Bulls are on parade in the summer of hope with investors lining up to buy stocks

It was bulls on parade overnight as investors shifted into riskier corners of the markets while Wall Street spent the better part of the session getting stopped into trades. Easy money, cash on the sidelines, and no secondary outbreaks as economies re-open have investors lining up to buy stocks.

The risk-on move, coupled with a first-level bear capitulation, has seen some aggressive factor rotation taking hold.

Positioning – be it the entire wall of money levels or relative length in defensives — all of which is likely playing a part in the extremely bullish pivot in US stocks.

Lockdown easing and, in particular, relaxation of travel restrictions in several European countries in the last 72 hours also helps. And the EU differences over the Franc-Germany rescue fund have seemingly narrowed during the previous 48 hours with some compromise deal likely.

But the rally was cut short as bulls ran headlong into President Trump, who is homing in on China over their handling of the outbreak and the latest Hong Kong Law.

All eyes will be on the US and President Trump’s response. White House press secretary said that President Trump was “displeased” with China’s efforts while alluding to the sum of the market’s fears:” that it’s hard to see how Hong Kong can remain a financial hub if China takes over.”

The economic reopening narrative will continue to get tested by increasingly challenging US-China trade relations. President Trump will probably respond to Hong Kong national security legislation after a May 28 vote at the National People’s Congress.

The risk of higher US tariffs will loom large, but as the summer of hope rolls on, does any of this matter in the broader scheme of things? It should and it will, but perhaps not as damaging as it has in the past given, we have been down this road before.

The summer of hope

So much for the go away in May mantra as a summer rally could be finding its legs.

With dozens of vaccine and therapeutic projects and trials underway, investors will continue to get a steady stream of encouraging medical news where a quantum leap to a cure could ensue.

Hard to believe S&P has clawed back to early March levels. Feels “better” out there but by no means fixed until that vaccine is in the hands of all.

But for immediate concerns, case counts have dropped sharply in various European countries despite lots of reopening. And while medical experts are quick to remind that second wave might well be a threat in the Northern Hemisphere in autumn, but with the combined effort of the global biomedical research community backed by unlimited government funding effective therapeutics – if not vaccines – might have been discovered by then.

Add to that still mostly risk-off bearish positioning and markets could be in for a broader rally on a full-fledged bear capitulation, which could trigger steeper rates curves and a weaker US dollar as the primary expression.

We only got a small taste of that overnight but there is undoubtedly more of that to come.

Markets have shown incredible resilience to what has arguably been the most defining economic shock since the great depression. And yet there is a strong sense that overall investor positioning remains risk-off across equities, commodities, and currencies, including most model-driven players.

But if we close the week with some headroom above 3000 on the S&P futures and begin the assault on the NASDAQ 10,000, it gets more challenging to argue Hong Kong going to one system risks of even Cold War 2 risk.

At some point, it becomes like 2010/2011 again, where everyone argues the bear case in the narrative, but the S&P 500 soars daily in the real world.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp