“My guess Sunday night was that the sharp uptick in COVID-19 cases in Australia, and the ongoing uptrend in the US, would trump any other news, of which there was little”, SocGen’s Kit Juckes wrote Monday.
“More fool me”, he added.
Allusions to the disparity between surging equities and [fill in the blank with your favorite risk factor] are ubiquitous these days.
The tendency to suggest that stocks are a castle in the sky is understandable. After all, equities’ phoenix-like rise from the ashes of March was ostensibly predicated on COVID being brought under control, which was seen as the only guaranteed path to the restoration of economic activity.
Simply put: COVID is not under control in the US.
While other western nations (as well as China, South Korea, Japan, and APAC) are doing much better in keeping flare-ups to a minimum during the re-opening process, it’s hard to imagine global risk assets digesting a double-dip in the US economy with anything that even approximates alacrity. And let us not forget that Brazil, Mexico, and others are struggling with their own outbreaks.
Given that new lockdown measures in some states are already manifesting in decelerating activity, it’s possible we could look up two months from now and find that the nascent rebound in the world’s largest economy has petered out. There’s much more on this here and here, but the following updated visual using OpenTable’s data speaks volumes.
Some of the apparent enthusiasm for risk assets early Monday may have been attributable to traders and investors reengaging after being reluctant to carry risk into the long holiday weekend despite the blockbuster jobs data.
As documented in “Close Proximity“, we were staring at three days during which headline virus numbers from hotspot states were almost guaranteed to rise. And they did — rise, that is.
But between authorities in Beijing keen to engineer a rally and a generalized lack of interest in going against the grain, it looks as though folks are now chasing the jobs report on a delay.
“We’re certainly sympathetic to the collective reluctance to press stocks higher on Thursday afternoon given the long-weekend’s headline risk”, BMO’s Ian Lyngen, Benjamin Jeffery, and Jon Hill wrote Monday, adding that “the question now becomes whether the post-payrolls buying is simply picked up as the overnight price action implies, or if there is a new headwind for risk lurking as the week gets underway”.
“US investors are boosted by the payroll data on Thursday and Chinese ones by the trend in PMIs”. SocGen’s Juckes said, before dryly noting that “the Chinese press thinks an equity rally would be a good thing for the economy, too, so we can call [the] buying an act of economic patriotism. Or, People’s QE?”
There’s something ironic about that characterization. “People’s QE” is a label some observers apply to iterations of Modern Monetary Theory.
Still, lurking in the background is the biological threat.
“You may have observed footage of some of the weekend party scenes here in the US and concluded that they were nothing but petri dishes to propagate the spread of the virus”, Bloomberg’s Cameron Crise half-joked, on the way to quipping that “it rather appears they were simply meeting points for Robinhood traders plotting their next foray into the market”.
Jokes aside, I mentioned Sunday evening that as long as volatility stays well-behaved, mechanical re-leveraging from systematic strats can continue to run on something akin to autopilot.
COVID headlines will hit in a data vacuum this week (aside from ISM non-manufacturing, which beat, and jobless claims), which means absent a spike in fatalities or signs that anyone is inclined to care about the ongoing rise in caseloads, equities can push higher.
“It’s a pretty light week on the data front and earnings season has yet to properly kick off, so now more than ever financial markets are likely to be hostage to flows as opposed to fundamental drivers”, Crise went on to say, noting that we probably should have learned by now that “when it comes to explaining or forecasting short-term price action”, following the money is more important than “sticking to a dogmatic fundamental view”.
On a Nomura model, lagged re-leveraging from the vol.-control universe amounted to more than $5 billion in added equity allocation in the week through last Thursday. The same model shows $19 billion of buying over the past two weeks, and some $39 billion over the past month.
Between systematic flows and the “sideline cash” argument (see here, here, and the figure below), it’s pretty easy to make the bull case even in the face of a persistently cringeworthy COVID news.
“Outflows from money markets are accelerating worldwide, according to EPFR”, Bloomberg’s Wes Goodman chimed in on Monday, calling the drawdown of the cash hoard built earlier this year “a big neon sign showing risk appetite is increasing”.
All of that said, it’s certainly possible that the risk-on tone evidenced early could fade, and, indeed, you’re reminded that US equities have had a bit of trouble extending the rally recently. There have been three meaningful selloffs over the past month (June 11, June 24, June 26). Those three sessions served as a reminder that stocks can still go down, in case anyone needed clarification on that.
“All else being equal, we’d point to the COVID-19 stats as the most obvious touchstone for those eager to be bearish equities as an important technical gap is filled”, BMO remarked. “That said, the willingness of investors to ignore the escalation of case counts and the implications for the pace of re-openings remains impressive, if not somewhat perplexing”.
