Optimism around economies opening is catching a tailwind by an incomprehensible policy backstop.
US equities were stronger Monday – S&P 500 up 3.2% following similar gains through Europe.
Vaccine hopes underpinned sentiment. Preliminary results from Moderna indicated immune responses were acknowledging in volunteers vaccinated under human trials.
Remarks from the US Federal Reserve also helped, with Chair Powell noting, “we are committed to using our full range of tools to support the economy.”
Optimism around economies reopening and a coronavirus vaccine is driving higher equities, oil prices, and weaker USD.
The incomprehensible stimulus support means positive news triggers an asymmetric positive response in markets compared to a sell-off in risk via negative news. This dynamic is becoming more entrenched in market sentiment as Western Europe and the US loosen mobility restrictions.
In more general terms, the extraordinary policy support, both monetary and fiscal, is combining with greater optimism of an economic rebound, driving further declines in front-end equity volatility, which is feeding into a weaker G-10 USD narrative, supporting global risk.
Beyond extraordinary policy support, a key reason for the strong recovery in risk sentiment is how much of a game-changer a vaccine is.
Compared to previous downturns that were more multi-faceted and ostensibly more difficult to unwind. The removal of a single recessionary input (the virus) via a vaccine or more effective treatment can pave the way for fast recovery in output.
Style concentration (and thus rotation) risk is something which concerns speculators long e-minis probably more than the absolute level of the market for now.
But with S&P 500 3000 magnetic attraction level starting to tug, you do not want to be caught short with your pants down in case of important vaccine news.
But Big But
Trade tensions remain a critical risk for markets, however. USDCNH is trading in a tight range, and the China-sensitive AUDUSD is shrugging off these concerns and is well-supported on the rally in US equities.
By contrast, TWD and MYR sensitivity are increasing. Worries that Taiwanese companies – a crucial part of the US supply chain in North Asia –could lose out from the US-China trade spat.
While the Ringgit is very dependant on China trade and falls in China’s industrial and consumer-consumption engine would be bad for the Ringgit.
Caution is warranted with financial markets increasingly decoupling from the real economy. Disinflation is still more likely than inflation, which could continue to weigh on gold unless the employment level spring back to life.
While central bank liquidity is being used to repair balance sheets, service debt repayments and keep workers on the payroll amid a collapse in aggregate demand.
Indeed, it is a recovering economy built on the Federal Reserve Boards house of cards.
Joking, I said to a long-time trading colleague that pretty soon the White House and the Fed will own a controlling share in 50 % of the S&P 500 constituents, FANG will control 40 %, leaving 10 % for the bears to speculate.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp