Take Five: Sell in May?

LONDON (Reuters) – Fresh turbulence in U.S. banks and debt ceiling woes in Washington suggest recent stability in world markets will most certainly be put to the test in May.

The latest U.S. and Chinese inflation numbers and a Bank of England interest rate decision are among the calendar highlights meanwhile.

Here’s a look at the week ahead in markets from Ira Iosebashvili in New York, Rae Wee in Singapore and Amanda Cooper, Naomi Rovnick and Karin Strohecker in London.

1/ COOLING DOWN

Any cooling down in Wednesday’s April U.S. inflation data should give investors comfort that the Federal Reserve is done with tightening after more than a year of dramatic rate increases to contain price pressures.

After all, the Fed has just signaled a pause after delivering a 10th straight rate increase.

Economists polled by Reuters expect a 0.4% rise in consumer prices. A sharper-than-expected slowdown could vindicate those betting on rate cuts later this year, giving a further tailwind to risk assets – including an equity rally that has seen the gain 5.8% year-to-date.

A strong reading, on the other hand, would support the case for the Fed to keep rates higher for longer and feed into market fears over stagflation – a mix of high inflation and low growth that is detrimental to risk assets.

GRAPHIC – Poll sees US inflation accelerating anew in April

2/ CHINA CHECK

A raft of Chinese data will likely offer a reality check on March’s upside surprises.

    April trade figures on Tuesday are likely to show a cooling of March’s export surge. The services component of the price data can gauge demand, but consumer and producer price data broadly paint a picture of deflation. April inflation data is out Thursday.

Together with credit data – seen chugging along without being outstanding – it’s a complicated picture for investors and the People’s Bank of China to navigate. Indeed, news that China’s manufacturing activity unexpectedly shrank in April has raised pressure on policymakers to boost an economy struggling for a post-COVID lift-off amid subdued global demand and persistent property weakness.

And flows figures suggest foreign money is staying away, for now.

GRAPHIC – China data shows a struggling economy

3/ THE CROWN

King Charles’ coronation may provide a temporary bump for UK businesses with households expected to buy extra groceries as well as coronation memorabilia for an extended weekend.

Investors are more focused on the economy stagnating, with latest UK GDP data out on May 12.

A day earlier, the Bank of England is likely to lift interest rates again to battle inflation — even as rising mortgage costs increase financial stability risks.

At 10.1%, UK inflation is the highest in Western Europe. Energy prices are likely to stop soaring this summer, helping annual inflation comparisons. But lengthy health service waiting lists causing long term sickness have exacerbated a worker shortage linked to Brexit, keeping wage rises high.

Money markets price a more than 70% chance of the BoE raising its main rate to 4.5% on May 11 and taking it to 5% by year-end.

GRAPHIC – The year ahead for BoE

4/ SELL IN MAY

Conventional wisdom has it that May is the ideal point to take profit on equities and lay low until later in the year.

“Sell in May and go away” is based on the premise that the best six-month period of the year for stock market returns is November to April, while the leanest is May to October. Over the last 50 years, the S&P 500 has gained an average of 4.8% between November and April, and just 1.2% between May and October, according to Reuters calculations.

However, this pattern fades over a shorter time-frame.

Over the last 20 years, the out-performance of November-April over May-October narrows to 1%. Over 10 years, November-April has underperformed May-October by 1 percentage point and over the last five years, it’s underperformed by 3 percentage points. It might be time to find words that rhyme with “November”.

GRAPHIC – Sell in May and go away?

5/DEBT AND DISTRESS

Bulging debt burdens and distress woes in emerging markets are high on the agenda when finance ministers and central bankers from G7 advanced countries meet in the Japanese city of Niigata May 11-13. The group has invited a number of policy makers from emerging economies such as India, Indonesia, South Korea, Singapore and Brazil to attend an outreach meeting.

But that’s not the only burning issue for the gathering under the Japanese presidency that will also look to address spillover effects of Russia’s war against Ukraine and sanctions against Moscow as well as global inflation and supply chain pressures.

Financial stability could also become a key topic as tremors from a fresh flare up in U.S. banks ripple across markets after First Republic Bank (OTC:) became the third lender to collapse since February.

GRAPHIC – Emerging market debt burdens are on the rise

Source link