US stocks fell for a second day as a broad-based risk-off narrative envelops global capital markets amid rising coronavirus cases worldwide that threaten to derail the recovery train. Companies whose destinies are closely connected to the reopening of the worldwide economy are hardest hit.
Investors continue to worry about the worsening Covid-19 situation, particularly in India and Japan which have triggered a two day pull back with continued anticipation of more state emergency requests.
Delivering an untimely conk buster, the surge has led to increased travel restrictions and severely dented parts of the priced to perfection reopen trade, leading to renewed concern over the continued economic impact, shrouding a batch of solid corporate results in the cloud for Covid uncertainty. Indeed, "priced to perfection" and rising Covid worry makes for the worst possible bedfellows.
The glaring problem is that despite strenuous efforts by the medical community around the globe, we’re not even close to calling it a day so that people can start again or continue with things more productively.
Vulnerability to renewed infections will translate into weak domestic demand in Asia. But, fortunately, exports continue to strengthen which is pillowing the slide.
Oil plummeted overnight amid a worrying Covid-19 resurgence as the epicentres of crises fall on two of Asia’s largest importers of crude oil, India, and Japan, which make up over 16% of global oil demand.
Increased travel restrictions have derailed Eid holiday plans and threatening the nascent jet fuel recovery, while new waves crashing onshore in Japan will likely lead to more state emergency requests.
With new Covid waves bringing risks onshore, unless there’s a quick reversal of tide it would likely require a rerating lower of global oil demand forecasts for this year. This latest Covid surge has wrong-footed more than a few traders who were building long positions ahead of what’s expected to be a successful US summer driving season.
Compounding matters is the more optimistic tone from Iran nuclear talks. A lifting of US sanctions and an accelerated return to total production for Iran would mean some near to medium-term pressure on prices.
Safe-haven demand for the US dollar, which is the ultimate negative signpost for risk, has also weighed on sentiment.
The USD is stronger this morning, capitalizing on “risk-off” which is enveloping global markets. But for the US dollar to make any significant headwinds, it’s mainly reliant on a hawkish shift in tone at the Fed to validate a bullish US dollar view.
With Covid concerns negatively denting oil prices overnight and regional travel restrictions likely to remain in force longer than expected due to the new Covid wave hitting Asia's shores, yesterday ringgit recovery could get walked back amid "safe-haven" demand for the US dollar.
Gold has held up well in the face of a slightly stronger USD but supported by falling US yields as the global capital markets veer to a decidedly defensive stance. The fact that gold has somewhat managed to move higher despite the safe-haven demand for the US dollar is also reassuring, as it could be a sign that any reallocation that could have been taking place might be taking a long hiatus, especially with stocks under pressure and more extended stimulus support to the economy possibly needed as this recent Covid surge could ultimately delay the Fed’s taper.
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Weaker than expected NFP print puts USD under renewed pressure; Gold extends gains to hit a recent high as commodities steal the show; GER30 stages recovery