Close Proximity

There was good news and bad news headed into the holiday weekend in the US.

The bad news is, virus cases jumped the most ever in Florida. So did hospitalizations. The new positivity rate in the state has been climbing for the better part of three weeks. Fatalities rose the most in a month.

The trend isn’t your friend down there. At least not on any of the headline numbers. It’s possible to divine other, more nuanced metrics, and that may well be a worthwhile exercise. But we are fast venturing into territory where the following adage applies: “It just is what it is”. Usually, that statement is wholly nebulous. Sometimes, though, it’s extremely apt. And we’re getting to that point across a handful of states in the US.

For his part, Trump on Thursday described a trio of vaccine candidates as “looking really, really good”.

Frankly, it’s not clear why the White House bothers pretending anymore. At least one Republican hailing from a hard-hit state explicitly suggested that Trump stop – pretending that is.

“As our economy is restored, it is imperative that President Trump is not undermined in his mission to return our economy to greatness”, Arizona Republican Andy Biggs declared, in a statement. “Dr. Anthony Fauci and Dr. Deborah Birx continue to contradict many of President Trump’s stated goals and actions for returning to normalcy”, he continued. “It’s time for the COVID-19 task force to be disbanded”.

I’ll just leave that there.

The good news headed into the weekend’s festivities is that this week’s economic data (sans jobless claims anyway) beat pretty much across the board. From pending home sales to ISM to the June jobs report, bulls got everything they could have asked for.

Of course, there are demons under the bed, but risk assets are happy to pretend they don’t exist — for now.

Equities were buoyant for most of Thursday stateside as the market basked in the glow of NFP. If one looks at the S&P’s best quarterly performances going back some seven decades, the odds of an encore after Q2’s epic showing appear decent.

Needless to say, at no prior time in history has monetary policy been so squarely in the corner of risk assets. Ray Dalio reiterated that point during an interview with Bloomberg.

Then again, at no time in history has the outlook been as uncertain as it currently is.

“The collapse in earnings expectations this year has been dramatic, with global 2020 forecasts cut by 36%”, SocGen’s Andrew Lapthorne wrote Thursday. “That said, June actually saw little in the way of adjustment to the consensus with the quarterly EPS profiles of the S&P 500 ending June where they started in May”, he added, before noting that “there remains a strong V-shaped forecast for Q3 with most sectors expected to see a big pick-up in profits”.

Elsewhere, it’s worth noting that junk funds saw $5.5 billion in outflows in the week through July 1. It was the fourth-largest high yield outflow ever on Lipper’s data, and it came on the heels of blockbuster returns for the asset class in the second quarter.

Investment grade funds, on the other hand, enjoyed yet another week of strong inflows, taking in more than $7 billion as folks continue to exhibit a desire to invest alongside Jerome Powell and the Fed.

Randomly switching gears, oil rigs fell again last week, Baker Hughes said, bringing the collapse over the past 16 weeks to ~73%.

Crude got a shot in the arm on Thursday from the better-than-expected jobs report in the US and is coming off its best quarter in 30 years. This week, a survey suggested OPEC output dropped to the lowest since 1991 last month.

Considering everything that might have gone “wrong” in the holiday-shortened week stateside, you’ve got to think most market participants are thinking something along the lines of “I’ll take it”.

Of course, we’re now staring at three days during which headline virus numbers from hotspot states are almost guaranteed to rise. It also seems likely that Americans, not exactly known for prudence and discipline, will spend the holiday weekend in close proximity to one another and also in close proximity to copious amounts of alcohol. That, in turn, isn’t conducive to “social distancing”, and could mean that caseloads rise on a lag once the incubation period ends.

Through it all, there’s still an uncomfortable disconnect between risk assets and the real economy, even as the latter recovers.

“Admittedly, our skepticism surrounding the sustainability of the bid for risk assets has been steadily eroded since mid-March”, BMO’s Ian Lyngen, Benjamin Jeffery, and Jon Hill wrote Thursday, adding that they’re “content to filing it away with the myriad of other things in life we simply don’t understand despite all of the compelling explanations such as gravity, reality television, and the fact the rebooting really does solve a lot of performance issues”.