The markets have started May with a bit of volatility after yet another solid month for stocks and other risk assets in April. US equity indices have struggled for direction over the past few days, particularly the tech sector. European tech stocks have also struggled, while shares of travel firms have performed better after the EU announced plans to reopen its borders to tourists who have been fully inoculated against Covid-19. The news has also boosted crude oil, with Brent climbing above the $69 handle today. In another sign that it is not completely risk off, copper prices were holding their own relatively well too. Meanwhile, in FX, the US dollar has staged a bit of a recovery attempt, causing the EUR/USD to dip back to 1.20, while the USD/JPY has climbed above the 109 handle. The greenback has been supported in part by profit-taking after its consistent weakness in April until it found support on the last day of the month on Friday, when the Fed’s Kaplan said the central bank should start talking about tapering bond buying soon – contrary to what Chairman Powell had said earlier in the week.
Will the dollar recovery continue in the week ahead of will it once again fade? What about the stock markets – will it be a case of “sell in May and go away,” or will we continue to see strength for the markets as confidence grows further about the global economic recovery?
Thus far, the weakness in stocks and the rebound for the dollar have been mild. This is hardly surprising given the strong momentum behind the equity markets and abundant central bank support. The likes of the Fed and ECB have promised to keep their QE stimulus programmes running at full throttle despite signs of strong recovery in the US and some other parts of the world. The speeding up of Covid vaccinations in the Eurozone also helped to calm investor nerves. The US quarterly reporting season has been very good, too, so far. Although there has been signs of rising inflationary pressures, central banks have been almost unanimous in suggesting this will be transitory. Betting against the Fed has never worked, and speculators will be wary of initiating short positions even if valuations have gone through the roof.
Indeed, as global lockdown measures are slowly easing further, things will hopefully return to more normal ways in the coming months. Obviously, the situation in India is a big concern, but with many parts of the world now in a much better position to slow the spread of the virus and with Covid vaccines being rolled out, the markets may not show too much concern.
Economic growth in the US, UK and EU are likely to accelerate and inflation will probably heat up. Investors have been pricing this in by pushing bond yields higher. Small and steady rise in yields will not scare the stock market bulls, but if they start to accelerate to the upside then it would suggest that growth optimism is being replaced by worries over inflation. So far this hasn’t been the case, but it is worth watching the yields closely, nonetheless.
Recap of macro events so far this week
The week ahead is filled with plenty of more macro data and we have the Bank of England’s policy meeting to look forward to, while company earnings will continue to pour in with Pfizer expected to post results today. China and Japan will remain shut until and including Wednesday for public holidays. On Monday, the US ISM manufacturing PMI disappointed and its employment component fell, although prices paid rose in another sign of rising inflationary pressures. Overnight, the Reserve Bank of Australia kept its monetary policy unchanged and despite rising commodity and house prices said it may extend its asset purchases into 2022.
Looking Ahead
We will get more indicators for nonfarm payrolls report on Wednesday as ADP and employment component of the ISM Services PMI are released. On Thursday, the Bank of England will take centre stage, while Friday will see the release of monthly jobs reports from both North American nations.
Here’s what’s in store for the rest of the week:
Wednesday
- New Zealand employment data
- Euro zone final services PMIs, flash for Italy and Spain
- US ADP private payrolls and ISM services PMI
- Earnings: Pfizer and GM
Thursday
- German factory orders and Eurozone retail sales
- Bank of England policy decision
- Earnings: Societe Generale, ING, Next, Barratt,
Friday
- Chinese trade balance Caixin services PMI
- German industrial production
- US nonfarm payrolls
- Canadian employment report
- Earnings: Credit Agricole and IAG
