Stocks Pop to Fresh Highs But Are Buyers Balking?

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Risk Rally Stall in EU
Dollar mildly bid
Nikkei 1.12% Dax 0.69%
UST 10Y 0.72
Oil $43
Gold $1959/oz
BTCUSD $11617/oz

Asia and the EU
CNY PMI 55.2 vs. 54

North America Open
No data

Stocks raced to fresh All-time highs on the open of trade in Asia on continued optimism about the “reopening” trade but indices stalled in choppy European trade with London closed for a bank holiday.

Equity traders were buoyed by better than expected PMI data out of China which showed that the non- Manufacturing index rose to 55.2 vs. 54.0 forecast moving comfortably above the 50 boom/bust line. With China now making up 16% of global GDP the rise in service activity was taken as a welcome sign that the country’s economy has fully recovered from the COVID shutdown.

Although COVID infections passed 25M worldwide and India reported the highest daily case number on record, the markets are fully dismissing any further risks from the virus. The conventional wisdom is that the worst of the virus damage is behind us, that the current medical protocols are far better at preventing death, and that the majority of new cases are relatively minor with few requiring hospitalizations.

Whether this sanguine view proves accurate remains to be seen. There is no doubt that the current state of art in medical treatment has improved markedly at keeping patients alive, but the virus remains a serious public health threat with fully 15% of cases reporting long term symptoms that at present have no medical cure. Furthermore, the natural relaxations of social distancing norms and most importantly the refusal to wear masks in public spaces as was evident by the massive rally in Berlin yesterday suggests that infections rate my climb again as the weather gets colder in the Northern Hemisphere and more people crowd indoors where the virus transmission rate is 40 times more potent than it is outside.

For now, the markets are perfectly content to ignore any further COVID risks, and equities remain supported by the ultra-accommodative policies G-3 central banks. Momentum begets its own reality and equity traders are happy to bid stocks on any dip. But complacency is clearly creeping into the market especially as long term bears continue to capitulate. Today’s price action suggests that new buyers may be balking and some profit-taking could be due.

With no data on the docket, there is little economic news to drive trade today but if US corps can’t rally the indices through Asia session highs at the start of the open stocks could quickly sell-off with Nasdaq testing 12,000 support and S&P looking to see if can hold the 3500 level.

Boris Schlossberg
Managing Director

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