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Beware The Month Of June: Event Risks Are High

June is rife with event risks as at least three major economic events are coming up. As a result, the markets are in a sort of holding pattern, and analysts expect key indices to remain range-bound for now. Bank of America Merrill Lynch notes that the GT5 has been trapped between 1.2% and 1.8%, while the DXY has been stuck between 92 and 100. The ACWI has been range-bound between 380 and 440, while the SPX has remained between 1850 and 2100.

“Event risk month” starts with Fed meeting

Michael Hartnett, chief investment strategist at BAML, notes that there are three key events in June that the world’s markets will be watching. All three are sources of much debate, and it’s easy to see why the markets are so uneasy.

The first is the FOMC meeting on June 15. BAML Chief Economist Ethan Harris expects the Fed to hold up on hiking rates in June while making hawkish comments that will imply that policymakers are apt to raise rates in September. Meanwhile another team at the same firm warned that there could be a surprise rate hike this summer.

Indeed, several members of the Fed have been sounding more and more hawkish lately, but the markets aren’t buying it as well-known names like Dave Rosenberg and Jim Grant say that the Fed isn’t serious about its hawkishness. In fact, depending on which point an analyst or economist is trying to make, there are historical precedents pointing in both directions. In some cases, Fed members have made hawkish comments, only to pull back from immediately hiking rates, while in others, they seemed to balk at raising rates but then did so a month later.

event risks
event risks

Event Risks – Bank of Japan to meet, Brexit vote

The Bank of Japan is set to meet on June 16, and BAML Japan strategist Shusuke Yamada expects modest easing, plus a delay in the consumption tax hike and between ¥5 trillion and ¥10 trillion in economic stimulus to be announced in June or July.

In the U.K., the major event risk in June is tied to Brexit, which is up for a referendum on June 23, and Hartnett and team note that recent polls suggest a more than 75% probability that the nation will vote to remain in the European Union. BAML European Investment Strategist James Barty believes a “Bremain” vote would boost sterling and the FTSE Index modestly.

What to do in the current time of even risk?

In light of the event risk in June, Hartnett continues to expect volatility and returns in the single digits across assets. He suggests being long volatility and gold, favoring stocks over bonds and developed markets over emerging markets, and preferring investment-grade over high-yield. He also suggests being long Main Street and short Wall Street.

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