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Will markets sustain a rebound after a torrid week in May?

Here are the key questions facing investors as a new trading week beckons.

Will markets recover their mojo?
After a volatile week for risk assets and, in the case of investors exposed to Brazil, a shellacking, the coming days matter greatly in shaping whether this year really warrants a case of selling in May and sticking to the sidelines for the summer.

Higher volatility entails weaker share prices, lower bond yields and pressure on emerging markets, as seen briefly last week. However, buying the dip has been ingrained in the mindset of investors and time and time again since 2009 such bravery has been rewarded. There’s certainly plenty of dry powder on the sidelines waiting to pick up assets on the cheap. Bank of America Merrill Lynch says fund manager holdings of cash are “too high for a big top in markets’’.

Last week’s Washington ructions, which prompted a big sell-off in the dollar and US stocks, may fade while President Trump tours the Middle East on his first overseas trip. But the dollar remains vulnerable to more economic disappointment, so GDP numbers plus Federal Reserve minutes and data on home sales, jobless claims and durable goods all have market-moving potential.

Key to market sentiment is whether investors think the Fed will revert to caution and hold back on a June rate rise. There are many moving parts — from slowing inflation and China tightening financial conditions to commodity prices and the pace of global growth. Investors are still leaning towards the Fed going in June — but would like some reassurance.

Any surprise from Opec and Russia?
Brent crude has bounced firmly from its recent foray below $50 a barrel.

All eyes will be on Opec’s meeting in Vienna, where the cartel is broadly expected to extend the duration of its output cuts for another six to nine months. The big question though is whether the group and its allies such as Russia may look to surprise the market by agreeing a larger reduction at Thursday’s meeting than the combined 1.8m barrel a day curbs already in place.

While analysts think the most likely outcome is a straightforward increase in the duration, with Saudi Arabia and Russia both pushing for a nine-month increase, many traders think the market may require a bigger shock if Opec wants to push prices further above $50 a barrel.

Whether they are willing to do that with US shale already rebounding fast remains to be seen.

When does euro strength raise the alarm?
The single currency has appreciated sharply of late, rising towards $1.12 versus the dollar — a level not seen since last October. The euro has also approached ¥125, its strongest level in 13 months.

That might reignite European Central Bank concerns about a strong euro’s impact on exporters, particularly if the pace of the euro’s strengthening becomes uncomfortably quick.

Several factors are in the euro’s favour. European political risk is off the table, the eurozone economy is growing fast, the dollar is wobbling, the euro is considered cheap, and the eurozone’s capital accounts surplus encourages strong fund inflows. The euro also tends to demonstrate haven tendencies when markets become risk-averse.

The biggest catalyst, though, is tapering. Minutes from the European Central Bank’s recent meeting set the stage for a shift in its forward guidance when policy officials convene next month. UBS thinks tapering will arrive in September and sees the euro up to $1.15 in six months. RBC Capital Markets is more circumspect, expecting QE to remain in place until mid-2018, coming off only glacially.

It may be premature to start worrying about euro strength, but positioning data show how investors are switched on to its potential upside.

A rush of debt deals for the US muni bond market?
One of the marquee issuers in the municipal bond market will test investor enthusiasm and its ability to cut its borrowing costs when it issues a $2.2bn bond next week to refund some of its earlier issuance.

The sale from Hudson Yards Infrastructure Corporation, which is primarily tax-exempt, stands out after a drop in new bond issuance in the $3.8tn market that states and local governments use to fund vital public works. Sales are off more than 10 per cent from a year earlier, according to Thomson Reuters. For that and other reasons, the deal is expected to draw significant demand.

The original bonds sold by the corporation helped finance the extension of a subway line as the city transforms a 26-acre train depot on Manhattan’s far West Side.

Analysts with Barclays note that market “activity remains rather subdued”, estimating that $100bn of municipal bonds will mature this summer. The investment bank says that supply is unlikely to “be heavy” over the next few weeks. But a successful offering from Hudson Yards, and a wider improvement in the market, could tempt other issuers to the table. Barclays adds: “In June, supply is likely to truly test the market.”

Will demand remain robust for European sovereign bonds?
European sovereigns may be enticed to launch new long-dated debt while borrowing costs are still extremely low, and demand from the investor community is still demonstrably benefiting from a wave of post-election euphoria.

Last week, France attracted over €31bn of orders for a €7bn 31-year bond with a coupon of just 2 per cent, highlighting robust demand for sovereign debt in the aftermath of Emmanuel Macron’s election.

Bankers and investors expect a syndicated bond sale this week, possibly for long-dated paper from Belgium after it cancelled an auction last Monday.

Bond issuance is at a sensitive juncture in Europe. While the risks from the French election have lifted, European bond markets are also addressing the prospect of potential changes in monetary policy this year or early next year, especially in relation to the ECB’s bond purchases.

A Belgian sale would provide the next test of how strong and sustainable investor demand is.

Reporting by Michael Mackenzie, Roger Blitz, David Sheppard, Eric Platt and Thomas Hale