Market momentum has been more about sentiment than math, a manifestation of the endless liquidity matra having nudged investors to believe TINA. OK, so forget the math because that is another in the laundry list of things the market does not care about, but how many negative sentiment signals can the market absorb before finally hitting the skids.
Both the NASDAQ and S&P 500 initially hit fresh highs overnight before risk sentiment began to succumb to a confluence of factors, including surging COVID-19 cases, the rollback of California's economic reopening measures, and the latest in the almost daily escalation of US-China tensions as the Trump administration denounced China's territorial claims in the South China Sea.
Traders are starting to weigh the critical risk to the sharp downturn in the activity data. Its been the bounce in mobility that has been part of the market's highlight reel for the past two months. Now the global PMI data is in danger of slipping due to the rolling back of mobility improvements following economic lockdowns. California and Hong Kong are the latest to reintroduce restrictions.
With so many states re-imposing lockdown measures, the fear is that the US economy slows again. But in fact, the economy likely did not get going in the first place, and instead, we bore witness to pent-up demand. There is a difference between the bounce from the lows, after the astounding sudden stop of March and April and a bottom-line economic recovery. Indeed, this view is getting fleshed out on every high-frequency data dashboard. Bloomberg shows an across-the-board moderation on their panel on most if not all HF metrics
Consumer income and spending are especially vulnerable, as are the credit cycle issues, mainly as lockdowns increase. Store sales,( although arguably there is a notable improvement in internet-based consumption counters,) restaurant bookings are going back down, public transport usage has flattened, electricity demand is weakening again, all of which is suggesting we're moving into a near term critical zone for risk sentiment.
China Data
China June exports at +0.5% y/y vs: -2.0% consensus and imports at +2.7% y/y vs. -9.0% consensus, both in USD terms, are driving a greater-than-expected narrowing in the trade surplus. There is no immediate positive impact on risk as to its a soft day for equities and positive for the USD.
But the second wave of COVID-19 outbreak in Beijing and flooding in some parts of southern China could have caused the narrowing.
As far as China's recovery is concerned, however, the economy's supply-side continues to recover, i.e., production, exports, and investment-driven imports. That is positive for commodity exporters such as AUD, IDR, and MYR. However, you would be hard-pressed to notice an FX market reaction these days, as momentum has turned lame again.
Forex
G10 FX vols are trading sideways across the board with stocks doing little after the weak close in New York.
But even with growth stocks, silver, and Tesla (NASDAQ:TSLA) keep the pedal to the metal, driving higher in full-on ludicrous mode, FX markets look more like slumber bunny.
Despite the sleepy market overtones, traders remain more inclined to short the dollar despite no joy so far this week after the USD caught a bid as equities slipped
USD/THB trades up to 31.50 after the Bank of Thailand says it will allow more gold and commodities trading in USD to reduce volatility. The BoT has been thinking of doing this for a while as one of the reasons for baht appreciation was that onshore names sold physical on rallies and converted it back to THB. This could mean they do not have to convert it back to baht, driving lesser demand, and keep USD/THB well bid. I still prefer to sell THB on rallies.