Hangover.

Risk appetite abruptly evaporated on Thursday, as investors assessed the long road back from the virus and concerns mounted about a second wave of infections in the US.

Jerome Powell struck a largely upbeat tone about long-run prospects for the world’s largest economy, but the near- and medium-term challenges are formidable, he said. A steep decline in oil on Thursday added to the risk-off move.

Markets appear to be vexed by new cases in Texas and Florida, as well as rising hospitalizations in Texas and California. Overall, the US case total is rising at the slowest pace since the onset of the panic, but charts like the one below (which I used on Wednesday afternoon) are disconcerting.

“This is the first time we’ve had a little bit of negative newsflow recently” on the virus, one economist at UBS told Bloomberg. Equities in Asia were down sharply, as were stocks in Europe.

“It’s hard to look beyond profit-taking as the culprit”, Axicorp’s Stephen Innes said. “Blaming Chair Powell’s gloomy outlook is too far fetched. It’s more likely retail traders caught in stock market sector microbubbles getting stopped out”.

The dollar rebounded as the risk-off move accelerated. The greenback initially pushed lower in the wake of the Fed Wednesday.

Bonds were on the rebound as the mood soured around equities. 10-year yields in the US, Germany, the UK and Japan all dipped Thursday.

There’s a “decidedly risk-off optic… despite the Fed’s dovish ‘lower forever’ policy tone”, Nomura’s Charlie McElligott remarked, citing Powell’s “cautious economic outlook and fears that the dreaded ‘second wave’ in the US has already commenced”. Charlie notes “a pick-up in client ‘too far, too fast’ feedback, with recent risk-on winners being monetized”.

Who knows, perhaps the pro-cyclical trade was just being “rented” again, like so many other rotation head fakes over the years. Russell 2000 futures were off sharply and tactical bear-steepers in the US were unwound.

“This morning, with one eye on reports of a second wave of COVID-19 infections in parts of the US which are reopening, the mood is risk averse”, SocGen’s Kit Juckes remarked. “If my inbox is anything to go by, the world is split pretty evenly between those who think current equity valuations are mad and those who think the bubble’s only just beginning to take shape properly”.

If signs that the virus is resurfacing “for real” in the US continue to top the headlines, Kit’s inbox is likely to start skewing towards the “mad” side – at least until equities fall enough to make those valuations come down. Even under reasonably optimistic scenarios, stocks are stretched.

Remember, it doesn’t take much to tip the scales psychologically, and even if the overall infection rate in the US is steady or even falling towards zero, market participants could begin to obsess over headlines featuring the words “Texas” and “Florida”.

Throw in rising angst around the still tenuous domestic political situation stateside and you’ve got a recipe for a pullback.