Five big investment themes for the week ahead
Five big themes likely to dominate thinking of investors and traders in the coming week and the stories related to them.
1. Not that risky
Centrist Emmanuel Macron faces a May 7 run-off against the far-right’s Marine Le Pen in the French presidential election but polls suggest he should win. With populists beaten in the Netherlands, it seems fair to ask whether the year’s political risks – tagged as the biggest threat to markets this year – are proving less troublesome than expected. There are elections to come in Germany, Britain and possibly Italy and US President Donald Trump always has the potential to surprise, but, relative to the gloomiest predictions, things are looking rosy. Will political risk take a back seat to monetary policy as the year progresses? The European Central Bank acknowledged that the euro zone economy is picking up but nonetheless kept its ultra-easy monetary policy stance.
2. Move over Frexit, Quitaly next
Just as France’s political risks fade, Italy’s loom large. Former prime minister Matteo Renzi looks set to regain the leadership of Italy’s ruling Democratic Party in a vote on Sunday, a move that could raise the chances of early elections. With anti-establishment, eurosceptic parties such as the 5-Star Movement doing well in opinion polls, euro zone breakup risks could again start to weigh on investors’ minds. In fact, the Italian/German 10-year bond yield gap, a barometer of relative risks, is back at 200 bps after narrowing 20 bps after Sunday’s first-round French presidential election win for centrist Emmanuel Macron boosted risk appetite. In addition, S&P review Italy’s sovereign ratings on Friday, two weeks after Fitch downgraded Italy citing a sluggish economy, fiscal slippage, banking problems and political risk ahead of elections due in 2018.
Italy’s Renzi set to regain leadership of weakened ruling party
Frexit makes way for Quitaly atop bond investor worry list
Berlusconi says ECB breached his human rights with bank stake ban
3. Into the arms of America
It’s a big week on the US policy and data front – the Fed meets and a series of top-tier economic indicators culminates with the monthly jobs report on Friday. All this follows the distinctly underwhelming Q1 GDP report, which showed the slowest pace of growth in three years. Q1 is pretty much always soft, but still. The run of consecutive monthly job increases will have extended to a fresh record in April and the Fed won’t change policy. Markets are attaching a 65% probability of a rate hike in June, yet there are lingering doubts about how far the Fed can go. The pace of job growth is slowing, and the yield curve is its flattest since the election. If next week’s data is on the soft side – the US economic surprises index has have tumbled in recent weeks and is close to going negative – even June might be in doubt.
4. Sell in May and go away?
It’s that time of the year again when the old market adage does the rounds, even though it hasn’t worked for the better part of the past decade. MSCI’s gauge of world stocks is up for a sixth straight month, the longest such streak in more than a decade and global companies have added nearly $5 trillion to their market value so far this year. Above-average valuations and concerns over the “Trump trade” has sparked talk of a pullback in stocks. Yet, brokers point to the double-digit earnings growth across major markets, the first time such a synchronized upswing is underway since 2010, as a factor that can keep equities underpinned and a signal that any weakness in stocks is an opportunity to buy. In the past week, $21 billion was pumped into equity funds globally as more cash is tempted off the sidelines. “The ‘Sell in May and go away’ strategy did not work in 2006, 2009, 2010, 2012, 2013, 2014, and 2016; and, we don’t think it will work in 2017,” says Jeffrey Saut, of Raymond James.
5. Emerging recovery
Emerging debt and equity funds have taken a combined $55 billion so far this year, having already surpassed last year’s $44.1 billion inflow, according to JP Morgan. Much of that is predicated on a view that growth across developing economies is recovering. PMI data next week may bear that out. While Chinese factory activity data due on April 30 may moderate after hitting five-year highs last month, any acceleration in Indian PMIs from last month’s five-month peak will show the world’s fastest growing economy is recovering from last year’s painful currency reform. Most recent hard data, from Taiwan to Mexico, has painted a picture of solid recovery, with the latter having just posted robust first quarter growth of 2.7%. Markets are increasingly easy about US protectionism risks, especially as the pledge to scrap the NAFTA trade deal seems dead in the water. Investors polled by Reuters this month cite recovering growth as a key reason for preferring emerging markets. Favourable PMIs could help emerging stocks extend their recent run to two-year highs.
(Reporting by Dhara Ranasinghe, Jamie McGeever, Vikram Subhedar, Sujara Rao and Nigel Stephenson; Editing by Andrew Heavens)