Risk Rebounds But Warning Bells Ring Loudly

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Small rebound in risk
EZ IP a bit betterUK GDP worst ever
Nikkei -0.75% Dax 1.10%
UST 10Y.70
Oil $36/bbl
Gold $1735/oz
BTCUSD $9475

Asia and the EU
EZ IP -17% vs. -18%

North America Open
USD U of M 10:00

Risk rebounded a bit today after a very serious selloff yesterday but the move was restrained suggesting that the markets remain concerned about the threat to economic growth from the resurgence of infections of the coronavirus.

Equities were up by more than 1% in European trade while risk FX was up by only half that amount. The global economic calendar is essentially barren today with markets only seeing the huge declines in activity from the months of lockdown as the UK economy contracted by 20% and EZ Industrial Production declined by 17%.

One release of note will be the U of Michigan consumer survey with traders looking to see if sentiment improved as many states eased economic restriction. A big unknown is whether the recent wave of social justice demonstrations across the country and the wave of unrest affected consumer behavior last month.

With risk assets near multi-month highs, economic data unsupportive, and government largesse (both monetary and fiscal) on pause at current levels it’s difficult to see what would propel the risk trade higher except momentum.

Momentum, on the other hand, remains strong as buy the dip mentality continues to permeate the investor class, especially on the retail side. Yesterday’s selloff was a blow to the bulls, but hardly a mortal wound. To turn sentiment negative markets would need to see several such steep selloff days.

Nevertheless, the spike in volatility is a clear warning sign that more market pain may be due.

Boris Schlossberg
Managing Director

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