That popular old adage, sell in May and go away, has never seemed so prescient, at least based on the evidence of the last two weeks. Since the end of April, almost on cue, investors seem to have been instinctively heading for the sidelines. Brent crude has fallen $15 (12%) so far this month; the gold price has lost nearly $100 (6%); silver has plummeted by almost one-third and the copper price is down 10%. Equities have not been spared – the MCSI World free is down more than 3% for the month-to-date. Not surprisingly, high-beta currencies have fallen back sharply, with both the Norwegian krone and the South African rand down more than 5% against the dollar this month and the Aussie down more than 3%. Conversely, safe-haven currencies like the Japanese yen and the greenback are in favour. In the past week, the dollar index is up more than 3.5%. Should investors’ aversion to risk intensify then the dollar would be likely to benefit further. Given the enormous extent of dollar shorts out there, the potential for the greenback to squeeze still higher is significant.
Guest post by FXPro
Commentary
Eurozone economic divergences growing ever wider. The first estimate for Q1 eurozone GDP data is seen later this morning, but the data released by national statistical offices so far this morning suggests that the big countries are doing very well. France grew 1.0% QoQ, with Germany 1.5% QoQ. Compare this with the 0.5% growth seen in the UK and the US growing 0.4% on the same basis. However, within the eurozone, the data will serve to open up the ever-growing gap in economic performance between the core and the embattled periphery and, if sustained, will further persuade the ECB of the need for higher rates. Of course, that’s the last thing the periphery needs at this point in time, but the ECB is saddled with setting policy for the eurozone as a whole, even though this becoming an ever more futile mandate to fulfil.
Groundhog Day in Greece. This headline is one that might have been used at any time in the last 18 months. According to a Reuters story yesterday, those pesky inspectors from the EU and the IMF see a high risk of a shortfall in revenue and, as such, will want extra government spending cuts. German Finance Minister Schaeuble said as much as well: “We won’t be able to agree to additional measures without clear conditions”.
US recovery still on track. Thursday’s slew of economic data suggests that the economic recovery remains essentially on track. Ex autos and gas, retail sales rose by a creditable 0.2% in April, after a 0.7% increase in the previous month. In YoY terms, retail sales are up almost 8% which, with inflation of 2.7%, represents real growth of over 5%. Helping to support retail sales is the more positive performance in the jobs market: initial jobless claims fell 44K to 434K in the week ended May 7th. Separately, core producer prices continue to rise – up 0.3% in April – the second month in a row and a YoY increase of 2.1%. More Fed officials are starting to push for higher rates; Philly Fed President Plosser suggested that it would be time for the Fed to commence tightening in the not-too-distant future, and that it must be prepared to act aggressively.
Manufacturing remains one of the few bright spots in the UK. Unfortunately, good news is thin on the ground in the UK economy these days, but one consistent bright spot is manufacturing. Fingers crossed that it continues, as some of the recent industry surveys suggest that slowing domestic orders have weighed on production recently. According to the ONS, manufacturing production rose 0.2% in March, an increase of 1.1% in the first quarter vs. the final quarter of 2010. As such, we can expect the manufacturing sector to make a positive contribution to first quarter growth. In addition, yesterday’s trade figures imply that net exports could contribute more than 1% to GDP growth in the first quarter, with export volumes up 5% in the quarter and imports down 2%.
Nervous investors favouring cash over commodities. Some interesting and not so surprising, results from a recently conducted Bloomberg survey. Almost a third of global investors intend to put more money into cash over the next six months, with the same percentage intending to lighten up on commodities. It could be argued that we have started to see this type of asset allocation-shift over recent weeks, with some of the major commodities experiencing some sharp down-drafts and safe-haven assets gaining favour. Investors also seem to be less convinced about equities, especially those traders located in the United States.
Intriguingly, nearly one-third of investors in the poll felt that the US offered the best prospect for returns over the next half year. In contrast, Europe was regarded as one of the worst prospective investment locations. On currencies, the majority of those polled felt the dollar would outperform the euro over the next three months.
Finland gives support to Portugal bail-out. For a country of just five million people, Finland punches above its weight in European affairs on occasion. After the dramatic success of the anti-bailout True Finns party at the recent election, it appears that in talks between the two largest parties in the country have reached a common understanding regarding the conditions under which they would prepared to sanction aid being given to Portugal. Two of these conditions are a commitment from Portugal that it conducts meaningful state asset sales, and that private investors undertake to keep their money in the country. Finland is also seeking a guarantee that any bailout money will be repaid, although exactly how enforceable this would be given that Portugal’s financial predicament is open to question. Moreover, to the extent that this principal of climbing to the top of a sovereign’s capital structure (ahead of existing bond-holders) catches fire, the potential for even higher bond yields amongst Europe’s fiscal miscreants just increases. On Friday, we are likely to get confirmation that GDP fell in the first quarter in Portugal; with austerity on the way down the pipe, 2011 promises to be a very tough one for this economy.
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