Profit Taking Hits Markets

Posted on

EU risk off flows dominate
Nikkei -0.38% Dax -0.91%
UST 10Y 0.82
Oil $37/bbl
Gold $1701/oz
BTCUSD $9686

Asia and the EU
EU GDP -3.6% vs. -3.8%

North America Open
No Data

It’s been a decidedly risk-off start to the trading day with US index futures down by more than 70 basis points while in FX USDJPY was down by more than 50 pips.

After several days of relentless rallies, risk assets are clearly coming under some profit-taking pressure as traders lock in gains at key levels.

The economic calendar remains barren with only GDP data in the EU which beat slightly to the upside and in the US the only data point of note will be Economic Optimism at 1400 GMT. Overall the markets appear content to tread water for the time being as the dominant theme remains the bet on the global recovery.

However, as we noted yesterday the move in risk has been driven by government largesse rather any serious improvement in economic fundamentals, and that cycle of massive stimulus appears to be abating. Tomorrow markets will get to hear from the Fed, but Mr. Powell and company are likely to keep policy unchanged rather than announcing any new financing plans and the lack of fresh initiatives from the Fed may spur further profit-taking as the week proceeds.

Meanwhile, the far bigger threat to the market is the new reticence by Republicans in DC to enact further spending legislation. The stopgap income support from PPP will run out by July and unless the government issues additional income support the measures the true danger to equities will not be the second wave of COVID infections but the second wave of unemployment claims.

Add to that the fact that investor sentiment is reaching 1999 euphoria like state with many inexperienced retail traders bragging about 100% gains in a matter of days and equities could be setting up for a perfect selling storm if the helping hand of government suddenly pulls back.

Boris Schlossberg
Managing Director

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