May 3, 2019 / 11:00 AM / 16 days ago

Take Five: Vol squall coming? World markets themes for the week ahead

(Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2019. REUTERS/Brendan McDermid

1/SELL IN MAY?

With cross-asset volatility at record lows, it’s a great backdrop for investors to load up on risk. Reams have been written on the reasons for falling volatility, but logic attributes it first to major central banks’ recent tilt back into dovishness, and second to the global economy’s tepid but steady expansion with few inflation surprises.

So low is cross-asset vol that a gauge compiled by brokerage INTL FcStone stands 3.6 standard deviations below the mean. In other words, it deems that a vol surge has less than a 0.02 percent probability of occurring. And with that has come willingness to go short safe assets such as gold or Treasuries, and on protective hedges such as the VIX. (The latter is a measure of how much S&P500 options are expected to fluctuate, essentially a vol gauge). Outstanding shorts on VIX futures have reached record highs, CFTC data shows, surpassing the build-up seen before last February’s “Volmageddon” blowup.

Unsurprisingly, some market watchers advise caution. As Volmageddon showed, vol can spike spectacularly in a quiet market, sometimes driven by just one unexpected data point. After all, if the old adage holds, some people may be looking to sell in May and go away.

Graphic: VIX futures - tmsnrt.rs/2LiRsW2

2/GIMME HOPE

Data: more important than usual these days as markets try to decide whether the green shoots cropping up in some places are the real deal.

Take the euro zone. Growth was faster than expected in the first quarter, after slumping in the second half of 2018. U.S. and Chinese first-quarter GDP surpassed expectations, too, while the Bank of England has just raised growth forecasts for 2019.

So will upcoming data — U.S. and Chinese trade numbers — surprise to the upside as well? Germany releases industrial orders figures on Tuesday, and Friday brings a raft of British data, including first-quarter GDP.

For sure, one week of brighter data isn’t enough to shift entrenched pessimism. So while Citi’s economic surprise indexes for Europe and United States have started ticking higher, they remain in negative territory. Nor have brighter growth numbers managed to lift German 10-year bond yields much above zero percent yet. But keep watching that data.

Graphic: Green shoots of false start for Europe's economy - tmsnrt.rs/2VK8UGG

3/“TRANSITORY” WEAKNESS?

This month’s Fed meeting saw Chairman Jerome Powell play down recent weakness in U.S. inflation as “transitory” and declare the policy stance “appropriate”.

His failure to give any hints that the central bank was weighing interest-rate cuts disappointed the S&P500 and pushed money markets to slash rate-cut bets for this year to around 40 percent from over 60 percent. It will also have earned Powell the ire of President Donald Trump, who has slammed the Fed boss for not doing more to support the economy.

So is Powell right in his view of inflation? Some recent indicators, from first-quarter growth to factory orders to productivity, have been pretty strong. The flip side is manufacturing is growing more slowly and inventories are building. So we’ll need to see whether consumer and producer inflation figures due May 9 and 10 confirm the inflation backdrop is indeed transient.

Graphic: "Transitory" weakness - tmsnrt.rs/2WkULNe

4/TECH TALK

Forecast-smashing results from Facebook, Amazon and Apple have laid to rest any short-term worries about the so-called FAANG group of tech titans. Google and Netflix, the other members of the cohort, were less sweet but not disastrous. Hopes now are that Asian Big Tech will confirm the comeback signals — mid-May is when China’s Baidu, Alibaba and Tencent update us on their earnings.

For MSCI’s global tech index .dMIWO0IT00PUS, net earnings revisions are at their strongest in over six months. With 60 percent of IT companies having reported so far, almost 90 percent have beaten expectations, according to UBS. Coming after a string of downgrades before March, that’s a relief.

However, global tech earnings growth is expected to slow, compared with 2018. But after two years of double-digit growth, a pullback may represent a return to normal rather than a worrying drop. It’s more than likely that growth-hungry investors will return to backing big tech.

Graphic: Tech comeback - tmsnrt.rs/2Wj4wMb

5/RATES ON HOLD OR(R) LOWE(R)

Markets were waiting to see who would cut interest rates first – Adrian Orr or Philip Lowe? The Reserve Bank of Australia, run by Lowe, has decided not to. So now it’s a question of what the Reserve Bank of New Zealand, headed by Orr, does on May 8. Both have the same story to tell – low inflation, strong labor markets and limited room to cut interest rates. Both economies have strong links with China, where growth is slowing.

Lowe’s decision to hold rates provided a boost to the Aussie dollar though he left the door open to rate cuts. Possibly the decision was also complicated by upcoming elections but analysts polled by Reuters broadly expect two rate cuts this year.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2019. REUTERS/Brendan McDermid

For Orr, the complication is that the new monetary policy committee now includes external members. The recent rise in the Aussie-Kiwi exchange rate has suggested there’s a greater chance of a cut in New Zealand. But with the RBA on hold, the RBNZ might opt to do the same.

What’s not in doubt is that Asia is in policy easing mode - Malaysia on Tuesday moved to support its economy with a 25 basis-point rate cut. Others are likely to follow.

Graphic: Asia central bank policy rates - tmsnrt.rs/2Vz4keD

Reporting by Jennifer Ablan in New York, Vidya Ranganathan in Singapore and Danilo Masoni in Milan; Saikat Chatterjee and Dhara Ranasinghe in London; compiled by Sujata Rao; editing by Larry King and Andrew Heavens

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