(Bloomberg) -- 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 coronavirus infections, the collapse in corporate earnings and the shocks reverberating from the economic data are toxic enough. Now throw in a new eruption of political sparring between the U.S. and China, this time over the origin of the virus.
“A fresh threat of U.S.-China tariff escalation is yet another aftershock of the original crisis that is reinforcing a dollar-supportive backdrop,” said JPMorgan Chase (NYSE:JPM) & Co. currency strategists including London-based Paul Meggyesi and Meera Chandan.
On Monday, Asian and European markets provided a taste of how the week may unfold. Hong Kong’s Hang Seng Index tumbled 4.2%, while French and German stocks sank more than 3%. S&P 500 Index futures retreated as much as 1.8%. Japan and China’s onshore markets were shut for holidays.
The dollar and yen rose on demand for haven assets, with the Bloomberg Dollar Spot index gaining 0.2%. The Indonesian rupiah led a drop in emerging-market currencies, posting its biggest decline in six weeks.
Warren Buffett on Saturday tempered his normally bullish optimism during a meeting for Berkshire Hathaway Inc . (NYSE:BRKa) 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 U.S. 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% and U.S. Treasury yields dropped.
The following are comments looking ahead to a week in markets:
JPMorgan strategists, including Meggyesi and Chandan:
- “Besides putting pressure on Trump’s poll numbers and hence spilling over into U.S.-China geopolitical tension, the crisis has also raised the stakes of the U.S. elections, where a Democratic sweep is now in play.
- “The dollar has not been negatively impacted by this yet, but a greater discount may be demanded closer to November if these trends continue.
- “The concurrent synchronized deployment of massive quantitative easing will be a less of a major driver of relative currency performance, compared to last decade where QE was more rolling and less synchronized.”
Adarsh Sinha, co-head of Asia foreign-exchange and rates strategy at Bank of America Merrill Lynch (NYSE:BAC) in Hong Kong:
- “Risk-off seasonality is typically the topic du jour as we enter May. Investors should normally resist the urge to premise trading views on well-known seasonal patterns. However, if seasonality dovetails with fundamental risks, we think there is a more compelling case to fade the risk rally.
- “Markets may be underestimating the risk of imminent deterioration in U.S.-China relations and overestimating the incremental capacity of central banks to support risk assets.”
Adam Cole, Royal Bank of Canada’s chief currency strategist in Europe:
- “Concern on the potential for another flare up between the U.S. and China is dominating price action as U.S. Secretary of State Michael Pompeo said there was ‘enormous evidence’ that Covid-19 originated in a laboratory in Wuhan, echoing Trump’s comments last week.”
Eric Stein, Boston-based co-director of global fixed income at Eaton (NYSE:ETN) Vance (NYSE:EV) 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 U.S. 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 U.S., other countries, even the ones that seemed to mostly look the other way during the trade war, seem acutely focused on this issue.”
Jameel Ahmad, a markets analyst at FXTM in London:
- “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 (NYSE:BABA) and Tencent. I think companies need to take their cue from Amazon (NASDAQ:AMZN) 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. Investors should remain cautious and closely monitor the leading indicators for signs of gradual improvement from the Covid-19 shutdown.”
(Updates throughout.)
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