UK investors have brought with them the mantra of sell in May and go away after returning from the long holiday weekend. Weak manufacturing data from China and the UK as well as the Reserve Bank of Australia cutting interest rates to ward off deflation all point a weaker economic outlook. Stock markets have recovered all of their losses from the start of the year but sentiment is still damaged from the sell-off. While markets can still push higher, the beginning of May is a seasonal weak point that already appears to be triggering some profit-taking.
The cautious sentiment can be seen in precious metals markets, which are favoured in times of uncertainty. Gold has surpassed $1300 per oz while silver has crossed $18 per oz, both at the highest in 15 months. The strength in precious metals is in large part thanks to US-dollar weakness. The dollar index has fallen below 92, whilst the euro, British pound and Japanese yen are all at multi-month highs. The weak US first quarter growth figures on top of a cautious statement from the Federal Reserve has seen market expectations for a June rate hike fall to 12%.
Sterling came off its highs after UK manufacturing data saw a surprise contraction in April for the first time in three years. The UK economy remains worryingly dependent on the service sector, which is going to have to work a lot harder to keep UK economic growth afloat. Services as a component of estimated first quarter GDP were strong, but this could change if the much-vaunted Brexit-induced slowdown kicks in closer to the referendum.
The slowdown in Chinese manufacturing has prompted weakness in the basic resource sector of the FTSE 100. Volatile oil prices and nerves ahead of quarterly results from Royal Dutch Shell mean the oil and gas sector is acting as a drag on the UK benchmark equity index.
More plummeting profits from major European banks including HSBC, UBS, BNP Paribas and Commerzbank is sparking a sell-off in the banking sector with RBS losing over 3.5%.
The drop in HSBC profits was better than expected and has seen shares trade flat. Despite the volatility in emerging markets, the relatively faster economic growth in Asia continues to cushion HSBC against the problems facing the investment banking divisions within US and European-focused banks.
US stocks look set for a lower start in line with weak international markets ahead of vehicle sales data and more quarterly earnings, including from Halliburton which just announced the official cancellation of its deal with Baker Hughes.
Notable earnings before the US open: Pfizer, CVS Health, Estee Lauder and Halliburton
Notable earnings after the close: CBS and Western Union
USA pre-opening levels
S&P 500: 15 points lower at 2,066
Dow Jones: 118 points lower at 17,773
Nasdaq 100: 13 points lower at 4,346
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