Opening gap reverses
Markets remain quiet post NFP
Nikkei 1.37% Dax -0.81%
UST 10Y 0.92
Asia and the EU
EU IP -17%
North America Open
Markets reversed their Asia opening euphoria to trade flat at the start of the European session as the relentless bid for risk abated a bit.
Stock index futures were up by 50 basis points at the open of Asian session trade but the gap was slowly filled as the night proceeded driven by profit-taking in oil and lack of any fresh positive news.
After Friday’s massive risk-on rally driven by surprisingly strong US Non-Farm employment data, both equities and FX markets were on pause as traders now looked to Fed meeting midweek.
The NFP numbers were a massive upside shock to the market coming in much better than anticipated but in the end, it turned out that fully 3 million workers were misclassified as employed over the confusing PPP instructions from the BLS. Although the BLS noted the error in post news release markets chose to ignore the clarification as the rebound trade raged on.
This week however some of that enthusiasm may fade if the market perceives even the slightest hint of reduction in either monetary or fiscal stimulus. To that end, there are reasons for bulls to worry. In the last few weeks, the Fed has tempered its purchases of bonds for its QE program, while over in the Senate Mitch Mcconnel has told the President that the next stimulus bill will be about $1 Trillion. While that figure sounds large it is actually less than the market is anticipating and that may prove to be a barrier to further gains in risk assets.
For now, the upside move in the markets is driven purely by the assumption of government largesse as all of the hopes of consumer V-shaped recovery are just that – hopes. The consumer has actually increased his savings in light of the economic uncertainty and its doubtful that the consumer will quickly ramp up spending in the next few months.
Therefore after a massive rebound rally, risk assets are now vulnerable to a correction and the less the anticipated new rounds of government stimulus may be the catalyst for the move.