It did not take long for authorities to make their first arrest under the new Hong Kong security law. This has a can of worms writing all over it on the political rungs, but unlikely to be a market-impacting event.
Not too unexpectedly, traders, for the most part, have kept risk on a short leash ahead of the significant risk events of the week (FOMC minutes, US ISM & EU final PMI readings, NFP) and, of course, the July 4th long weekend.
Markets are trading lower to start the month despite a better Caixin PMI print which registered the most significant improvement since 2009. However, external demand remains weak, as seen by the falling new export orders component.
Other risk assets are trading mixed with oil higher post a bullish industry inventory report. This is relatively bullish for oil, if tomorrow's official inventory report confirms the API draw. Traders trade on the delta, not opinion, and the API draw exceeded even the most bullish inventory forecasts.
At the same time, the dollar remains bid as worries over the ongoing uptick in cases in the US (Dr.Fauci warned that nationwide cased could hit 100k per day from the current levels of 40k, while the ICU system in several states is running over 90% capacity) weighed on sentiment.
More broadly, however, the stimulus backdrop and improving macro data points continue to see risk assets bid on dips. Suggesting cyclical FX currencies will remain bid on dips.
Europe is expected to open down 40bps with cyclicals likely to pause for breath in the early going.
There was not a heavy skew on the Asia tape one way or the other. Still, the market set up remains cautiously defensive with signs of de-risking entering the fray ahead of an expected drop off in volumes on the back of the holiday-shortened week.
More broadly, however, price action remains constructive, with dips continuing to be bought on the back of three primary tenets on EU stocks. 1) Catch up to US market plays; 2) lockdown easing; 3) the steps toward debt mutualization are all very much still in place.
But it is hard not to get distracted as the press is dominated by the coronavirus's politicization in the US. To mask, or not mask, seems to the battle lines. Put simply, Democratic presidential candidate Biden's supporters are worried by it, and President Trump's supporters are not.
The New York Times uses a graphic to show US cases' growth rate on a par with March and April. US economist Tyler Cowan has written a column for Bloomberg on the politics and social behavior associated with the virus. The markets seem less concerned, though. Whereas two or three weeks ago rising case numbers in the south were a huge deal, today there is extraordinarily little concern, and with equities rallying sharply overnight, it is hard not to say that the proof of that view is in the pudding.
But something I've been harping on to clients the past week is that I'm starting to think all that is good is in the price, and while stocks remain at elevated levels(SPX 3100), they will continue to be very sensitive to any bad news. But ultimately, given the high level of economic uncertainty that lies ahead h2, I think investors will be more prone to take profits as we move above psychologically key levels rather than add risk until we have that ultimate recession stopper is in hand, which is a vaccine of course or at minimum a definitive flattening in the US epidemiological curve.
It is hard to get away from the idea that complacency is starting to build again. The comfort blanket provided by central banks is unlikely to be pulled apart anytime soon, but that doesn't mean the market can't experience extended periods of risk-off, especially, as we start to head into summer trading conditions, where liquidity could be a challenge.