Everyone has a plan until they get punched in the mouth, and nothing could be further from the truth as traders remain entirely unsure what playbook to run with this morning.
The prophets of doom versus the wall of money arguments seem to be battling it out for supremacy today, although truth be told volumes are pretty light so far.
Falling infection rates have provided investors with confidence that the lockdown approach was working, allowing equity investors to look forward to 2021 as impressive monetary and fiscal policy provide a post-pandemic bridge. However, rising new daily Covid-19 cases in two of the three most populous states in the US (Florida: 7d moving average +32.4 % w/w; Texas +11.8%) will test that resolve. And it will put to the test the wall of money theory as well as those who wholeheartedly believe in the continuous functional power of liquidity in the system.
Note that USDCNH is only slightly higher at Asia open, despite negative news of Beijing related to Covid-19. Meanwhile, the pullback in AUD and NZD should prove temporary, especially if domestic drivers can prove more dominant.
If Covid-19 becomes the main narrative and a primary driver of markets again, EM currencies that have ignored their still-rising daily cases look set to underperform.
But oil prices matter as the reaction of energy markets to rising Covid-19 cases could prove crucial this week for commodity currencies.
For oil, there’s an increasing focus on the weak recovery in demand. The OPEC+ Joint Technical Committee meets on Wednesday where a panel will advise on output cuts following the one-month extension agreed earlier this month. A Joint Ministerial Monitoring Committee will meet on Thursday.
China Data Dump
China's May data dump reminds us that that the path from government stimulus to asset price reflation will be a bumpy one. IP (4.4% y/y vs. 5.0% consensus), retail sales (-2.8% y/y vs. -2.3% consensus) and fixed-asset investment (-6.3% y/y vs. -6.0% consensus) were all weaker than expected. USDCNH and SHCOMP are broadly unmoved so far. Markets, especially equities, have looked through soft data and ahead to a post-covid-19 environment. But
Among all the data released today, IP is most closely correlated with GDP. The IP improvement bodes well for Q2 activity growth. China's economy continues to recover, helped by the relaxed virus control. However, some local-level tightening has been needed to counter a second wave as well as the continued policy support, as shown by the above-expectation TSF growth in May.
A pick-up in new cases in Beijing in recent days brings the focus back to the present. And while government stimulus will boost r industrial output first, then consumer spending with investment dragging up the rear but eventually following. But its consumer's willingness to leave their apartments amid persistent social distancing – either mandated by governments or by consumer behavior – will dictate the speed of the recovery. But China's consumer recovery is not moving forward quickly by any stretch of the imagination
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow