US equities closed stronger Tuesday with the S&P again rising 1.5% following a mixed session in Europe and gains in Asia.
After what was expected to be cynical for stocks’ Q4 rebalancing, equity indices recovered well in the New York session; mind you, estimating the market's impact of quarter-end portfolio readjustment is never a precise science and perhaps the lack of follow-through lower may have triggered some speculators to trim shorts.
US markets closed higher overnight – near their best levels, in fact – as the global economy undoubtedly remains in a cyclical upswing, except for a few pockets of weakness.
Still, the next couple of weeks may tell us much about how the rest of the pandemic develops as the renewed wave of the virus in some US states is starting to weigh on economic activity. The renewal of lockdowns so far is mostly concentrated on the service sector of the southern and western states which certainty prolongs the rebound of the service sector, but the impact is much less than the first lockdown in March.
On an even brighter note, some metrics* suggest the coronavirus death rate has halved in the US since mid-April. The optimist in me looks for potential drivers including better medical treatment, healthcare systems that are no longer overwhelmed, younger patients and mutation of the virus. If this data holds consistent, the lower mortality rate might have market-improving implications as far as the US government not imposing additional lockdown restrictions are concerned.
Markets are incredibly puzzling given the US is in the midst of dueling crises (health and political), which is usually not a recipe for a bullish appetite. Still, the wall of money argument continues to resonate as long-term investors continue to look through the Covid-19 fog via the lens of massive amounts of government and central bank stimulus.
Still, that belies the tracking data which suggests the inverse relationship between economic activity and Covid-19 cases is particularly severe for several of the states exhibiting the most troubling trends, including Texas, Florida and California. The lesson from mobility data suggests consumer behavioral changes in response to Covid-19 trends can hamper economic recovery even if states don’t re-impose containment measures. I’m not ushering another Prophet of Doom forewarning as consumers are astute and they’ll do what the think is best. Still, it’s just something to consider as all eyes will be trained on consumer deportment changes over the July 4th weekend.
Because of the long weekend effect, traders may err on the side of caution, unwilling to chase the market much higher instead preferring to remain in event risk trading mode while keeping positions on a short leash into the long weekend.
Europe had a bit of a mixed session yesterday. However, the path of least resistance arguably seems higher with dips in Europe continuing to be bought particularly with US inflows, which should continue to provide a decent tailwind when markets return to all systems go after quarter-end rebalancing.
The rotation from the US to EU stocks signals the extended catch-up play as global investors see Eurozone economies are now trending "more open" than their American counterparts. It seems that Europe is reopening safer, as reflected in the low levels of virus transmission resurgence with far more manageable new cases.
Gold markets are definitely in "rude health" as a commanding mix of growth-linked commodities (copper and oil) rising and the S&P higher sees the inflationary fires smoldering again just waiting for the all systems go lift-off where the incredulous amounts of stimulus will provide a commodity price tailwind unlike ever before.
With global economic data improving, at this point there seems to be little chance of more central bank stimulus getting added to the punch bowl near term. So, if the inflationary fires do start to reignite, this will be the most obvious path for real yields to move lower, which will unambiguously support gold.
The Ringgit has been trading in a relatively narrow range this week despite improving risk sentiment and firmer oil prices, but it still put in its most significant monthly advance this year as Asia currency came back in focus, supported by improving Chinese data points. As always, the strain between the cyclical global upswing and lingering concern around the underlying long term systematic economic weakness has kept a wary bid under the dollar.
While longer-term structural concerns linger, cyclical currencies like the CNH, KRW and the super high beta AUD should continue to outperform in an environment where investors are more focused on improving activity data. The long-run structural concerns – especially in countries where the virus case counts are rising – are proving to be a headwind for high-carry FX such as the IDR.
It seems like scientists and doctors (not to mention market traders and analysts – amongst others) who are unqualified and shouldn’t necessarily be commenting on the epi curve have an overwhelming sense of medical urgency to voicing a view on the topic; turn on the TV at any given hour for an example.
Then we have the "new normal" research practice of using "preprint" servers, where none of the papers are peer-reviewed; instead, they are raucously critiqued and crowdsourced via Twitter's echo chamber by scores of commentators.
At no other time in history have so many "experts" published so much. I read somewhere that more than 10,000 COVID-related papers have been published since January. By comparison, only 29 studies were published during the 2003 SARS pandemic.
There’s a case to be made that any time scientists start making claims about this or that before the ink has even dried, they should think twice and make sure they include three crucial caveats on the reports denoting that the research paper is 1) preliminary, 2) provisional, and 3) unvetted. If nothing else we’ve got to be able to trust the data.
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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