Trade talks, the on again-off again North Korean summit, Italian politics. That pretty much sums up the month of May.
For stocks, the month started sweetly, rallying to make recent highs but then stalling. The rally came off the back of easing tensions between China and the US, then stalling on North Korean summit being cancelled. Finishing the month being panic sold as investors reacted to the increasing farce in Italy.
The Italian election out come and, what looks likely to be new elections mid-year, has sent investors flying into safe havens and out of high risk assets. Emerging markets suffered but nothing compared to the bond markets in Italy, then Spain and Portugal. The fear setting in is that the treatment of the new PM’s cabinet by the Italian president, could ignite further Anti- European sentiment, which could inspire the same in Spain and Portugal, also do not forget about Greece too. The P.I.G.S are back in focus. Risk is definitely off as we end the month of May. Perhaps, as the saying goes, sell in May go away, will prove true again this year.
The bond rout in European markets, saw major flows into the US treasury market along with Japanese Government Bonds. However, the US levels were key at where they turned from. Volume also ticked up. Noting that the US 10-year note is the most crowded of trades, and the most net short in decades, the buying volume coming in could well be sustained. This certainly looks to be keeping the 30 year bull trend line in tact for the time being. The US 30 year note also faded off the key resistance of 3.22%.
The flight to safety of JGB’s and US Treasuries saw the Yen and Greenback dominate moves as Eurodollar got smashed. The Eurodollar still remains net long on the Commitment of Traders, however, having fallen through 1.16 I suspect we will hit a lot of stop losses and more selling is in front of us for June.
Moving away from politics, on the economic front, things are not so rosy either. This month saw no change in monetary policy by Australia, US, UK or New Zealand. All four central banks keeping rates steady. The US also missed on inflation and the minutes from the FOMC showed that they are prepared to ignore inflation settings when deciding where rates should be at. Recent moves in the bond market however have highlighted the issue for the US, their economy is just not as strong as the Fed would like. The odds for 3 rate rises this year have dropped significantly and it would appear that a rate rise in June is at even.
Certainly, the move in the Greenback is reflecting this change in tune. The Greenback is always sold off on the Fed rate rises and has been in a down trend since their 2nd of 6 recent moves back in December 2016. It fell from 103.77 to 88.12, some 1,565 pips. The rally in the Dollar Index has wiped out the last 2 moves and is trading back at Sep 2017 highs. It is also just 100 pips shy of having retraced 50% of that 1,565 pip fall. With the US bonds and dollar rallying that will force the Fed to sit and wait for a few more months. If they do not raise rates, many will begin to question what we already see, that the US economy is not as healthy as the mainstream media wants you to believe.
And that will be the key for June as we look ahead. Political dramas from both Europe and US/Asia will continue to influence price but the markets will want to hear from the US Fed, if only to have something else to focus on. Thursday June 14th is the date the FOMC will announce, and with 16 hours later we will hear from Draghi at the ECB and then the BOJ is out Friday afternoon. So; mark that day(s) in your diary, either to avoid, spectate or participate as it will be interesting.