Will markets sustain a rebound after a torrid week in May

After a volatile week for risk assets and, in the case of investors exposed to Brazil, a shellacking, the coming days matter greatly in shaping whether this year really warrants a case of selling in May and sticking to the sidelines for the summer.

Higher volatility entails weaker share prices, lower bond yields and pressure on emerging markets, as seen briefly last week. However, buying the dip has been ingrained in the mindset of investors and time and time again since 2009 such bravery has been rewarded. There’s certainly plenty of dry powder on the sidelines waiting to pick up assets on the cheap. Bank of America Merrill Lynch says fund manager holdings of cash are “too high for a big top in markets’’.

Last week’s Washington ructions, which prompted a big sell-off in the dollar and US stocks, may fade while President Trump tours the Middle East on his first overseas trip. But the dollar remains vulnerable to more economic disappointment, so GDP numbers plus Federal Reserve minutes and data on home sales, jobless claims and durable goods all have market-moving potential.

All eyes will be on Opec’s meeting in Vienna, where the cartel is broadly expected to extend the duration of its output cuts for another six to nine months. The big question though is whether the group and its allies such as Russia may look to surprise the market by agreeing a larger reduction at Thursday’s meeting than the combined 1.8m barrel a day curbs already in place.

While analysts think the most likely outcome is a straightforward increase in the duration, with Saudi Arabia and Russia both pushing for a nine-month increase, many traders think the market may require a bigger shock if Opec wants to push prices further above $50 a barrel.

Whether they are willing to do that with US shale already rebounding fast remains to be seen.

The single currency has appreciated sharply of late, rising towards $1.12 versus the dollar — a level not seen since last October. The euro has also approached ¥125, its strongest level in 13 months.

That might reignite European Central Bank concerns about a strong euro’s impact on exporters, particularly if the pace of the euro’s strengthening becomes uncomfortably quick.

Several factors are in the euro’s favour. European political risk is off the table, the eurozone economy is growing fast, the dollar is wobbling, the euro is considered cheap, and the eurozone’s capital accounts surplus encourages strong fund inflows. The euro also tends to demonstrate haven tendencies when markets become risk-averse.

Source: Financial Times

Jr Trader Alexander Kumanov

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