Anarchy in the streets threatens to throw a wet blanket on risk recovery as investor optimism over economic reopening in the US could wane. If American consumers were reluctant to come out of their Covid-19 lockdown cocoon fearing a secondary spreader, it’s unlikely they’ll feel any safer with military Humvees rolling down Pennsylvania Avenue. The economic recovery has been dependent on reducing fear. If fear is generated by anarchy in the streets, that will harm the recovery.
Trump's foray into what is effectively a "War Measure Act" could negatively impact the US equity market while derailing the S&P 500 bullish ambitions to test 3100 this month. Still, there’s a lot of fizz left in the can as global markets remain buoyed by the further reopening of economies and hopes for a quick economic rebound. Still, fear to leave you home is the rally slayer.
Outside of what we hope is just a short-term wobble in US markets, but more importantly, cooler heads prevail on the US streets. It’s been a solid start to the month for most equity markets in Asia as investors put concerns over increasing US-China tensions behind them while the Caixin China manufacturing PMI moved back into expansion territory at 50.7.
This better tone in Asia has fed through to European equities with the DAX up and investors paying careful attention to sector performance again, given some of last week's moves. The Eurostoxx Bank index is also up over 3%, helped by the headlines around Mediobanca as Billionaire Leonardo Del Vecchio seeks to increase his stake to 20% – he currently owns 10%.
There’s a lot of event risk for markets to deal with this week in the form of Thursday's ECB meeting and Friday's US employment report. Sentiment in the short term continues to remain more constructive, provided that equities are willing to shrug off unrest in the US as well as concerns over the US and China relationship.
While equity markets remain a matter of momentum, one thing to consider is the role of the CTAs. If there’s a decisive shift in the technical landscape they’ll re-emerge as the dominant force in markets, just as we saw on the break of 3000.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies