US markets closed higher overnight near their best levels, helped by a record pending home sales print. However, there hasn't been much follow-through as positive risk momentum is giving way to de-risking. While the holiday-shortened week could be a factor, it is almost certain that the upcoming NFP are probably curbing investor enthusiasm, as are the non-stop headlines about the re-imposition of lockdown measures in several states.
The rollback lockdowns are localized in nature. However, they may impact US regional economic concerns as a whole, especially if people cautiously lock themselves down, given increased community risk.
While traders remain curiously cautious waiting for the next catalyst, they are also shifting into event risk trading mode this week and keeping risk on a short leash into the long weekend. I think COVID-19 de-risking playbooks are still at work and investors are not aggressively buying dips while booking profit quickly.
Arguably, the path of least resistance seems higher with dips in Europe continuing to be bought particularly with US inflows, which should continue to provide a decent tailwind when markets return to all systems go after quarter-end rebalancing.
The rotation from the US to EU stocks signals the extended catch-up play as global investors see Eurozone economies are now trending "more open" than their US counterparts. It seems that Europe is reopening safer, as reflected in the low levels of virus transmission resurgence with far more manageable new cases.
There is likely to be some nervousness in gold today with potential half-year re-allocations. The market is still very bullish on gold and will likely continue to buy dips provided the direction of travel for real yields remains on track.
Something I have written about lately is consensus trades, especially as we start to head into summer trading conditions were liquidity could be challenged.
In stocks, it would be easy to argue that everyone is long, but I don't necessarily think that is the case. At current levels, risk uncertainty and bearishness is increasing leaking into the market fray. Perhaps this means that the pain trade is for a further stock market rally.
However, the latest survey from Datatrack suggests there is no consensus at all, and frankly, from my seat, that paints a more exacting picture. There isn't a crystal ball anywhere clear enough to forecast what tomorrow might bring, let alone Q3
It is also hard to pick up any clear signals from price action in fixed income and equities. Month and quarter-end rebalancing adds to the noise in markets at the moment. Just look at the way the S&P 500 Futures traded into the close night, rallying almost 1%. That also seems to buck the consensus that funds would-be sellers of equities and buyers of fixed income. Perhaps price action for the remainder of the day will offer a clearer picture.