Discussing the anatomy of this frightening blow-off top will probably go on for weeks, and the blame game will extend well into next week. But you couldn’t have drawn up the chart pattern any better if you’d used a protector and compass set, let alone a CAD machine.
Explaining the unexpected makes it easier to accept the unknown. It was a classic 'risk-off' 24 hours that sent equities and oil sharply lower amid USD strength, which from my seat can’t be so easily explained.
New daily Covid-19 cases in the three most populous states in the US are mixed, but that doesn’t tell the full story. So full circle back to the FOMC where worries that Fed Chair Powell was too gloomy on the economic outlook seem hard to swallow as a driver of the risk selloff. We should be thanking him for not sounding too upbeat, otherwise he might have been accused of triggering a taper tantrum style selloff.
Franky, the messaging from this week's mass exodus is not especially apparent, although the growing second wave of infections in Florida and other battleground US states (e.g. Arizona, Pennsylvania, Minnesota) could stage the launchpad for investors to map President Trump's prospects of winning in November against the performance of equity markets.
With Covid-19 back in the spotlight, it’s never too early for investor speculation on what a Democrat presidency could look like for exchanges if the voter polls continue to move in Joe Biden's favor. Billionaire hedge fund manager Paul Tudor Jones is the latest to offer a view, seeing a tax hike of 2-3% of GDP if the Democratic candidate wins which is unequivocally bad for US stocks and, ultimately, the US dollar.
Outside that fantastical analysis, what's probably a sure bet today is the Covid-19 Friday playbooks are getting dusted off the shelf where chapter one explicitly states: de-risk at all cost into the weekend for fearing a sizable jump in the weekend’s Covid-19 case counts. But the same will hold for those that just so happened to be short risk, and they’ll be more prone to cover for the opposite reasons.
As I alluded to this morning, the reversion guys working from home will probably spend most of the day cleaning spilled milk off their new Moroccan-style Crate and Barrel rug while avoiding dips at all costs after getting steamrolled yesterday. So, risk in general is unlikely to return to any significant degree if that view holds any water as we head into the weekend.
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In January the Fed needed to put the Taper Genie back in the bottle; now they need to convince the short end crew to back off repricing the Fed Funds strip