Why Are Stocks Up?

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Shanghai up 5.3%
PMI and ISM on tap for US
Nikkei 1.83%% Dax 1.88%
UST 10Y 0.69
Oil $41/bbl
Gold $1776/oz
BTCUSD $9207

Asia and the EU
EU Sentix -18.2 vas. -10.9

North America Open
USD PMI 8:30
USD ISM Non-Manufacturing 10:00

Equity markets were sharply higher while currencies were far more subdued on the first trading day of the week as risk-on sentiment out of Asia helped lift all assets.

The Shanghai compose rose more than 5% today – it’s best performance since 2015. In fact turnover in Chinese equities has also reached levels not seen since that year as those indices are coming out of their long slumber. It’s difficult to pinpoint why investor sentiment in China has turned so positive except to note that bulls are clearly betting that the worst of the pandemic global slowdown may be behind us.

The bullish bet on COVID is that the record rise in new cases does not matter as the virus may be losing its lethality and death rates as a percent of cases continue to decline. This is clearly the market view at this point as equity assets race higher on this premise.

So far that thesis has been proven correct as both death rates and hospitalizations remained under control. But such optimism may be woefully misguided as there is often a month lag between the spikes in infection and the stress of the medical systems. Already the 5 day average of all hospitalizations has risen sharply. It’s true that better treatment procedures and a younger cohort of patients could be contributing to much better outcomes than in March and April. Nevertheless, it’s just too early to tell if the pandemic is truly under any sort of medical control.

There is also no doubt that consumer behavior has improved markedly as fears of death or serious infection have eased, but if the death count once again begins to accelerate the consumer will undoubtedly retrench and that in turn will send risk assets lower. That’s why for the US the most important data point for the next several weeks will not be any of the economic releases on the calendar but rather the rate of change in new deaths from COVID. Horrid and macabre as it is, the death curve has remained relatively steady providing little fodder for media headlines, but if the US number begins to slope upward once again crossing the physiologically important 1000 per day barrier the enthusiasm for risk assets is sure to fade.

Meanwhile, the calendar today brings the ISM Non-Manufacturing data with the market looking for a print of 50 versus 45.4 the month prior. Much more importantly for traders will be the employment reading of the index with the forecast of a decline to 30.7 versus 31.8 the month prior.

Given the fact that the US economy is primarily service-based the lack of improvement on the employment front could take the wind out of the sails of the overnight rally and reverse much of the gains especially on fears that unemployment bonus benefits are expiring at the end of the month. However, an upside surprise would provide further fuel to the bulls adding to the notion that a V-shaped recovery is indeed taking shape.

Boris Schlossberg
Managing Director

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