Expect an Eventful Summer

I've been keeping a low profile lately to observe the market development which mostly has been characterized by marginally positive to neutral sentiment. Equities somewhat higher,  oil has rebounded up to $50 supporting the energy sector / utilities and providing a degree of confidence to EM oil producers. Last but not least IG credit is stronger , supported by ECB's new corporate bond purchase program.  

My only transaction has been to buy some more Kinnevik B share now that they've dipped to 225kr and to average down my purchase price.  This holding to me is "off-benchmark" in that it is more in the future growth category than dividend income, but I believe long-term it will satisfy both objectives.

I believe the saying "sell in May and go away"  will apply to 2016 as well.  There are several reasons why i believe a 10-15% correction is coming in June-July.

1. Fed hike possible - June 15 Fed Chairwoman Yellen signaled on Wednesday it may actually hike in June and that two hikes remain on the table for 2016.  The market is clearly under pricing the probability of a June hike.  Market implied probabilities for a June hike  jumped from 5% to 30% post release of the minutes.  It should perhaps be higher yet...    A hike on balance should be equity valuation negative, particularly for div income stocks
2. Brexit Referendum - June 23.   Much already been said about this.   Polls say 40-45% chance of a brexit while Bloomberg's "superforecasters" suggest a much lower risk at 25%.  In any event,  a Brexit vote would have drastic and unpredictable consequences to the market as it introduces considerable uncertainty to Britain, Europe and indirectly the world.  With such a risk on the horizon,  why risk investing before this event? 
3. Greece/IMF. - Jun 7-Jul 20  Will there be a new standoff between the creditors and Greece this summer as a repeat of 2015? I think not, but it may still get messy with delays and broken promises which will spook markets. The added spice here is a disagreement between IMF and the EU led by Germany. The IMF wants to grant some debt relief now, while Germany wants to delay it until 2018 or later, effectively kicking the can down the road to appease German voters and southern European governments which have sold their people the virtues of austerity.  Greece is so indebted, the only solution to a bankrupt state is debt relief to give some chance of growth - moral hazard or not, the country is too far gone.  GDP of €176bn cannot carry a debt burden of €300bn (170%) even if the debt is spread out over 40 years. With zero or negative growth, there is no scenario in which Greece can "grow" its way out of the problem - and inflating away debt looks unlikely.  
   
   According to the WSJ, next key dates are  (WSJ Article on Greece Debt)
• Jun 7-  IMF- €300m  (2010 rescue)
• Jul 13- IMF - €449m (2010 rescue)
• Jul 20 - EU -  €3260m (two tranches)
  
  EU needs IMF in the program to maintain fiscal discipline.  Without agreement with the IMF, there will be now disbursement by the EU.  In total some €4bn due over summer. It could get messy.   
4. General over-valuation - Now.   Considering markets are already "toppish" with lower revenue and earnings, valuations look high and ought to come down.  Share buybacks cant continue for ever.  This is to say that on balance, risks are to the downside.  It would take some markedly good news about inflation or global growth to warrant higher indices.  There are of course bright spots, but overall equity indices are on the high side.
5. US election -  Republican Convention July 18-20 .  Elections are Nov 8,  which in itself could be a disaster if the Donald is elected, but there are market risks even in the near term.  If Trump is officially selected as the Republicans candidate at the convention on July 18-20.  What happens if Cruz (or someone else) is selected without popular support?

With so many "risky events" scheduled over the summer, I certainly plan to kick back on the sidelines with a cold beer and enjoy the footy Euro Championship, in waiting for a good entry.