Market in a Risk Tug of War

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NK blows up embassy with SK
Market risk buoyed by infrastructure bill
Nikkei 4.88% Dax 2.00%
UST 10Y.72
Oil $37/bbl
Gold $1732/oz
BTCUSD $9482

Asia and the EU

North America Open
USD Retail Sales 8:30

Markets were caught in a real risk tug of war in early European trade today as the positive news on the fiscal and monetary front was offset by fresh geopolitical concerns.

Yesterday the risk trade was buoyed by news that the Fed was willing to buy individual bonds which helped credit markets and spurred a massive reversal in NY afternoon. Equities were further helped by the prospect of a possible US infrastructure bill which could be another useful boost of stimulus as the US economy recovers from the COVID shutdowns.

However geopolitical tensions in Asia roiled the markets at the start of EU trade when it was reported that North Korea blew up the South Korean liaison office which serves as a defacto embassy between the two nations. So far the reports have not been confirmed by South Korean military forces but they appear to be in line with the new hawkish tone taken by Kim Jung Un.

It’s unclear why Kim has suddenly turned so hostile towards the west and part of the reason may have to do with his frustration at US sanctions which persist at choking off the NK economy. Most likely, however, Kim may be facing internal rebellion at home and his new bellicose stance is meant to ensure absolute loyalty from the populace by creating a fresh focus for anger. This is classic dictatorial tactics and suggests that the political situation in North Korea may be more tenuous than the market believes.

For now, however, those worries only had a passing impact on prices as markets continued to remain hopeful about more stimulus. Today’s calendar brings US Retail Sales data and traders will be keen to see if there is a sharp rebound in demand as some of the US states came back online and consumers received their stimulus checks.

The consensus view is for a 5% rebound from a -17.1 contraction the month prior and given the fact that mobility data shows a pick in activity in May the number could beat to the upside which will help to keep the rally going in equities for the time being. Both Nasdaq and S&P have paused around key levels with 10,000 capping the upside in NQ while 3100 has been the resistance for ES, but a very bullish Retail Sales number could help markets power through those levels as the day proceeds.

Boris Schlossberg
Managing Director

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