Participation Is ‘Voluntary’

If investors are concerned about rising virus cases in the US (and abroad, for that matter), that consternation wasn’t readily apparent early Monday, as futures rose and the dollar slumped.

News flow over the weekend wasn’t particularly encouraging. Infection rates in key hot spots are disconcertingly high (that’s what a “hot spot” is, after all) and to the extent you think a Democratic sweep in November would imperil equities, suffice to say Donald Trump’s Tulsa rally was an abject failure (the president is reportedly “furious”).

“Markets look like they are trading utterly randomly which, as we head into the summer, wouldn’t usually be a huge surprise”, former trader Richard Breslow wrote Monday. “But some of the commentaries have struck me as truly strange. The US market apparently doesn’t read the polls and will be shocked if the Republicans fall behind”, he added. “Note to analysts: whatever news is out there is in the price”.

June 21 saw the most new COVID-19 infections globally of the pandemic, but all investors care about is future lockdowns, which don’t appear to be on the menu when it comes to policy options — or at least not for many of the officials with the authority to impose them broadly.

“By our count, which uses data from Johns Hopkins University, 19 states have registered record high number of cases in the past week”, BNY Mellon’s John Velis wrote Monday morning. “There is a clear relationship between social distancing by states and cases of coronavirus”, he added, using a simple plot of the Dallas Fed’s Mobility and Engagement Index for each state on May 15 versus the subsequent change in COVID-19 infections through the past weekend.

This is becoming harder to ignore. There are, of course, a number of mitigating factors, not least of which is that fatality rates haven’t surged and many of the new cases are occurring among young people who are less likely to become critically ill.

One thing is clear: Trump is embracing an increasingly cavalier attitude towards the situation, a position which may or may not pay off headed into the election.

Read more: Reverts To Reckless Abandon In Virus Fight

For markets, this only matters if there are more lockdowns. In the absence of evidence to support the notion that sweeping regional restrictions are in the offing, investors are likely to trade the promise (and delivery) of stimulus.

“[The] Fed is ‘all-in’ and will remain in that stance until the US unemployment rate falls to an acceptable level (i.e. <5%) or claims fall below 400k”, BofA notes, adding that the “Fed rhetoric has been bigger than its wallet thus far [with] Fed facilities operating at just a fraction of potential”.

(BofA)

As ever, a weaker dollar is risk++. “The dollar is struggling today, right at the resistance zone it rallied up to”, Breslow went on to say in his Monday missive. “Why not, the markets are in the mood to try to be happy. And who needs a safe haven when that happens”.

Speaking of havens, all of the stimulus has some confident that gold can move higher. It’s looking to push out the range it’s traded in since mid-April. This isn’t a haven trade, it’s a debasement/”lower forever” trade, and with yields low, there’s no opportunity cost, at least not if you’re talking cash.

“As the pandemic sweeps on through Latin America, the global economy isn’t out of the woods yet and I suspect we need to see the worst of the global picture before we can see a long-term dollar downtrend start properly”, SocGen’s Kit Juckes remarked.

For BNY Mellon’s Velis, it won’t necessarily take a return to draconian lockdowns to rattle markets, though.

“While we don’t expect the same type of top-down broad-based lockdowns to be declared by authorities in those states with rising cases counts, we do expect demand will be crimped as rising case counts will lead to ‘voluntary’ social distancing”, he said Monday. “Developments on the public health front will delay the recovery and put a crimp in both supply and demand in severely affected states”.

In explaining the turnout for the Tulsa rally, the Trump camp blamed just such “voluntary’ social distancing”.