Don’t Worry Be Happy – Risk on Flows Roll On

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SP takes out 3000
EU bond spreads compress
Nikkei 2.55% Dax 0.62%
UST 10Y 0.69
Oil $34/bbl
Gold $1725/oz
BTCUSD $8973

Asia and the EU
No data

North America Open
US New Home Sales

Risk on flows resumed with a vengeance as markets returned to full force today with SP500 futures taking out the 3000 level for the first time since the early days of March as investors bet on the resumption of the global economic activity while ignoring the brewing geopolitical risks.

With most of the developed world starting to lift its lockdown restrictions equity investors remained in a giddy mood taking stocks higher across the board. The risk on rally spilled over into other assets as well with EU bonds much better bid as the spread between Italian BTPs and German Bunds narrowed to less than 200 basis points for the first time since April.

The market bet is that the near limitless monetary support from central banks combined with a very aggressive fiscal response in the US and a less aggressive but nevertheless historic response from the EU will offset the near depressionary impact of the COVID lockdowns and will revive growth quickly.

But one factor that investors are ignoring is the brewing war of words between the world’s number one and number two economies. As the US and China relations continue to deteriorate the prospect of disruptions to the global supply chains as well as global demand is not being factored in at all.

Perhaps investors are betting that the war of words is just that, as both US and Chinese officials simply create a propaganda campaign for internal consumption to deflect from their massively inept handling of the pandemic threat. But even if that were the case, such propaganda schemes often turn into much more menacing threats and retaliation as both sides try to play “tough”.

That’s why despite the seemingly easy-go-lucky nature of the current price action, downside risks persist and could quickly materialize if the war of words between US and China turns into a war of deeds.

For now, however, investors are content to buy, buy, buy and with little fresh data on the calendar economic event risk aren’t likely to derail this move, but any further tension between Washington DC and Beijing might.

Boris Schlossberg
Managing Director

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