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China Encouraging Spending And Aiding Businesses, But Risks Remain

ByStephen Innes
Published 07/07/2020, 04:21 AM
Updated 07/09/2023, 06:31 AM

It’s a very bullish risk-on backdrop but massive big-cap tech driving is the bulk of outperformance and the usual reopening baskets are doing well. At the index level, cyclicals are not outperforming the way one would presume with Industrials, Materials, and Energy all lagging behind.
 
China is encouraging spending and making it easier for businesses to deleverage by pulling in equity investors. Still, there are risks in this approach, of course, none more so than a second wave outbreak.
 
The COVID-19 outbreak shook the global economic edifice to the core, but it held up until this recent COVID flare-up in the US. To sustain the recovery in Asia, further monetary and fiscal easing will be needed. It's time cement, not paper over some of those repairs.

The negative correlation between broad-based USD indices and US equities is the highest since July 2016.

Despite the data surprises, indices in the eurozone lag those of the US and resurgent virus cases offer scope for cyclical underperformance in the US economy over the summer that could undermine the US dollar and drive EUR/USD beyond 1.15 in the near term.
 
With equities continuing to perform strongly, JPY crosses have experienced bouts of strength - notably AUD/JPY and EUR/JPY. I expect this dynamic to stay, for now, providing some support for USD/JPY on dips despite the broadly weaker USD, which could make for some choppy price action at times.
 
EUR/USD price action remains constructive, boosted by positive risk sentiment, and with better eurozone data and USD weakness, adding a boost.  

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