Can The Risk Rally Continue?

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China halts some soybean buys
Risk turns negative
Nikkei 0.84% Dax -1.65%%
UST 10Y 0.64
Oil $35/bbl
Gold $1741/oz
BTCUSD $9546

Asia and the EU
EUR Manufacturing PMI 39.4 vs. 39.5
GBP Manufacturing PMI

North America Open
USD ISM Manufacturing 10:00

News that China may be halting purchases of US soybeans sent US futures lower in morning European dealing as US-China tensions appear to be the only factor that could derail the relentless rally in stocks.

Over the weekend almost every major US urban area – responsible for the vast majority of the country’s GDP – looked like a war zone with protestors clashing with police forces over the state of race relations in the country. There was looting and low-level violence in nearly every major metropolitan area, but equities shrugged off the chaos rallying to close the opening gap lower as the bullish impulse remained unstoppable.

However, the news from China quickly changed the mood, and equities were firmly lower by 50 basis points into the European open as investors quickly dumped risk. China is clearly playing a game of pressure with the US trying to aggravate an already weak business situation in the country’s farmland which was devastated by the pandemic and prior trade war tensions.

The rhetoric between Beijing and DC may overshadow all else this week as markets have clearly decided to discount all of the bad economic news as well the unprecedented levels of civil unrest on the assumption that global economic recovery will resume with a vengeance aided by the ultra-accommodative monetary policy and record fiscal stimulus. Yet the bet on the resumption of global growth depends on the world’s number one and number two economies coming to some sort of trade detente. For now, those prospects look dim as both Trump and Xi play to the nationalist impulses at home in order to boost their political standing.

The markets may also be underestimating the risk of a geopolitical mistake. The Chinese may press too hard, assuming that Trump is too distracted with domestic problems to respond forcefully to any action on their part. But Donald Trump is the most impulsive President in modern history and any escalation of tensions from Bejing could elicit a much more disproportionate response from DC.

For now, the markets continue to ignore all risks and remain only slightly lower despite the economic dangers ahead. The bulls continue to trade on the “Fed has got our back” assumption, but how long that thesis can last remains to be ween.

In FX meanwhile, risk currencies are unfazed with AUDUSD up by more than 1% on the day while the buck remains weak across the board. Part of the reason for buck’s weakness as we noted last week may be the view that the US is no longer the safe-haven asset it once was, but another factor for dollar’s weakness may be a simple fact that the currency market does not necessarily believe that the US recovery will the fastest in G-10.

On the docket today the market will get a look at the ISM Manufacturing data which is projected to improve slightly. Any upside surprise could keep the risk rally alive, but if the Manufacturing print misses, both equities and USDJPy could turn sharply lower as the day proceeds.

Boris Schlossberg
Managing Director

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