US equities ended higher Thursday, the S&P closing up 1.1% after a choppy session for most of the day before steady gains in the last hour of trading. European stocks were better as well, US10Y yields rose 1bp to 0.69%, and oil up 2%.
US bank stocks gained after the FDIC moved to reduce cash collateral requirements for derivative trades and ease restrictions for banks to invest in venture capital. That’s great news for start-ups and could boost employment as more investment pours into new ventures; it will bring a lot of old and new people back to the workforce due to expansion.
It was another odd 24 hours (though that’s hardly unusual) where correlations didn't fit the headline noise and probably raised more questions than answers about yesterday's sell-off.
Equities struggled, but there aren't any signs of a broader risk-off/contagion. Treasury yields remain within the existing channel, and there was no massive bid for CHF.
There's a growing sense that risk markets have reached a near-term exhaustion point. It seems like we've reached a point where as much good news as can be extrapolated has been milked, and investors are finding it hard to see the marginal or incremental new support. I'm not suggesting the stealthy market rally won't resume, it's just that investors may need more prominent catalysts – ideally a vaccine.
Look at the mild reactions to the central bank policy of late: the Fed and BoE both saw adverse market reactions to policy expansions. Not because they under-delivered, but instead because they received precisely what was telegraphed.
Besides, the central banks are now making it clear policy support will last only as long as the emergency does. Whether anyone believes that is one thing, but it certainly doesn't help the market cause.
It's the same for the PMIs: better than expected, but in a world of picking economic data numbers out of hat rather than forecasts, it's hard to read too much into the data.
None of this means equities are going to have an epic failure, but it could mean all that’s good is in the prices where the next order of business is suggesting we may enter the profit-taking feedback loop on upticks. After all, even the longer-term investors are taking quick profits to claw back March's losses those days.
Besides the exhaustion narrative, the market feels fully loaded and with lots of people uncomfortable chasing it – especially as we enter the summer doldrums of July where liquidity drops off significantly – maybe it’s finally time for a long-overdue summer break. Still, I wouldn't hold my breath on that.
But with central banks fully priced for now, with even the longer-term investors booking profit after a couple of weeks to claw back losses from March. That meant the US trade headline on Europe, coupled with the US Covid-19 headlines, caused the big step back in stocks. But key risk metrics have hardly moved; 10 UST is still in the same range, and gold sold off.
So this wasn't a step back into safety, maybe just plain old profit taking accentuated by some early pre-quarter-end rebalancing before some of Wall Street's most exceptional head off to the Hamptons this week. Indeed, this wasn't a massive step back in risk and towards safety, probably just another bump in the road to recovery.
Gold started the day well but was quickly dragged lower by equities and some complacency towards the spikes in new coronavirus cases. This should continue to feed into some nervousness around the price of gold in the short term, together with mid-year re-allocation.
With gold keeping a bid, it's enhancing its claim as the non-USD haven of choice; when risk returns, it holds up much better than anything else.
At least we don't have to deal with angry red tickers to start the day with equities finding some footing overnight and oil prices lifting off the mat. But given it’s Friday, I'm just not sure how much gas is in the market tank this week to chase these endless cycles of risk on risk-off.
Despite talks of USD beta to risk declining, it's not the case for broader risk-off moves as bond markets barely blinked an eye. So one could argue the recent FX moves looked to be driven by pure spec and fast money types.
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Equities hit with the inflation stick; Saudi assurance provides oil with shelter from the storm; USDJPY hedge plays building; Gold appears prone