Bad Month Gets Uglier for Pretty Much Everything Except Bonds

(Bloomberg) -- The old “sell in May and go away” adage might have been better this year reading, “sell before May.”

Risk assets have had a lousy month with only traders long bonds and the dollar smiling. A month bookended by surprise tweets from President Donald Trump -- the first on China, the second on Mexico -- steamrolled the calm felt in April when trade optimism and a dovish turn from global central banks still ruled investor sentiment.

On May 5, Trump tweeted that tariffs on China would rise, shattering market complacency and sending volatility soaring. Traders rushed to reprice a re-ignited trade war and the possibility it would be long, drawn-out ordeal, and recession concerns returned. Then Trump ended the month the way he began it, tweeting late Thursday he was going to boost tariffs on Mexico in a bid to stop immigrants illegally crossing the border.

Read: Trump ‘Gone Rogue' on Trade Is Last Thing Global Economy Needs

The S&P 500 has fallen 5.3% this month and the MSCI All-Country World Index is off 5.7%, both poised for their worst drops since December. The JPMorgan Emerging-Market Currency Index tumbled the most since August and the Bloomberg Dollar Spot Index is close to its highs from the end of last year. Yields on 10-year Treasuries are down more than 30 basis points.

Futures contracts on American equities benchmarks fell more than 1% before the market open Friday, showing the rout should extend.

“The increasingly upbeat mood of late April was punctured by the very much not-priced-in collapse of U.S.-China trade talks,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. “Since then we have had a great deal of turmoil in global equities and EM FX plus a stunning rally in safe-haven government bonds.”

The tariff thunderbolts sent market confidence reeling.

“You're seeing investors over this past month focus on their anxieties,” said Hannah Anderson, global market strategist at JPMorgan Asset Management in Hong Kong. “We're seeing a lot of movement as investors try to figure out what are the right expectations for future growth.”

Read more about Wall Street handicapping a trade war.

While summers used to offer a quieter time in markets, that is not the case in the Trump Era. Traders are now focused on the June 20 Federal Reserve meeting, on the look out for commentary on trade, as well as the G-20 meeting in Osaka at the end of the month, where Trump and China's Xi Jinping are still expected to meet.

While stock market optimists are clinging on to a so far resilient global economy, benign monetary policy environment and the hope that that Trump will eventually need to make a deal, the month of May has made others think again.

“We could fall another 10% on the worst-case scenario (total collapse in discussions), but even at the current level I still think macro investors who are buying are far too optimistic,” said Stephen Innes, head of trading and market strategy at SPI Asset Management. “Why anyone remains positively disposed to equity markets in this environment is beyond logic.”

--With assistance from Gregor Stuart Hunter and Eric Lam.

To contact the reporters on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net;Adam Haigh in Sydney at ahaigh1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Ravil Shirodkar

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