Take Five: Sell in May? Let’s find out

Oil briefly rose back above $120 a barrel, the highest since 2022, as the Iran conflict entered its third month and shut the Strait of Hormuz, raising inflation and growth risks globally. Investors are also focused on Friday’s U.S. payrolls report, with economists expecting 73,000 jobs added, while the Fed signaled a less dovish stance and the RBA faces a possible third straight rate hike with markets pricing an 80% chance. In Europe, Q1 earnings are expected to grow 3.2%, but the energy surge may dominate sentiment, and UK local elections could pressure gilts if Starmer’s Labour suffers a heavy defeat.

Analysis

The near-term winner is not simply “energy,” but the subset of European cash-flow stories with direct leverage to elevated commodity prices and a funding tailwind. Integrateds like SHEL can see a faster-than-expected step-up in buybacks and balance-sheet repair, but the larger second-order beneficiary is the European banking complex if higher oil keeps inflation sticky and term premia elevated: that preserves net interest margins even as rate-cut timing gets pushed out. The loser set is broader than just consumers; cyclicals with thin operating leverage and import-heavy cost structures are exposed if input prices stay high while demand softens.

The key risk is that markets are still treating the conflict as an earnings overlay rather than a macro regime shift. If the Strait disruption persists for weeks, the inflation impulse likely feeds first into breakevens and gilt yields, then into earnings downgrades with a lag of one to two quarters; that’s when the current “energy offsets everything” narrative starts to break. UBS’s downgrade on silver is consistent with that setup: a stronger real-rate backdrop and risk-off liquidity tends to pressure precious metals even when headline geopolitics are supportive, so the market may be underestimating how quickly a hawkish central-bank reaction can overwhelm safe-haven demand.

The Australian hike risk is a clean short-duration catalyst: a surprise tightening would reinforce the global “higher for longer” impulse and support the USD against commodity FX. Conversely, a softer payrolls print would be interpreted less as benign cooling and more as growth damage if energy prices remain elevated, which is a worse mix for equities than either shock alone. The consensus is probably overconfident that strong earnings can absorb every macro shock; the more likely sequence is margin resilience first, then valuation compression as bond yields reprice higher.

For HSBC, the setup is constructive but asymmetric: higher-for-longer rates and weak UK political credibility help NII near term, but a gilt selloff and domestic policy instability raise funding and capital-mark stress if the political noise broadens. The market is underpricing the chance that bond volatility, not earnings, becomes the dominant channel over the next 1-3 weeks.

Key Decisions for Investors

• Stay long SHEL versus broader European cyclicals for the next 2-6 weeks; the risk/reward is favorable as oil-linked cash flow should outpace any near-term demand disappointment, but trim into any Brent spike above the prior panic high because policy intervention risk rises quickly.
• Add a tactical long HSBC vs short UK domestic banks / rate-sensitive UK equities into the local election window; if gilts sell off on political instability, HSBC’s global earnings mix should outperform while domestic lenders and utilities carry more duration risk.
• Initiate a short silver exposure via SLV puts or a defined-risk short-dated put spread over the next 1-2 weeks; the catalyst is a hawkish bond-yield reprice from sticky inflation, which can overpower geopolitical safe-haven flows.
• Consider a long USD/short AUD trade into the RBA decision, using tight stops; the asymmetry is better if the RBA disappoints dovish expectations, but if it does hike, the move should still be limited by already-high market pricing.
• Pair long SHEL / short European industrials for 1-2 months as an earnings-quality hedge: energy cash generation is more directly levered to current macro conditions, while industrial margins are more vulnerable if input costs rise faster than pricing power.