Sell in May?

Overview: The retreat in US stocks yesterday, coupled with disappointing earnings news, has sent equity markets lower today.  However, the May Day holiday has closed most markets, warning of spill-over at the start of next week, though China's markets are closed through next Tuesday and Japan through next Wednesday.  In the Asia Pacific region, only two bourses were open, and they both were sold aggressively.  Australia's benchmark fell 5%, and the Nikkei slid 2.8%.  In Europe, the UK is open, and the FTSE 100 is off around 2% in late morning turnover.  US shares are heavy, and the S&P 500 is poised to gap lower. The US 10-year yield is off a few basis points to hover near 60 bp.  The dollar is mixed.  The dollar-bloc currencies and the Scandis are nursing losses in the risk-off mood, while the euro has joined the yen and Swiss franc with small gains. Emerging market currencies are mostly weaker, led by South Africa, Turkey, and Mexico.  Gold settled below $1700 yesterday, and follow-through selling may be setting up for a test on the $1640-$1650 support area.  June WTI that had neared $10 a barrel earlier this week, briefly poked above $20 today where it met a wall of sellers.  

Asia Pacific

Australia's manufacturing indices tumbled. The AiG and CBA measures fell further in April, with the latter decline more than the preliminary estimate. Separate reports warned that given the public assistance sought and unprocessed claims, unemployment may be surging above 10%.  

Japan reported vehicle sales in April fell by a little more than a quarter year-over-year. In March the decline was about 10%. Separately, Tokyo core CPI fell below zero in April (-0.1%) from 0.4% in March and weaker than expected. This hints at the risk that the core rate for the country also so the return of deflation.  Japan's core rate excludes fresh food.  When both energy and fresh food are excluded, Tokyo's CPI fell to 0.2% from 0.7%.

The dollar reached JPY107.40 yesterday after being a big figure lower. It snapped a six-day decline. However, the greenback was greeted by sellers in Toyko and is near JPY106.80 in London.  The JPY106.40-JPY106.60 area offers initial support.  We have been waiting for a reversal pattern in the Australian dollar. A minor one was seen yesterday, and there have been follow-through selling today. Initial support is seen in the $0.6430 area, and then the week's low near  $0.6380. The RBA meets next week and may warn that further gains in the currency will make an economic recovery more difficult. Although mainland China was closed, the offshore yuan (CNH) weekend by around 0.6%, which puts the dollar above CNH7.12. It reached CNH7.1350, its highest level since April 2.  Some link the yuan's weakness to a signal by Chinese policymakers of displeasure with talk in the US about retaliation over the Covid-19 pandemic.  

Europe

The final UK manufacturing PMI was a touch weaker than the preliminary estimate.  It stands at 32.6, down from 32.9 flash report and 47.8 in March. April Nationwide houses prices held up better than expected.  Consumer credit collapsed by an unprecedented GBP3.8 bln in March. The Bank of England meets on May 7.  

The ECB underscored its commitment to do whatever is necessary. It took two new initiatives yesterday. First, it offered a new short-term loan facility called the Pandemic Emergency Long-Term Refinancing Operation (PELTRO). Funds will be made available starting this month at minus 25 bp and will be available for a term of up to 16 months. This will appeal to those banks that do not lend to the public sector. There was a hint that it could be open to non-banks, but it is not completely clear.  Second, the ECB lowered the rate on the Targeted Long-Term Refinancing Operations that can now be as much as minus 100 bp if the lending meets the quota. This is 25 bp lower than previously. The first auction of these funds will be in June. Lastly, ECB President Lagarde underscored that its efforts were scalable, implying a likely increase in its two main asset purchases programs and that it would be extremely flexible, which means further deviation from the capital key. The signal is that it will work to ensure tighter spreads.  

The euro's 0.75% advance yesterday was the largest since April 7. Follow-through buying today is lifting it to nearly $1.10.  It has not traded there for a month. A band of resistance extends to $1.1035, where the 200-day moving average is found.  It is looking a bit stretched ahead of the North American session. Sterling's rally seemed to negate the potential head and shoulders pattern, but it stalled near $1.2640, near its 200-day moving average and last month's high. It has slipped to around $1.2535. A break of $1.25, and especially a close below it, would re-open the downside next week.     

America

A day after the FOMC meeting, the Federal Reserve announced two adjustments to its programs. First, it widened the Payroll Protection Program lenders to include non-depository institutions. This seems like a minor tweak, and much of the new money appears to have already been claimed (i.e., begun the process). Second, and more importantly, it is expanding the Main Street Lending Facility to include some larger companies. Many in Congress that have been advocating support for oil companies, which a recent op-ed in the Financial Times said, was "worse than death," see the Fed's decision as supporting the industry without having to have a separate facility. Recall that some of the large producers could already qualify for assistance under the Primary and Secondary Corporate Bond facilities. By one estimate, some 40% of the S&P 500 can be eligible for Fed assistance.  

The Washington Post carried a story playing up the Trump Administration's efforts to hold China responsible for the coronavirus. A range of retaliation has reportedly been discussed. Some old ideas, like preventing the government pension funds from investing in Chinese equities to scrapping it's sovereign immunity, to most controversially, canceling some of its debt it owes China.  The US also benefits from sovereign immunity, and this is a knife that cuts both ways. The idea of canceling debt to the US owes to China was quickly denied by Trump's economic adviser Kudlow and judging from the market's lack of material reaction means that it is not believable. It would be difficult for the US to default to a specific holder of US Treasuries, and even if it could, the risks to US creditworthiness and reputation make the costs of such retaliation quite high. And despite the costs, if the US chose to go down this path, there are many steps China could take to express its displeasure. Recall that China is the primary source of many drugs and antibiotics in the US directly (and indirectly through India). China is also the primary source of rare earths needed in electronics, autos, and military hardware. 

The US reports the manufacturing ISM and the final manufacturing PMI. April auto sales are expected to have fallen to about 7 mln vehicles (from nearly 11.4 mln in March and 16.4 mln in April 2019). Markit reports Canada's manufacturing index, but more importantly, the Bank of Canada is expected to announce Governor Poloz's successor today. His term end early next month. The deputy governor Wilkins is seen as the odds-on favorite to become the first woman governor of the central bank.   

The recent price action of the Canadian dollar illustrates our insight that it is more sensitive to the risk attitude (using the S&P 500 as a proxy) than it is to oil. Despite the surge in oil prices, the Canadian dollar weakened yesterday, and the weakness of equities today is dragging the Canadian dollar lower. The US dollar approached the April low yesterday before recovering smartly to finish near CAD1.3945 (from a low near CAD1.3850). Today is it is back near CAD1.4025-CAD1.4040.  Initial resistance is seen near CAD1.4060 and then CAD1.4100.  Risk-off is also taking a toll on the Mexican peso. The greenback reversed higher from the MXN23.65 area yesterday to settle near MXN24.17 and is now pushing above MXN24.50. A move above MXN24.66 would target MXN25.00 in the near-term. Lastly, as expected, Colombia's central bank cut its overnight lending rate by 50 bp to 3.25%. It cut rates 50 bp in March as well. The Colombia peso was the best performing Latam currency in April, with a nearly 2.9% gain against the US dollar.  

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