The month of May is gone and despite the old saying “Sell in May and Go Away”, the equity asset class has registered historical record inflows. Although the jeopardized picture, US equities outflows have been compensated by international mutual funds and ETFs inflows. The debate still holds on.
Almost 27 billion dollars of inflows supported the equity price action also in May. During the month, the market experienced just two days of “higher” volatility as the political risk temporarily affected the positive momentum. The Brazilian stocks sell-off, together with the widening of the sovereign CDS, reflected the concern about the reform agenda because of the accusation against President Temer. The market turbulence begun the day before, 17th of May, given a possible impeachment of President D. Trump in conjunction with the FBI investigation about the Russian influence on 2016 US Elections.
But that’s it and the VIX Index, except a few days, continued to trade without discounting any risk for the future. I do not believe that this is a pure anomaly of the market. More specifically, in the current environment it seems to be reasonable to see lower and lower levels of volatility due to the role of Central Banks. In other words, a shock of government yields could be the trigger for a repricing of risky assets if not sustained by higher levels of growth.
Moreover, as highlighted by a research report from Goldman Sachs, last rally explanation is not only motivated by the analysis of flows. In fact, the European Equity behavior was more correlated with the Euro Area Composite PMI and Manufacturing PMI than with inflows. Of course, the appetite for risk coming from extra EU investors has been playing its own role, but the relative impact is limited. We are embracing the idea that a possible decoupling between Europe and US is more likely due to a combination of factors: the ECB supporting dovishness compared to the FED willingness to hike and the relative strength of economic data still in favor of better opportunities in the Euro area. For this reason, I consider the recent higher inflows a consequence rather than the first catalyst of last rally. The question is whether those inflows are going to be considered as a long-term positioning and immune to a US equity market correction.
Still I keep monitoring the level of credit spreads, especially in US where the role of the Central Bank is set to be less invasive with respect of what is happening in Europe. Also, the debt bubble in China either if you are considering it as a private debt or better as a shadow government one, is an element to be taken into consideration. Meanwhile we should enjoy the low level of volatility. Just be ready to jump off a trade that seems to be over crowded.
Christian Zorico: LinkedIn Profile