided to pull out of the internationally-brokered Iran nuclear deal, but it's unclear to what extent this will affect global supply.
Markets are already looking ahead to the big June OPEC gathering which will also feature the meeting of OPEC/Non-OPEC Joint Ministerial Monitoring Committee (JMMC). Russian Energy Minister Alexander Novak said last month that his country could ease up on production curbs, whilst the latest OPEC report signalled that the cartel was ready to step in to ease supply shortages. Collapsing Venezuelan output coupled with the likely removal of Iranian oil from world markets following the imposition of US sanctions means the rebalancing of crude stocks is happening faster than expected. US shale oil output is jumping, hitting a record high, but so far it does not seem to be plugging the gap left by OPEC's decision to reduce supply.
OPEC's monthly report last week revealed rising output and improving demand for crude that has virtually eliminated the global supply glut. Meanwhile prices have soared, with Brent crude rallying to $80 a barrel, up about 50% this year. The spread on WTI remains massive as the US shale production levels rise and Brent supply takes a knock.
It all suggests that OPEC could be a lot closer to unwinding a deal struck last year with numerous non-members to stem production. Even if Iran's supply is taken away, OPEC and others seem well placed to fill the gap.
And another word of caution for the oil bulls – the International Energy Agency said last week that global oil demand would cool as oil approaches $80 a barrel, cutting its forecast for demand growth to 1.4m barrels a day from 1.5m b/d, which could keep a lid on prices even if supply constraints remain a problem.
In the coming week, traders should keep an eye out for the weekly US crude oil inventories report on Wednesday.
Forgoldthe question is really about the strength of the USD and what US real yields are up to. This has the makings of a perfect storm for gold bulls. If real yields do start to creep higher, that would traditionally weigh on gold prices. Likewise, a stronger USD tends to force gold and other dollar-denominated commodities lower. Last week saw gold fall below its 200-day moving average and this could start to act as a level of resistance going forward. The move lower – which came as US yields spiked – also saw it breach the 23% retracement of the big up move from late 2015 highs.
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EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.