Tipping Point Looms For Risk-Averse Equity Markets

By Jan-Patrick Barnert and Michael Msika, Bloomberg Markets Live analysts and commentators

After April failed to provide the seasonal tonic some might have hoped for, a packed first week of May could be pivotal to those who remain optimistic that a bottom for stocks is near.

A raft of economic and earnings reports will be watched carefully for clues on market direction, while Wednesday’s Federal Reserve rate decision has the potential to be a tipping point more than ever.

“We are 100% certain there will be a recession someday in our future, but not yet,” says UBS GWM Chief Investment Officer Mark Haefele. Instead of positioning for that scenario, investors should focus for now on how to capture opportunities in a climate of high inflation amid concerns about fast-paced monetary policy changes, he says.

Still, sector rotation last month shows many aren’t yet heeding such advice, favoring defensives over growth and cyclical stocks.

For now, risk aversion is the name of the game. The Stoxx 600’s 1.2% drop in April was that month’s first decline in seven years.

“The more interesting moves, as so often the case, were beneath the surface with some of the year-to-date leadership in the energy, commodity complex fading, while defensives outperformed,” says Cowen’s head of European trading Carl Dooley.

Macro data due this week include final PMI numbers for April and factory orders from Germany. And on another busy earnings week: 163 companies in the Stoxx 600 Index will report results.

So far, the picture isn’t that bad as companies are strongly beating estimates, according to Barclays strategist Emmanuel Cau. “While firms sound more cautious, most stick to their guidance and expect resilient margins,” he says, noting that revenue growth has so far remained solid at 12% in Europe and 11% in the U.S.

But more will be needed to reverse market momentum that has turned negative across the globe. Volatility of around 30 points signals the extent of investor caution. A SocGen sentiment indicator has dropped to levels last seen during the peak of Covid-19 lockdowns.

“This will likely culminate in a bounce in equities,” perhaps post the Fed meeting, SocGen strategists Manish Kabra and Arthur Van Slootenwrite. Yet they warn that it could prove short-lived again.