Western Europe and Developed Asia economies continued with their grand reopening with minimal effect on virus transmission at a national level what minor hotspots that did occur were extinguished relatively quickly.
But the key in the "China blueprint" narrative is that besides a brief flare-up in Beijing, China has also kept the virus under control.
The US remains a bit of a mystery mash. The significant outbreak in the New York Tri-State Area has been tramped down similarly to other major metropolitan areas around the globe. However, transmission rates have picked up over the last month in several southern states, derailing some state reopening plans ahead of the economically crucial July 4 holiday weekend.
Ongoing research suggests that limiting large gatherings and even smaller celebrations at bars and restaurants accompanied by widespread mask use may significantly reduce virus transmission while allowing large parts of the economy to reopen. Suggesting that the virus can be contained while keeping the economic costs manageable.
Although the temporary rollbacks present a near term speedbump, by no means are they a roadblock to recovery. The US containment measure has been a bit of a jumble.
I am not an economist and frankly not well versed in the finer points of the dismal science after opting for the NatWest trading desk rather than finish my master's. But the market is torn between robust cyclical data, with Citi's surprise indexes registering off the charts versus a surge in US virus case counts. Still, June was a pretty bumpy month for stocks relative to the smoother sailing in April or May, suggesting the US virus levels are a significant impediment for stocks higher.
Still, a lot of crucial risk variables have lit up in June; WTI oil prices have been bullishly anchored to the $40 level (+ 200 % from the lows), China's growth has been resilient while US dollar funding concerns have virtually evaporated. Still, health concerns and the soft rolling lockdown could lead to a soggy patch as the improving data competes with the virus outbreaks. And while the US data for June has been robust so far, we may see some loss of momentum even beyond reversals and pauses to reopening in a growing number of states if people continue to feel unsafe to leave their homes as ultimately its consumer traffic that counts.
I guess we will learn two things from the July 4th weekend.
1) Did US travelers' practice social distancing/ did the curve in the Sun Belt States stay roughly the same?
2) Did consumer traffic (foot and driving) bound higher?
Indeed, it suggests the market could be dealing with a couple of fat tail risks when weekend consumption data rolls in. Or at least until Google updates their mobility trackers
Let us make a deal mode
After three weeks of push and pull between robust current cyclical data and the increased focus on downside risks from deteriorating US virus news, the market could be moving into "Let's make a deal" mode, but still unsure what door to pick.
Behind door number one sits the all-in trade from a vaccine discovery. Behind door number two lays the relatively optimistic economic outcome, but its door number three, where the prophet of doom sits reminding us the virus risk will lead to a more significant growth hit in Q3.
Most rational views are not banking on a medical breakthrough anytime soon. But the most likely Alka seltzer moment will come when signs that the infection spread in critical hotspots is no longer accelerating. And with stricter lockdown and face mask measures being taken across the Sun Belt states, there is an excellent chance we could see those curves flattening by mid-July.
Currency markets
Euro
One game plan
Despite some lingering concerns about the Recovery Fund proposal, it is unlikely the fiscal hawks will be a big enough voice to upend the majority apple carts on this significant step toward fiscal integration in the region and put to rest those concerns about the sustainability of the Euro project.
With the EU Summit on July 17, I think it is logical to stay bullish euro until that date, and unless there is some substantial negative news development, its a case of holding the course. The odds seem heavily tilted toward a European agreement. I think the market will price the positive outcome more aggressively as the date nears.
Additionally, the rebound from the corona-crisis in Europe has been much smoother than the US due to better virus control and a much smaller increase in unemployment rates.
Also, the long stretch of EU stock market underperformance and years of outflows is starting to reverse. With the euro relatively cheap against the dollar, more sizable EU inflows from the US will likely push the euro higher.
Discussions are starting to surface on how the US dollar will vote for either a Trump or Biden presidency. While it is too early to price in a ton of election risk, forex optionality behaviors have picked up around the November election date. Given the polling numbers are showing a positive Biden skew it harmful for US stocks and the US dollar given his proposal to reverse half of President Trump's cut in the corporate income tax rate from 35% to 21%
Asia FX
It is a mixed picture in USDAsia with very tight ranges and only small flows to report for Asian currencies. USD/PHP, from the New York close, fell to multi-year lows, similar to USD/INR on Thursday - though the USD/PHP move was not as significant as that seen in USD/INR (down about 0.5% vs. a more than 1% drop) or as quick.
USD/IDR retains its bid tone with continued bond selling and short USD covering. USD/KRW is trading in an even tighter range now; the 1198 area is seeing good buying interest.
BI' burden-sharing' is hurting IDR FX as the translation of higher monetary growth to FX is mostly through widening current account deficit compounded by an overheating economy. The pass-through of money supply expansion into a weaker FX remains a timing question; it is still a game-changer for the IDR bulls. To suggest the hoards of IDR carry trades are a bit spooked is possibly a colossal understatement.
Despite the INR being relegated to a second class, Asia FX "carry trade" in favor of the IDR only a week ago. But with India, current account set to move into surplus, US interest rate carry-vol is healthy, and all the fiscal negative baked into the cake, there was always a considerable retracement potential for the INR even more so now as local carry traders are moving out of the IDR on masse and shifting focus to the INR.
BSP surprised the market by cutting 50bp recently, but that also could be the end of the rate cuts cycle for now. Bonds have performed strongly on the back of rate cuts triggering some offshore demand, which may have helped the currency. The PHP has been resilient due to low oil prices, less dollar funding risks, and high-level reserves adequacy providing the Philippines plenty of policy wiggle room to maneuver.
The Ringgit has held pretty steady as energy prices continue to improve. Still, the passing dark cloud from the rating outlook cut continued to weigh on sentiment as did uncertainly of US-China relations in the wake of the HK law fracas.
As for political risk, its a short-term speedbump, but as we see time and time again, its never really that big of a game-changer for currency markets after all the votes have been counted.
Gold Markets
Gold is on the verge of testing the psychological $1800 level. The market has been brought higher by continued investor interest amid falling real rates and coronavirus concerns. The pullback from recent highs this week has likely been a positive for risk market double function of favorable vaccine trial results and robust economic data, signaling a continuation of the recovery. But it does not seem that anything matters for gold as gold remains bid on a stronger dollar and higher equities. Gold investors could be looking through this economic sweet spot in the recovery anticipating a downswing in the data, which would then be accompanied by even more stimulus.
Still, on the other side of the equation, US equity volatility is creeping lower again, particularly since the possibility of good vaccine news rises as time goes on, which could present some concerns for gold positions according to conventional wisdom.
But the vaccine news has not shifted house views that aggressively lower, perhaps because the market is now starting to change tact moving into long US inflation trades, which should see the gold appeal part of that inflation discussion. Especially with the Fed committed to keeping interest rates near zero as far as the eye can see while willing the let inflation pressures over steam.
Oil Markets
In the face of rising virus case counts in the Sun Belt states, the demand outlook was predictably being portrayed a bit muddied.
But rising hot spot case count and the re-imposing of soft lockdown in the US are likely a speedbump, not a roadblock to recovery. Research suggests limiting large gathering and wearing facemask will allow the broader US economy to reopen quicker and will less negative impact on the broader economy, so this could prove decisive for oil in few weeks if the US epi curve flattens or shift down.
The July 4th holiday weekend presents a fat tail risk for oil with gasoline inventories rising last week if the weekend mobility data suggest muted activity even it is only in the Sunbelt states, you will be able to buy barrels cheaper this week.
With the market torn between robust cyclical data and rising virus case counts in the Sun Belt, putting in significant headroom above $WTI 40 was also challenged by a possible resumption of US shale production as price move higher. While no less concerning is OPEC+ is likely to roll back cuts in August
The earlier than usual release of the Baker Hughes rig count ahead of the July 4 weekend suggests US rig count and activity is beginning to bottom out, albeit from a shallow level.
OPEC and its allies have not discussed extending their record 9.7 million b/d production cut accord beyond July, suggesting they might be more inclined to let the curbs ease down to 7.7 million b/d starting in August, as planned. With the JMMC scheduled to meet on July 15, traders could remain a bit cautious until then.
It will take at minimum two weeks for the July 4th COVID-19 curve testing data to roll, and with the JMMC hitting the radar, we could remain sandwiched in more of the same range trade mentality until we get a flattening on the US virus data.
My view on the JMMC outcome is based on the fact OPEC+ is using more sophisticated models for production targeting, including the Oil market curve. If the forward slope does not move into backwardation, I suspect OPEC+ will be more inclined to extend the 9.7 million b/d production cut accord beyond July.