US equities traded defensively Wednesday, but the S&P500 ultimately closed 0.4% after a choppy session and following gains in Europe. Market sentiment seems torn between 'second wave' concerns and the recent encouraging run of economic data in the US and China. But sanding down that thin strip of optimistic US data veneer, the market remains in a Covid-19 limbo state, albeit supported by an abundance of policy.
Still, US retail sales data is another reminder that we shouldn’t underestimate the resilience and adaptability of humans in the face of significant adversity – the recovery from extreme disruption is nearly always a positive surprise.
But as US Federal Reserve Chair Powell was quick to remind us, the outlook is still uncertain. Economic models don’t work because there’s no telling how consumers react to the great unknown as economists have never been down this road. As such, the quality of financial data remains questionable at best; besides, there’s uncertainty about how consumers will respond to rising infection rates.
The market has devolved into a bit of a three-ring circus. Where the new Robin Hood day- trading mob's self-anointed leader questions the investment prowess of proven legends in the market while encouraging his faithful to buy all dips. Almost inevitably, at some point this will all end in tears.
On the virus front, Texas reported an 11% rise in hospitalizations on Wednesday, with the total up 84% since Memorial Day, while on Tuesday the number of Covid-19 patients in Arizona exceeded New York for the first time.
G-10 Currency Markets
The latest sell-off the EURUSD continues to cascade through FX markets, lending some support to the USD. It never seems to fail; every time we get all bulled up on the EURUSD, within a week or so we’re seemingly closing in on yet another make or break level (1.1180). Arguably we should be in the buy zone (1.1210-1.1225) given the list of positives, particularly around debt mutualization. Still, a slide below 1.1180 might be a painful experience for many freshly struck Euro longs, suggesting the positive USD reaction to stronger than expected US retail sales data shows that the currency is not merely a haven.
The Australian Dollar
The reaction function echoed the USD's positive response to the US employment report at the start of the month. While the correlation of the USD to risk appetite remains strong, the currency also capitalizes on economic upside surprises in the US – even if they provoke equity market strength.
If the US dollar then starts to fire on US economic data exceptionalism, one could only assume that the Australian dollar moniker – as clean a proxy for US equities as one can find in FX – could fizzle.
But the acid test will be how the AUDUSD responds to any sizeable downside surprise in the US economic data during the exit phase. If the US dollar safe-haven bid outweighs the negative localized data effect, where does the Aussie turn?
Although there was a significant downswing in geopolitical risk along the India-China border, headlines around the Korean Peninsula and a rising virus case count in Beijing will remain in fashion for the time being. This may thwart any Asia FX bullish ambitions, despite both USDCNH and USDINR moving lower amid press reports that China and India have agreed to de-escalate the border tension.
Yesterday the USDCNH curve opened heavy after reports China may cut the RRR at the end of June or early July. It then became a choppy session with better selling interest as the market unilaterally expected diplomatic intervention in the border clashes.
While China/India de-escalation should mean USDAsia will be slightly better offered, with global risk sentiment getting held back by the unknowns around Covid-19's second wave, Asia FX may not readily be in hot demand this week.
Despite a detente in India and China tension (fragile as that may be) there was more of a risk-off theme developing that was getting played out outside of the headline narrative, with XAU buying leading the way – perhaps with stocks seemingly better for sale this week, although dips continue to be bought. Despite early losses yesterday, there was enough concern overall to shift gold back into the win column.
While a firm USD and some steadiness in global stocks may present headwinds to advances, gold still has many reasons to consolidate rather than sound the retreat bugle.
Monetary easing remains in full swing while Fed President Kaplan made a remarkable comment late on Tuesday that may have gone unnoticed. He effectively admitted that he, for one (and if not the Fed), wants to maintain cheap government funding. Indeed, listening with one's eyes closed, he almost perfectly described a central bank's role in Modern Monetary Theory! I think where gold found its home with the context of YCC it contextually should have put a bid under gold when Chair Powell hinted that it might soon be part of the Fed policy playbook.
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Yields are up, but it was a tale of two divergent tapes in US equity markets; Oil heads lower as dollar strengthens; Gold takes the express elevator down