Chinese proverb- Water surges only to overflow.

Most developed equity markets will close the end of May roughly where they started the month, despite the lacklustre finish. Holding onto a lot of the gains made since mid-February. Looking back over the month not a great deal has changed in terms of macro events, aside from interest rate expectations in the US. The other thing worth noting is the continued strength of the oil price, up around 10% since the start of the May.

The oil price and equities do generally correlate over time, probably as demand for both are a reflection of economic growth. Ironically, ultimately the rise in the oil price then tends to create the next global recession. In a strategy piece from Credit Swiss they believe the oil price is close to the ideal level for the global economy. Around $55-60 allows capex to return whilst not putting too much of a squeeze on the consumer. As far as the Saudi economy is concerned just below $50 a barrel is ideal as it mainly limits investment in low energy alternatives. Credit Swiss go on to point out that despite this recent recovery in the oil price, US inflation expectations have not yet increased.

Analysing economic leading indicators to try and understand if the economic picture around the globe is improving, there are some signs of a pickup in certain areas, but many of these indicators were reaching a low base. The divergence between cyclical and defensive stocks performance has improved from the start of the year but remains close to five year lows.  The Commodity Research Bureau boom bust indicator has likewise ticked higher in the past months but remains close to the lows of 2008.

The Economic Cycle Research Institutes leading indicators weekly index has moved higher in the past weeks. The Citi US surprise index has also ticked higher in the past weeks, having been on a downtrend for most of the year. China’s latest manufacturing Purchasing Managers Index reading for May, at 50.2, was unchanged from last month but slightly ahead of expectations.

Another thing that seems little changed this month is equity market sentiment appears to remain weak.

Just as the public at large and market commentators had begun to take for granted that the remain campaign was now winning the battle and closing in on the line ahead of June 23rd a Guardian poll put the leave campaign marginally in front. Opinion polls are likely to be a daily recurrence over the coming weeks. This latest poll appears to have made little difference to the bookmakers who still have the remain camp heavy favourites to win. Sterling did take a bit of a hit against the US dollar on the back of poll result falling just over 1%.

As we enter the summer months, August in particular can be a volatile time as last year and 2011 proved.

Posted on June 1, 2016 .