Risk Slides as Week Starts

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COVID fears shake up the market
Chinese data mixed
Nikkei -3.47% Dax -2.08%
UST 10Y.67
Oil $35/bbl
Gold $1722/oz
BTCUSD $9130

Asia and the EU
CNY IP 4.4%
CNY Retail Sales -2.2%

North America Open
USD Empire Manufacturing 8:30

Global markets opened lower to start the week spooked by the resurgence of COVID-19 cases worldwide with US stock index futures down by more than 3% at one point before rebounding in morning London dealing.

Reports of surging COVID-19 infections in emerging markets as well as spikes in the southern United States with Texas and Florida hitting all-time highs had markets worried that the dreaded “second surge” may be on its way. Although as many analysts have pointed out the first wave of COVID-19 was never really conquered.

The US now has the dubious distinction of being the only major industrialized nation that is seeing its caseload rising as the virus rate declines markedly in the northeast but is now rising the south and midwest but unless the infection takes on the same parabolic run as it did in the northeast in March and April the economic impact of COVID is likely to be much more muted going forward with most of the population far more aware of the social distancing guidelines and businesses making the key adjustments.

Although COVID fears may dominate the headlines, the market’s true focus will be on economic stimulus and to that effect, the recent reticence of Republicans to approve further unemployment benefits in July may prove to be a much more serious problem for the bullish thesis.

Although financial media has been full of stories about the V-shaped recovery in consumer demand, the truth is that most of the spending has been driven by stimulus checks and if those evaporate the current state of the US economy will not be able to sustain the spending rates organically.

For now, the bullish bias in the markets remains almost unstoppable with equities and risk FX still betting on government largesse to drive demand, but as we noted last week the increase in volatility is a sign that markets may be starting to make a second top and risk flows could quickly reverse if the news from Washington does not improve.

Boris Schlossberg
Managing Director

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