US equity futures are trading well this morning with the S&P500 knocking on the 3100 door in Asia. In New York, the S&P finished up 0.8%, aided by a late-afternoon rally, following gains in Europe and Asia. Oil was up 3.9% on global reopening fervor and speculation that OPEC+ will extend the duration of the May/June production cut quotas.
There’s nothing especially new to support the risk-on tone, despite continued optimism about recovery from lockdowns. Indeed, civil unrest in the US seems to be doing little to dampen sentiment. The US president has called for New York to bring in the national guard, while NY city mayor de Blasio has extended curfew to the rest of the week and starting from 8 pm instead of 11 pm. If nothing else, the mounting carnage in the streets will add to the enormous recovery bill that the Fed continues to paper over.
Forex markets climb the wall of worry
FX markets are joining equity and credit markets in expressing more positive risk sentiment by selling the USD. A weaker USD could ultimately coincide with EM and European equities closing the gap on US markets.
In the meantime, a weaker US dollar is as good an expression as any of how investors are climbing the wall of worry that covers US-China trade tensions, uncertain US civil unrest, the impact on the November presidential election, global disinflation and deteriorating labor markets.
Periodic flareups are little more than a fact of life in modern-day US-China relationships. But what seems to get proven time and time again, despite the market’s panicked flurry, is that Chinese authorities have no intention of weaponizing the Yuan fearing capital outflows. The recent run of Yuan's weakness was likely symptomatic of China's economic reopening's propensity to hoover up imports but then having no one to export to as most economies remain in lockdown.
So, once again, the trick seems to be picking peak trade war fear to buy the Yuan.
Spurring more "liquidity-on" this morning in ASEAN markets, Jiji reports that the Bank of Japan is considering doubling its JPY30 trn lending facility aiding small companies. The facility was announced in May as part of measures to help companies cope with the coronavirus outbreak. The incredible amounts of stimulus doled out makes it increasingly challenging to argue potential headwinds like a slower growth recovery, let alone the significance of Cold War 2.
Momentum is the name of the game
At the moment, every single dip across financial markets is being bought into relentlessly by investors. Easy money, cash on the sidelines and signs of lockdown restrictions easing are all helping to keep risk markets well bid.
If you’re finding it difficult to make much sense out of the market at the moment, don't fret as you’re not alone. Indeed, you’re in the company of many of Wall Street's finest.
With the algorithms running the show and having little empathy for looters rummaging through Louis Vuitton stores, we’re all now basically trend followers, so it’s just a matter of either getting on board or sitting it out (mind you, nothing speaks justice like stealing Louis Vuitton handbags…).
It’s also why positioning is so crucial at the moment. The likelihood is that traders will be chasing the same trades and no one’s getting any clear signal from traditional indicators, which makes running money that much harder. But it supports the trend following trade.
The trick now is to try and ride these trends for as long as you can and not be the last person to exit. In this case, you can see why investors prefer the liquidity of the US stock market to anything else. It’s the purest and most liquid way to express your bullish market bias in this climate.
The Troops are rolling down Pennsylvania Avenue
The fundamental problem is market psychology and whether the narrative will shift from the summer of hope to the summer of discontent where first consumers and then investors become jaded by a post-Covid-19 hangover, compounded by a White House running out of options on all fronts, be it domestic or foreign policy.
The market is reacting negatively to news that the US DoD is moving 1.6K army troops to the Washington DC region to support civil authorities. I'm not sure how much this will placate fears as it’s unlikely consumers will feel any safer with military Humvees rolling down Pennsylvania Avenue. The economic recovery has been dependent on reducing fear. If anxiety is generated by anarchy in the streets, that will harm the recovery.
The focus will shift to President Trump mobilizing "heavily armed" military to stop the protest. As history suggests, when governments put boots on the ground to quell civil unrest, it never ends well.
The heat came out pretty quickly for the markets, and perhaps a sign that short-term traders are positioned heavily long-risk could further unwind as positioning could be arguably bullishly stretched in both the SPX and the less liquid Aussie dollar. But keep in mind this is all a momentum play where you never want to be the last one on the rally bus.
Still, there's a lot of fizz in the can for regional markets. China May Caixin services PMI 55.0 vs. 44.4 in April, the composite PMI 54.5 vs. 47.6 in April and Australia's GDP data were slightly better than forecast and consensus. Building approvals were also quite a bit better than expected. So really the question might be, as it always is: where do you want to buy the dip?
Oil and FX
Brent crude is trading through $40/bbl on reports suggesting OPEC+ is moving towards an agreement to extend production cuts. Brent has now doubled in price from the April lows. The concern at the start of the week was that Russia didn't want to extend the agreement by one-to-three months.
The most bullish outcome for oil from the meeting (TBC, but expected to be brought forward to Jun. 4 from Jun. 10) is no sign of discord between Russia and Saudi Arabia. Headlines suggest they’re on the same page on supply, and that's bullish for oil in the context of an improving demand backdrop.
The impact of higher oil prices is leaving a profound effect on commodity-producing currencies (AUD, CAD, MYR, NOK). Persistent declines in implied US equity and rates volatility against the backdrop of higher oil prices are a powerful and sturdy combination.
Higher oil prices are fantastically good for GBP and could encourage EURGBP downside. Note that the weight of the energy sector in the FTSE 100 (10.7%) is much larger than in the Eurostoxx 50 (5.1%). But not all are winners for the INR, and it's yet another reason for more underperformance.
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Economic acceleration a powerful tailwind for stocks, but could turn less inspired in a week that promises no shortage of "rock the boat" type inflation data