The Global Economic Doctor

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Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Goodbye May, Hello June!
Step with care and great tack, and remember that Life’s a Great Balancing Act!
— Dr. Seuss

Summary: As May winds down, June looms.  It has great potential to be one those memorable months for investors, corporate chiefs and economic policymakers. Just to provide the high points: OPEC meets and US ISM manufacturing index reports both occur on June 2th; the FOMC meets June 14th-15th; the UK goes to the polls on June 23rd to vote on whether to remain in the European Union (EU); the European Central Bank begins its corporate bond buying program; and Spain goes to the polls to hopefully undo the deadlock from the December 2015 parliamentary elections.  Heading into the month, there has been a considerable build-up by Fed officials that rates are going up in June or July. A relatively forgettable G7 meeting in Tokyo in late May achieved little (probably pointing more to the preoccupation of leaders trying to cope with populist movements). And, there is a growing sense of disequilibrium in parts of the developing world (Brazil, Venezuela and Thailand come to mind). China’s growing debt burden is becoming more of a market focus as investors and policymakers ponder the ability of Beijing to manage it through a slowdown. In securities markets, what has been noticeable is the outflow of money from equities into fixed income and cash.  According to Lipper Fund capital flows, for the week ended May 25th, equity funds saw a net outflow of $4.8 billion, while there was a net inflow into investment grade bond funds of $873 million and $7.3 billion net inflow into money market funds. Another data provider, EPFR Global, indicates that equity funds have seen total outflows of over $100 billion year-to-date.  The VIX index (which measures volatility) ended last week at a low 13.12; we don’t expect that to last the month. Considering the economic and political landscape for June, there is a strong likelihood that volatility is going to return. It is probably a good time to put on the seatbelts.




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