Week’s Themes: Trump trip, Opec meet, G7 chat in Sicily
Five big themes likely to dominate thinking of investors and traders in the coming week
1. Torn in the USA
The first G7 leaders’ summit of the Trump era takes place in Sicily. On his first overseas trip as US president, Donald Trump will also visit the Middle East and meet with NATO leaders in Brussels. From an economic and market perspective, the G7 focus will be the US position on global trade and protectionism. Trump was elected on a platform of “America First” and “Make America Great Again”, which has been interpreted as an insular, nationalist economic agenda very much against the spirit of globalization of the last 30 years.
It’s a sensitive time for the world economy. Citi’s US economic surprises index has tumbled in recent weeks to its lowest in a year. If the US economy is beginning to struggle, the rest of the world might struggle too.
2. Spread out the oil, the gasoline
OPEC meets in Vienna with oil traders wanting to know if the output cut announced in January will be extended through March next year, as is widely expected. But because this is now in the price, it may need something else to take oil out of its tight range around $50 a barrel. Brent crude has bounced back 15% from the six-month low of $46.64 hit a couple of weeks ago. But the supply glut shows little sign of shrinking with crude stocks at a record 1.235 billion barrels in April.
Market sentiment is darkening – money managers now hold more bearish bets, or short positions, on Brent than at any time since the Intercontinental Exchange began collecting futures data in 2011. The real surprise could come if OPEC decided to extend for longer, deepen output cuts or restrict exports.
3. Desordem e regresso
“Ordem e Progresso” – “order and progress” in English – is the motto emblazoned on the Brazilian flag. Brazilians joke it should be “desordem e regresso” – “disorder and regress”. That certainly applied to the country’s financial markets in the past week, which cratered as the possibility of Latin America’s biggest power losing a second president in less than a year exploded.
President Michel Temer faces an investigation over allegations he condoned bribes to a potential witness in a major corruption probe. Brazilian stocks and currency both plunged more than 8% on Thursday, their biggest one-day loss since the 2008 global crisis.
Emerging markets around the world felt a downdraft too, and will be sensitive in the coming week to how the investigation unfolds. Otherwise, it was going well for EM: stocks on track for the fifth monthly rise in a row, the Mexican, Russian, Chinese and South African currencies all up against the dollar since January, commodity prices stabilizing, and decent growth data. Events in Brasilia will be closely watched.
Brazil’s Temer refuses to resign in face of investigation
Hush money scandal jeopardizes Brazil’s feeble recovery
Brazil markets plunge as Temer scandal threatens reforms
Brazil’s corruption vortex engulfs reform hopes
4. Pause for the cause
Inflows into European equities this year are now up to $15 billion. The reasons are well-advertised: fading political risk, the strongest economic and corporate profit growth in years, and continued ECB stimulus has drawn back a global investor base that has largely avoided for the past five years. What’s more, economic and profit growth is outstripping the United States.
That fundamental backdrop remains intact but there are signs of unease over valuations in some sectors. Morgan Stanley, JP Morgan and Credit Suisse have all sounded notes of caution on the rally in sectors such capital goods and chemicals whose fortunes are closely geared to the global and regional economic revival.
European valuations are cheaper than the US but are now above historical averages, so mid-year may be seen as a good time for portfolio managers to book some profit and reassess their holdings.
5. Both sides, now
“The world is upside down,” one analyst remarked last week, referring to how political concerns have shifted from Europe to the United States, while economic optimism seems to have moved in the opposite direction. But the situation is not that simple – economically the euro zone may have outperformed the US in Q1, but political and economic hurdles abound. On Sunday, the Spanish socialist primaries could determine whether prime minister Mariano Rajoy – heading a fragile minority government – will serve his full term. On Monday, Eurogroup meets and top of their agenda will be a deal with Greece to unlock aid that will help that debt-laden country meet upcoming debt obligations. Greek lawmakers approved austerity measures last week that helps pave the way for a deal and possible return to the bond market.
Finance ministers will also discuss whether a planned bailout of Italian bank Monte dei Paschi di Siena breaches new regulations on state aid to the banking system; the outcome could spark fresh worries about that country’s ailing banking system. Investors may have breathed a huge sigh of relief after far-right leader Marine Le Pen was trounced in French presidential elections earlier this month.
(Reporting by Jamie McGeever, Abhinav Ramnarayan, Karin Strohecker and Vikram Subhedar; Editing by Jermey Gaunt)