Fed Chair Powell sounded a cautious note on the US economic recovery in an interview with CBS News, noting that "for the economy to recover fully, people will have to be fully confident. And that may have to await the arrival of a vaccine".
Indeed, consumer responses to the relaxing of mobility restrictions dramatically depend on being safeguarded against the unknowns around Covid-19 – not to mention the level of fear surrounding job security as well as feeling safe at work. This will be a consumer-driven rally, and good news for the market and the economy as a whole is that businesses worldwide are reopening, albeit in fits and starts. While restaurants are opening at minimal capacity and mall traffic remains depressed, traffic congestion is beginning to tick significantly higher, suggesting that people feel confident in leaving their homes. This is huge as the global recovery will fall 100% on the back of consumer confidence.
S&P futures are up 0.8% and oil continues to recover, suggesting that investors are more focused on optimism of economies reopening. In the absence of a coronavirus vaccine, investors could take Chair Powell's comments positively as a signal that monetary policy will remain ultra-accommodative for the foreseeable future. Both equities and the broad trade-weighted USD could break out of their respective ranges this week on greater reopening optimism. Higher oil prices will certainly help.
Higher oil prices could provide the impetus for a sell-off in the USD vs. EM FX in particular, and various oil-producing or oil-sensitive G10 currencies, including NOK, CAD and AUD.
USDCNH has been trading in quite a narrow range. It’s a massive week for China risk, but USDCNH could drift lower this week if the NPC opens up a more accommodative monetary and fiscal policy stance, which should boost equity inflows.
A dovish interview from BoE Chief Economist Haldane, where he refused to rule out negative rates, suggests GBP underperformance will continue.
In Asia, there’s a considerable rebound in activity but no discernible change in the cautious sentiment of last week. Sell-skew was strongest in Japan on some evidence of taking profits on Tech and the second week of demand for index hedges, given the outsized focus on Huawei and global Tech sector in general.
Northbound connect continues to see inflows in the China A-shares on the expectation of policy deluge post-NPC, which should provide a boost to retail sales – though I’m not sure how much that will flow through to people dining out and going to pubs. That phase of the retail recovery needs time for confidence to build that there’s little chance of a significant resurgence in Covid-19.
There’s a noticeable level of caution around in USDCNH which remains firmly bid on dip.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies