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May was not a good month for risky assets with both equities and HY bonds losing ground, oil having a good beating and all metals, except for gold, suffering. Benchmark yields continued to fall, GBP finally “surrendered”, dollar-euro pair continued to trade in a narrow range while bitcoin made a great run.
It is rarely that easy to find good reasons for such a behaviour in the above mentioned markets and asset classes, as everybody who was watching or reading popular news portals would easily name at least two – trade wars and Trump bullying practically the whole world and resignation of Theresa May. In addition to that, FED proved to be less dovish than expected (probably saving their bullets for something more important than current worries), OPEC not able to keep prices of oil at the levels they probably wish (with US raising their production and inventories), economic figures in Europe disappointing and fiscal discipline in some EU countries highly questionable.
Trade, of course, was the most followed issue. With hopes and expectations high, the breakdown in negotiations between the US and China had bad impact on equity markets (consequences for the economy will be known later). The US increased the tariff rate on USD 200 billion worth of Chinese imports and announced that they may impose a tariff on the remaining USD 300 billion worth of Chinese imports as well.
China retaliated by increasing the tariff on USD 60 billion worth of imports from the US and contemplating about cutting on soybeans imports and rare metals exports. Besides China and the tech giant Huawei, which is taking a very serious beating, Trump and his lieutenants attacked Mexicans with upcoming tariffs, Germans for Nord Stream 2, French for Macron’s ideas of EU defense policies, Turkey on its talks with Russia and Iran for unproven attacks on oil tankers in the Gulf. There should be more, but it is quite hard to keep up with Trump’s pace.
The re-emergence of trade tensions will certainly have economic and policy implications for China. The tariffs introduced so far could drag on countries GDP growth by around 0.8% points throughout this year and next. These estimates could worsen in the event of further tariffs on the remainder of the exports to the US. The announced tax cuts on personal and corporate income also show the appetite from the authorities to help stabilize growth as retail sales and industrial production data was particularly weak.
Elsewhere in the emerging world, India saw the conclusion of its six-week long general election, with Narendra Modi’s Bharatiya Janata Party winning an absolute majority in the lower house. This provides some clarity on the policy outlook, and focus will now shift on unlocking the potential for long-term growth in India, which will be one of the key challenges and priorities for the BJP.
Eurozone data was mixed in May. The manufacturing PMI fell to 47.7, indicating contraction. The employment component also dipped below 50. On the other hand, the new export orders component did tick higher and Eurozone consumer confidence picked up in May to its highest level this year. The initial estimate for Q1 GDP also beat expectations reaching 1.6% on annualized basis. The concern in Europe is that trade uncertainty will filter through into the labor market and start hurting the service sector. However, the latest employment growth numbers in Europe have been solid. The European Parliament elections yielded a generally positive result for the European project with populist and Eurosceptic parties performing worse than was initially expected. In UK, Theresa May decided she has had enough and in rather emotional way stepped down from the PM position.
Worries about economy and trade continued to weigh on oil prices. In addition to that, Iran and Saudi Arabia are still unable to agree on production quotas, while there is still uncertainty about OPEC next meeting, planned to take place on June 25, as Russia is proposing a delay, which in no way is helping to support higher prices / lower production levels. With this in mind, many experts see sideways trading in the range of $50-60 per barrel for Light Crude.
Metals complex had bad times in May with Platinum and Silver losing all the ground they had gained since December. The reason was (so it appears) FED comments on May 1, which proved to be less dovish than the market had expected. With USD and rates high, relative value of holding precious metals is, certainly, less appealing. Gold was far more stable and its “safe-heaven” status supported the price. Silver and platinum are cheap to our understanding however it is not easy to be long in that kind of market. We are experiencing this “make it or break it” situation yet again, when it is very tempting to be long precious metals, but at the same time quite scary. With market expecting lower rates within next three FOMC meetings, precious metals may regain investors’ attention, with USD doing the opposite. On the other hand, FED may want to postpone its rate cuts to as far as possible, as labor data is still very strong and negativity in the market is far from its autumn levels. In any way, the pressures on Mr Powell are mounting and, if nothing changes, it is the stock market that will likely drive FED’s interest rate decisions, or so the bond market is signaling. Interestingly, these same people wanted 4% + yields just a few months ago.
To summarize, the positive emotions, which drove markets from the last day of Christmas, seem to be fading away. Resolution of trade disputes now look further away than most expected and now the hopes are, again, on Central Banks. With Southern hemisphere cutting rates and trying not to take sides in US-China fight and the Swiss contemplating a cut due to rising franc, all eyes now are on Mr Powell, whose words can either calm the markets down for at least a few months or bring back the unpleasant times of 2018.