US equities closed higher Monday, the S&P ultimately closing 0.6% higher after opening lower and following losses in Europe and a mixed session in Asia. US10Y yields little changed, rising 1bp to 0.71%.
Coronavirus infection concerns continue to linger; the Governor of Texas indicated overnight that infections are rising at an unacceptable rate. There was better news in Europe, however, with the UK reporting less than 1,000 new infections for the first time since March 23. If the US can practice better social distancing, stop protesting and wash their hands, maybe the market can get down to the first order of business, which appears to buying stocks incessantly.
The market has two things to deal with this week. On the data front, the June preliminary PMIs are released with the market expecting a further rise in global activity. However, the critical thing will be how the market deals with the ongoing pick-up in virus cases.
Recent headlines have not been that positive, with an uptick in cases in parts of the US. Over the weekend, the RKI (Robert Koch Institute) reported that the virus reproduction rate has jumped from 1.79 to 2.88.
So far, infection spikes have been localized but concerns should continue to grow about a second wave. However, with renewed widespread lockdowns the most unlikely course of action, the markets seem to be just shrugging off these concerns as the lockdown-easing narrative persists.
Any lingering weakness from last week was short-lived and once again it will be a matter of when or if the market starts to worry about what happens in Q3 and beyond when you begin to get more negative news flow regarding employment and growth.
On the data front, the focus will shift to the PMIs today which are expected to nudge higher where upside surprises will be immediately capitalized. Still, maybe not today; many questions remain as to whether current portfolios accurately reflect a world where in three months' time PMIs are above 55 and central banks and governments are adding more to the punchbowl.
The Australian Dollar
The Australian dollar is trading well after quickly re-establishing its beta correlation to US risk assets as traders felt even more comfortable owning the Australian Dollar after RBA Governor Lowe said he doesn’t think the AUD is overvalued at the moment. The current level is based on reliable health results, which suggests he’s not going to try to talk down the Aussie dollar anytime soon.
Lowe joined other central bankers in his nod to more fiscal intervention, advocating that borrowing now for future investment with low rates is the right thing to do. He also said a comprehensive reform plan from the government would help the economy lift from the shadow of the virus.
One concern of Lowe's was the general lack of economic dynamism in the Australian economy and that it needed to leverage technological advancements.
The Malaysian Ringgit
USD/Asia is trading lower, along with overall positive risk sentiment and US stock futures trending higher throughout the NY session – that’s despite getting held back by negative bond flows after comments by the Finance Minister last week downplaying additional monetary easing which led to a backup in Malay bond yields. Ringgit sentiment should improve today on better global risk sentiment, accompanied by another surge in oil prices overnight which contributed to that backup in Malay bond yields.
Gold finally printed new highs on the month, followed by a brief dip in Asia that doesn’t look set to last for too long. There’s been an increase in real money buying over the last two weeks, while fast money accounts have also started to show more interest to buy after a while of not being involved.
Gold markets picked up a real source of strength from the news flow concerning Covid-19.
While Beijing's outbreak appears contained, case numbers in Brazil passed one million, Mexico reported its second-highest daily death toll from the virus, and California added a daily record number of new cases. India's infection rate is also rising, according to the WHO. This news generated enough concern to put gold on a positive footing, despite equity gains in Europe. Gold gave up some gains ahead of the US Open.
Why is gold so strong when risky assets are also often robust?
It seems it’s caught between stimulus and concerns over an upsurge in Covid-19. The amount of liquidity pumping into the global financial system is providing a backstop while, at the same time, an uptick in inflation is unlikely to be met by a shift in the Fed monetary policy direction anytime soon. So, the Fed and other global central banks effectively continue to put out the welcome mat for gold investors.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies