Whilst we have become used to surging stocks since the first quarter fall out seen at the height of the impacts of the pandemic in the western world, the performance of stocks in this last week certainly leaves the professional trading community scratching their heads. With reports of over 5 US states reissuing lock down measures after a significant spike in new cases, and over 55,000 reported on Thursday alone this week in the states there is great cause for concern, which the stock markets do not seem to be acknowledging, with new highs in the cross hairs.
Granted, it has not all been bad news in the States and this week’s employment data beat with 4.8m new jobs created, versus the 3m expected. The unemployment rate also fell to 11.1% against expectation of 12.4% and the 13.3% level seen last month. On the face of it, this is good news that the workforce is again being mobilized. But, consideration must be given to the fact that this data is historic, and markets typically react to where we are now, not where we have been, and with lockdowns going in place across the US daily, expectation would be that this data could well start to reverse next month. So why isn’t this being reflected in the markets?
As we know President Trump is hell bent on higher stock markets as the driving force in his Presidential campaign, with this added to the rising numbers of individuals migrating from bank savings accounts to stocks in search of value during a low interest rate environment, we perhaps have 2 reasonable explanations. Funds and investment managers are also underweight on investment and reluctant to get involved at these levels’ liquidity is low, heightening volatility.
For now it would be foolish to fight the market trend and call a top to it, but if the case numbers keep rising in US States that had previously been felt safe, not only the markets could start to fall, but the probability of a second term for Trump will likely take a significant and perhaps terminal dent. For now, the worrying question remains, just how bad it will have to get before the markets start to take notice. Naturally, hope remains that this isn’t the case, but for now if a turn comes, we could see a reasonable correction.
In the FX space it's been a relatively quiet week. The Dollar is caught between becoming a safe haven currency and experiencing depreciation amid rising stocks and reacting positively to stocks which has led to safe haven currency sales. This merry go round has brought the markets to a relative stalemate, with the Dollar fall seen in the earlier part of the week, particularly against the Euro and Pound starting to reverse into the close of the week. Gold continues to be bought as we approach the 1800 area in XAU/USD, with the pair currently gaining more positively from good news lowering the Dollar value, whilst also gaining from the gold strength of low interest rate environments and those smart investors who see the clear inflation problems coming over the next 24 months due to the global government pandemic stimulus.
In the UK Brexit looms over us, with little in the way of progress this week now we are in “meaningful” talks. A resurgence in northern England is also a worry, and as the UK comes out of full lockdown on 4th July, there has been the need to keep one reasonably large City, Leicester in lockdown due to a spike in cases. With the UK way behind the curve, the next month will be very telling from both a business and relaxed measures new cases perspective, with the governments past and present actions carefully analysed.
The Week Ahead:
Monday: Quiet day as the states come back after the extended weekend. US ISM Non-manufacturing data is the highlight as well as the Canadian economic outlook release.
Tuesday: First up is the interest rate decision from the reserve Bank of Australia. In the European session the pick of the data is German Industrial Production. In the US session Quarles of the Fed Reserve is due to speak.
Wednesday: Current account and bank lending data from Japan in the Asian session before economic forecasts from the EU.
Thursday: Business confidence data from New Zealand comes first early in the session. In the European session we get German trade balance data. Weekly jobless claims from the States is the highlight of the afternoon as well as Wholesale Inventories.
Friday: French and Italian Industrial Production data in the European session. In the US session we get Core and Non-core US PPI and Canadian Unemployment