Markets have turned risk-averse since the start of May, with world stocks falling more than 5 per cent and commodities staging a broad retreat. But is the current retreat a moderate case of "sell in May and go away," or the start of a more serious sell-off, similar to that seen last summer?
Rupert Robinson, chief executive of Schroders Private Banking, believes the former is the more likely scenario. "Profit growth remains robust and valuations are attractive," he says. "However, in the short term, there are numerous headwinds that could cause markets to fall further.
"The impending end of the Federal Reserve's second round of quantitative easing, Japan falling back into recession and monetary tightening in China - fuelling fears of a hard landing - are all casting shadows over investor confidence. With Italy being threatened with a downgrade and Greece heading dangerously towards default, the spotlight is firmly back on the sovereign debt crisis in Europe.
"Investors should keep their powder dry for now and wait for buying opportunities when markets have corrected further. These days markets price in risk aversion much more quickly."
Stephen Lewis, chief economist at Monument Securities, says investors may have been anticipating the end of QE2 by taking profits. "However, if loose monetary policy has, up to this month, been fuelling a rise in the prices of risk assets, there is an argument that such profit-taking is premature. Could it be that the markets' fears relating to the end of QE2 are exaggerated?
"The Fed's QE2 will continue for five more weeks. In that time, the U.S. central bank could well inject, on a net basis, another $90-billion (U.S.) or so into the capital markets. That will represent a very substantial addition to market liquidity, should it remain uninvested in risk assets.
"The likelihood is, then, that if investors are already discounting the end of QE2, they are moving too soon. There was a similar market move in February 2010, ahead of completion of the first QE program. Taking that parallel, we should look for the sharpest losses in risk assets to be delayed until the third quarter of this year."
Jan Loeys, head of global market strategy at JPMorgan, says a lack of conviction among investors over the next big move in asset prices is a result of conflicting signals of near-term weakening in industry but medium-term resilience of global growth.
"We see equity markets in a range over the next month or two - although the array of negative forces will not be big enough to derail the medium-term uptrend in equities," he says.
"Risky markets, and everything with a decent yield, should gain over the next six to 12 months, due to the still massive value gap versus safe asset classes. The end of QE2 should not derail risky markets as its positive boost last year came from the message that policymakers would do what it takes to restart the economy. The end of QE2 means more 'mission accomplished' rather than a tightening of policy."