Sell In May And…
The old Wall St. adage, sell in May and go away may be in play! Sorry folks, had to do it. But seriously, with the end of QE2 coming, weaker economic data, and commodities beginning to sell off, markets are noticeably weaker across the board.
There are a number of converging factors going into today’s market action. First, let’s examine the commodities trade. There are 4 factors driving commodities right now: 1. The end of QE2 which has reduced hot money speculation; 2) China increasing bank reserve requirements to try to slow inflation; 3) the CME raising margin requirements thereby making it more prohibitive to hold positions and/or trade; and 4) weakening economic fundamentals.
This all adds up to the perfect storm in commodities so prices are lower, which is a good thing. However, if this also takes stocks lower then it could have an initial negative effect on the economy.
In addition, industrial production figures in both the Euro zone and the UK came in worse than expected, showing signs that those economies may be weakening as well. Add in the risk from the Euro debt crisis and you have the perfect recipe for lower prices.
What this also does is help reduce interest rate hike speculation abroad, as a continued decline in commodities prices should reduce inflation expectations and allow Central banks to not have to raise rates.
Oil is back to $95 and gold has retreated to the $1480 level, with all global stock markets lower. US retail sales and initial jobless claims are due out later this morning, though these number may come in worse than expected in light of the recent commodity inflation.
In the forex market:
Aussie : The Aussie is lower across the board as their employment report showed a loss of 22K job vs. an expectation of a gain of 17K. The unemployment rate held steady at 4.9% though, which is exceptional in today’s global economy.
Kiwi : The Kiwi is lower as stocks and commodities are lower reducing the risk for yield and increasing the demand for safe-havens.
Loonie : The Loonie is lower as its correlation to oil prices is highlighted this morning. In a risk-off environment, demand for the Loonie is light.
Euro : The Euro is lower across the board as the Dollar is strong on risk aversion. The major risk in the market right now is emanating from the EU, as the debt crisis in Greece is back in focus and not solution appears to be forthcoming. Industrial production figures came in worse than expected.
Pound : The Pound is lower as industrial and manufacturing production came in worse than expected, re-enforcing the declining growth story and providing cover for the BOE loose monetary policy despite the inflation report from yesterday.
Dollar : The Dollar is higher across the board as risk aversion has dominated the early market action. Advance retail sales figures came in slightly worse than expected, showing a gin of .5% vs. an expectation of .6%, though stripping out autos and gasoline sales the gain was .2% vs. an expectation of .5%, confirming that higher gasoline prices have hurt the consumer. Initial jobless claims came in at 434K, slightly higher than expected and PPI data was also higher showing a monthly gain of .8% vs. an expectation of .6%.
Yen : The Yen is mostly higher on risk-aversion as the un-wind of carry trades is increasing demand for Yen.
As we can see, it is apparent that the global economy is slowing down. The question is whether we are going to have a soft landing, or a crash landing thanks to Bubble Ben and QE2.
While the sell in May adage has taken on a new meaning from what was originally intended, we can see it is becoming harder and harder to support the growth story in light of all of the current news in the marketplace.
So this actually could be a time when the go away portion of the adage may apply, as there may not be a market catalyst to induce buying as the market sits around and waits for the aftermath of the end of QE2.
That’s not to say that markets won’t be volatile because they certainly can be, but rather that sentiment is changing from one of optimism to pessimism as the global economy trudges forward. This could potentially put the idea of QE3 back on the table, depending upon what happens in the near-term.
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