Trump Tweets Fuel Risk On Flows

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Trump tweets revive hope a stimulus deal
EU Retail Sales rebound
Nikkei1 -0.05% Dax -0.26%
UST 10Y 0.76
Oil $39
Gold $1888/oz
BTCUSD $10604/oz.

Asia and the EU
EUR Retail Sales 8.2%

North America Open
USD Fed Minutes 14:00

Stock index futures were higher by more than 50 basis points while risk FX gained ground as well will USDJPY rising through the 106.00 figure as risk-on flows dominated trade in Asian and early European trade.

The positive sentiment was driven by the hope of a revival in the US stimulus talks after President Trump tweeted that he was willing to sign parts of the bill immediately. Yesterday Mr. Trump announced that he was walking away from any negotiation with Democrats and was willing to wait until the election for any possibility of a stimulus bill. However, only a few hours later he seemed to have changed his mind and went on a massive tweet tirade demanding that some sort of deal be done now.

Although markets responded positively to his comments, the chance of any actual fiscal stimulus appears to be nil at this point as both time and political will are absent. The market’s reaction may have been naive but the underlying bid in stocks suggests that longer-term investors are convinced that the US economy will get a large stimulus package irrespective of who the President will be in 2021 and that conviction remains highly supportive of stocks.

Yesterday’s selloff, therefore, appears to be nothing more than profit-taking, still, any further meaningful gains in stocks will need to come from economic data as any signs of fiscal or monetary support will have to wait until next year. To that end, the markets are likely to become more sensitive to high-frequency economic releases which have been mixed so far. The labor data is clearly showing a slowdown in the rate of change with businesses still rehiring furloughed workers but at a slower pace. Business demand however as seen through the prism of the ISM Non-Manufacturing report is surprisingly resilient.

In the next few months, however, the labor market is likely to face further headwinds as the travel and transportation industries begin to permanently shed thousands of jobs. That in turn is sure to put downward pressure on aggregate demand so it’s difficult to see how risk assets could rally much further from here unless market sentiment fuels a melt-up based on hope alone.

Boris Schlossberg
Managing Director

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