Somber, Regardless.

Regardless of how risk assets start the new week, the mood is decidedly more somber than it was just seven days previous.

The warm glow of the upbeat May jobs report is gone, replaced by the smoldering remains of a charred Wendy’s in Atlanta, and the white-hot state of race relations in America, where the reopening process is imperiled both by ongoing protests in major metropolitan areas and rising infection rates in some locales.

Meanwhile, a COVID outbreak linked to a major food and vegetable supply center in Beijing is a source of concern, as are rising cases in Tokyo and the mounting death toll in Brazil, which overtook the UK last week to become the country with the highest number of fatalities outside of the US.

Read more: From Beijing To Tokyo To Iran To Florida, COVID Mounts A Comeback

Underscoring the palpable sense of angst among some officials, Andrew Cuomo issued a warning to Manhattan and the Hamptons over the weekend. “We are not going to go back to that dark place”, he said, threatening to reinstitute shutdowns if businesses don’t observe proper protocol around social distancing and other stipulations aimed at ensuring there’s not a second wave in New York.

“Texas serves as a reminder of the economic risks of the second wave”, Axicorp’s Stephen Innes said Sunday, on the way to calling April’s dramatic contraction in the UK economy “a lingering mnemonic of how damaging the first wave has been”.

But, as tragically absurd as it sounds, none of the above means that risk assets (which, for many, just means “stocks”) are going to care. Sentiment may be a bit shaky coming off the worst week for US equities since the March panic, but as documented here over the weekend, there really isn’t much evidence to support the contention that anyone is “all-in”.

The media frenzy around retail investors’ apparent fascination with “insolvency stocks” notwithstanding, key investor cohorts never believed in the rally and probably still don’t. Indeed, that’s one of the most amusing parts about the Robinhood story. Retail investors betting on the equity of bankrupt companies have managed to best not just big name fund managers who basically sat out the rally, but a basket of stocks widely held by hedge funds, too.

The absence of participation from hedge funds and the still low exposure of systematic investors, are two arguments (it’s really one argument, but you get the point) for why stocks can keep rising. I discussed this at length in “Maybe More People Need To Turn Bullish Before We Can Have Another Meltdown“, but it’s worth highlighting a few additional visuals and quick commentary which you can consider in conjunction with the linked post.

The figure shows the breakdown across positioning indicators in equities – it is not indicative of overexposure by any stretch. Risk parity’s 3-month beta to the S&P is in just the 1%ile on Deutsche’s simple modeling, while vol.-control and CTAs’ equities allocation sits in just the 2%ile and 17%ile, respectively.

(Deutsche Bank)

“We would like to highlight that risk-on positioning isn’t too worrisome, even if it was tempting to conclude so after Thursday’s setback in markets”, Nordea wrote Sunday.

“Macro Hedge Funds are generally risk-squared in positioning, and cash-levels are likely still relatively high among professional fund managers”, the bank’s Andreas Steno Larsen went on to say, adding that “this is fuel to the story that so-called Robinhood traders drove up asset prices with a little help from the Jay-man during March and April”.

(Nordea)

“A new cycle has started, and we think that investors should position as such. We think that stocks and credit will be modestly higher and tighter over the next 12 months, but the more compelling opportunity lies in traditional ‘early-cycle’ rotations”, Morgan Stanley says, reiterating a preference for small-caps and cyclicals, which took a breather last week after a monumental three-week surge.

Deutsche Bank’s overall consolidated positioning indicator shows a rebound from the panic plunge, but nothing near “normal”.

In fact, we’re just getting back to levels consistent with the lows hit during the Q4 2018 selloff and the risk-off episodes around the yuan devaluation and deflation scare in late 2015/early 2016.

(Deutsche Bank)

On deck this week are the BOE, the BOJ and Jerome Powell, who will testify on Capitol Hill. Powell’s remarks could be market moving, and the White House made it clear late last week that the administration would like to see the Fed chair adopt a more upbeat tone.

“The Fed on Wednesday sounded dovish, but the problem for markets is that they didn’t move the narrative forward”, Axicorp’s Innes remarked over the weekend. I’d generally agree with that assessment.

What Powell says to lawmakers shouldn’t be up to the White House, but we’ve been slowly desensitized over the past three years to the point where it doesn’t strike us as odd that Fed officials are constantly under pressure to deliver on a narrative dictated by the executive.

To be sure, there are good arguments for why the Fed was never really “independent”, but anyone who tells you things are no different now in that regard than they were in the past is being deliberately obtuse – it’s just as simple as that.

“The resurgence of COVID-19 cases offered a motive for some aggressive profit-taking in equity markets after a long rally”, ING said, in an FX preview of the coming week. “We suspect that while headlines about second waves in the US may temporarily upset sentiment, risk assets may once again prove resilient, still counting on the Federal Reserve’s printing machine and taking heart from the restart of the global economy”, the bank went on to say.

The BOE may well expand QE, while the BOJ isn’t likely to offer much. Oh, and key activity data is due from China, where Beijing is keen to show the world what a “V-shaped” recovery can look like — even if it’s engineered from on high.