Risk assets were buoyant in Europe and Asia on Tuesday, as global stocks rose despite concerns over worsening Sino-US relations and worries that the worst social unrest in decades will forestall a recovery in the world’s largest economy.
Donald Trump’s threat to institute martial law served as fodder for critics who warn this is yet another authoritarian turn for an administration with a penchant for blurring the line between democracy and autocracy.
If you’re looking to “explain” the resiliency of risk assets (which for most of you, just means “stocks”), you can point to central bank largesse (“it’s the liquidity, stupid“), but also to the dollar, which is on the back foot for a fourth day (on Bloomberg’s gauge) and a sixth on DXY. In either case, it’s sitting at the lowest in ~three months.
Quite a bit of that is attributable to the euro, which is enjoying a nice run on hopes of fiscal cohesion and ongoing reopenings across the bloc’s largest economies. The ECB is widely seen upping its pandemic emergency purchases this week in another bid to help the economy along.
A softer dollar generally means looser financial conditions. As SocGen’s Kit Juckes put it back in December, the world is a friendlier place when the greenback is on the back foot, and on Tuesday, he says “magic money is hurting the dollar”.
“The BOJ, ECB and Fed have increased the size of their balance sheets by 10%, 20% and 70% respectively since the start of this year, more than enough to absorb the increase in public sector debt issued to finance the fiscal response to the pandemic, leaving plenty to crowd baby-Boomers’ pension funds out of markets”, Juckes writes. “Promises to buy peripheral debt or high-yield send spread/yields down even before the central banks buy anything, and the only part of yield curves that can move, is the long end”.
To be sure, there are plenty of reasons for the dollar to retain its appeal, though. “The threat of mass unemployment, deep recession and geopolitical tension should keep nerves frayed and the safe haven dollar supported against a broad basket of currencies”, Rabobank’s Jane Foley says.
That’s true, but even if the protests and civil unrest stateside don’t manage to derail equities, the tumult could slow the recovery, undermine confidence in the administration, force more spending from Congress and even looser policy from the Fed, all of which “should” be dollar negative, at least in the medium- to long-term.
As for America’s social fabric, it’s being torn apart at the seams.
“How things change. We have moved on from an era in which an army was seen of little practical use, and defense budgets slashed; entered one where an army is accepted as needed at some point for looking national security threats, and defense budgets raised; just left one where any army was relied on to deliver logistical support during a country-wide virus lockdown; and are stumbling into one where an army is required to keep control of a liberal democracy”, Rabobank’s Michael Every wrote Tuesday.
Assuming you can avert your eyes (no easy task) and keep them squarely focused on the “up-and- to-the-right” charts for equity benchmarks, you can retain some semblance of sanity, if making money is where you find solace.
“I can’t think of any market crash brought on by civil unrest”, Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist” wrote, weighing in on the market side of things a note. “There are lots precipitated by excessive speculation which is then squelched with tighter monetary policy triggering a crash, but I can’t recall a single significant market correction that resulted from civil unrest”, he added.
And yet, it’s becoming more and more difficult to understand how the US election in November will go off smoothy under the circumstances and considering who’s involved and what’s at stake.
“There’s an army of commentators discussing this one way or the other”, Rabobank’s Every goes on to say, in his daily note. “It’s Law and Order; it’s fascism; it’s about time; it’s the end of US global leadership (which has long-term implications for markets if true)”.
Every says US voters “will get their say in November”.
That’s the plan, anyway.