As The First Quarter Ends, Here’s What to Expect in Q2

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The first fiscal quarter of 2017 officially ended on Friday of last week as US equities posted another solid weekly and monthly gain. Despite the longer-term trend of decent gains, equities around the world were mostly mixed during trading on Friday.

For equities in Asia, Hong Kong’s Hang Seng Index was down 0.78%, while Japan’s benchmark Nikkei 225 was down 0.81% for the day. Trading was not much better in Europe either, as London’s FTSE 100 closed down 0.63% for the day.

Analysts are attributing the lackluster final day of Q1 trading to the incredibly persistent political and economic uncertainty that started late last year and has ceased to abate. This is especially the case for equities in Europe, as British Prime Minister Theresa May signed and invoked Article 50 and officially started Brexit.

From when the article was invoked on Wednesday of last week, there are now less than two years and counting before the UK physically withdraws from the EU. In spite of the 24-month time-frame before any changes are felt, the signing of Article 50 seemed to unnerve some investors.

In terms of commodities, crude oil is back above $50 per barrel and ended with a sizable weekly gain of over 5.50%. Gold and silver are slightly negative for the month, but both metals posted an impressive gain of over 8% and 13%, respectively, for the first quarter.

Coming off a failed health-care reform attempt last week and a subsequent market sell-off of equities and other risk assets, investors looked towards economic data this week to gauge the direction of the economy.

Because of this, overall investor worry (measured by the VIX index) declined last week after a multitude of outstanding economic data was released. In fact, equities rallied nicely on Tuesday after consumer confidence exploded to the highest level since 2001. Domestic equities continued their gradual upward drift throughout the week.

As the second quarter is now here, so is a new earnings season. Judging by the surprisingly upbeat economic data released in the past few weeks, it’s safe to say market participants will not be overly shocked to see companies releasing solid earnings. If earnings reports are strong, markets will, as a result, edge higher. Earnings reports are only released four times per year, and they are one of the major drivers of overall market direction.

But many investors are not so sure Q2 will be full of rainbows and sunshine. With political uneasiness that just refuses to go away, apprehensions about the market are commonplace. Moreover, margin debt, or the amount of money retail and institutional investors borrow against their brokerage accounts for additional buying power, hit an all-time high in February.

This means market participants are using a lot of leverage with the expectation that prices will rise. If, however, prices fall dramatically, things could turn sour very quick due to the unprecedented level of leverage.

All-time market highs, all-time margin debt, and shocking political upsets (Brexit and the US election) all occurred during Q1, defying almost everyone’s expectations. So what does Q2 hold for the markets? The simple answer is: it’s anyone’s guess.