Bad start to May is a sign of things to come for markets

By Justin Carrigan

Sell in May and go away? The negative start to the month raises concern that the partial recovery in April is going to be about as good as it gets for risk assets.

For all the optimism stemming from the gradual easing of lockdown measures in some of the biggest economies, there are too many worries on the minds of traders to sustain the momentum from last month. The fear of a second wave of infections, the collapse in corporate earnings and the shocks reverberating from the economic data are toxic enough. Now throw in a fresh eruption of political sparring between the US and China.

“The smokescreen of another bilateral issue ahead between the US and China over the origins of the coronavirus pandemic will pick up steam,” Jameel Ahmad, a markets analyst at FXTM in London, said in a message.

Asian markets and equity futures on Monday provided a taste of how the week may unfold. Hong Kong’s Hang Seng Index bore the brunt, tumbling 3.8 per cent. S&P 500 Index futures retreated as much as 1.8 per cent, while European futures sunk more than 3 per cent. Japan and China were shut for holidays. In the Middle East, Saudi Arabia’s Tadawul index tumbled 7.4 per cent Sunday, fanned by some dire fiscal warnings from the country’s finance minister on the weekend.

The dollar and yen rose on demand for haven assets, with the Bloomberg Dollar Spot index gaining 0.4 per cent. The Indonesian rupiah led a drop in emerging-market currencies in Asia, posting its biggest one-day decline in six weeks. Treasury cash trading was shut, with Japan on holiday.

Warren Buffett on Saturday tempered his normally bullish optimism during an hours-long meeting for Berkshire Hathaway Inc. shareholders. A lot of uncertainty hangs over the market, he said. Still, he expects equities will outperform Treasuries over the long run and urged investors not to bet against America.

Though US stocks clocked up their best month since 1987 in April, prices slipped Friday as a string of companies issued profit warnings and President Donald Trump stepped up condemnation of China over trade and the handling of the Covid-19 outbreak. The S&P 500 retreated 2.8 per cent and US Treasury yields dropped.

The following are comments looking ahead to a week in markets:

Eric Stein, Boston-based co-director of global fixed income at Eaton Vance Corp.

• “The biggest new development that could weigh on emerging markets -- and it certainly weighed on markets on Friday -- is the pick-up in geopolitical tensions between the US and China, and really in some ways the rest of the world versus China.
• “The markets began to focus on the issue again after some comments about tariffs coming from President Trump. The anti-China rhetoric is not focused on trade as it used to be, but is now focused on the beginning of Covid-19 and what China knew or didn’t know at the beginning of the virus. In addition to pressure from the US, other countries, even the ones that seemed to mostly look the other way during the trade war, seem acutely focused on this issue.”

FXTM’s Ahmad:

• “The host of economic data releases scheduled from China early this week, including composite and services PMIs, as well as import and export data for April, will be seen as a gauge of economic sentiment.
• “The composite and services PMIs will be crucial for understanding what the reopening of China’s economy has led to in terms of improved productivity. However, the import and export data will perhaps be of even more significance because it will highlight what headwinds the majority of the world entering its own state of lockdown last month had on China’s own economy.”

Ali Malik, a senior investment adviser at Bank of Singapore Ltd:

• “We do believe that reopening is going to be the way forward, and that we are going to see that across countries gradually, starting from countries that have first experienced” lockdowns.
• “We are seeing bond issuance pick up globally. We’ve seen Qatar, Abu Dhabi, Saudi Arabia. And for China, we are going to see companies and provinces follow suit. We are focused on dollar-denominated bonds in China and, within that sector, we are focused on the high-yield property sector, which has done pretty well recently.
• There are “some very good propositions in tech in Asia. There are some names that we have tracked in the past, such as Alibaba and Tencent. I think companies need to take their cue from Amazon here -- just how Amazon has been been telling shareholders and companies that have been with the company for some time to please take a seat because things are going to take some time. We are still neutral on equities at this point.”

Iyad Abu Hweij, managing partner at Allied Investment Partners PJSC in Dubai:

• “The phased reopening of global economies, coupled with developments in new Covid-19 cases, will dominate trading activity in the coming weeks. However, investors should remain cautious and closely monitor the leading indicators for signs of gradual improvement from the Covid-19 shutdown.”