Is The Market Sleepwalking Into A Summer Growth Scare?

Stop me if you’ve heard this before: Investors are struggling to make sense of incremental escalations in the standoff between the US and China, while simultaneously grappling with the reality of worsening news around COVID-19 outbreaks in “hotspot” states.

It’s the same narrative, day in and day out. It would be frustrating (cumbersome, even) if anyone cared, but with the summer lull having set in, apathy reigns.

“With the MOVE index <50 and the VIX at just 28, it is safe to conclude the market appears to be lulling itself into a classic stretch of the summer doldrums”, BMO’s Ian Lyngen said Thursday, adding that “the increasing case count has lost much of its market impact over the last week; leading us to ponder the driver behind the collective disinterest and, more importantly, cast a watchful eye on other developments as the next directional impetus”.

Florida logged records for both new deaths and hospitalizations, at 120 and 409, respectively. Today’s press release from the state shows the positivity rate climbed to 18.39% Wednesday.

In Miami-Dade, ICU patients with COVID-19 hit another record. The number on ventilators reached the highest in 10 weeks. California reported 149 new deaths, its largest one-day jump. Texas reported record deaths for a third straight day. And on and on and on.

The inescapable reality is that with a handful of exceptions (the most notable being Andrew Cuomo, who largely prevailed in New York’s battle with the virus, but only after suffering grievous casualties), the state and federal response in the US is an unmitigated disaster. America, the richest country on Earth, is vying with Brazil for the crown of ineptitude.

You’ll note that even visiting the Florida Department of Health’s official portal to check the daily statistics is a risky endeavor, as it’s not a secure website. That’s how pitifully inadequate the country’s response is — you can’t even safely read a press release.

Stocks weren’t terribly amused with the situation on Thursday, and equities were likewise rattled by reports that the Trump administration is finalizing regulations to ban the government from purchasing anything (goods or services) from companies that use products from Huawei and/or Chinese surveillance giants Hikvision and Dahua, both of which were blacklisted by the Commerce department in October.

“The rule, which was prompted by a 2019 law, could have far-ranging implications for companies that sell goods and services to the US government since they will now need to certify they do not use products from Dahua or Hikvision, even though both are among the top sellers of surveillance equipment and cameras worldwide”, Reuters said, adding that previously, “there was uncertainty in the contracting community surrounding the implementation and enforcement of the rule, given its potential impact on contractors [but] the White House is making clear it will not be delayed and waivers could be difficult to get”.

Just to give you a concrete example of why this is problematic, the security cameras in my neighborhood are made by Hikvision. The company’s technology is everywhere.

Meanwhile, the Trump administration sanctioned Chen Quanguo, party secretary in Xinjiang who sits on the Politburo, in addition to a trio of other officials in connection with human rights abuses. It’s the highest-level sanction ever dealt in the country, US officials said.

The dollar rose Thursday, adding insult to injury for risk assets, while the long-end rallied hard, with bonds extending gains after a strong 30-year auction, bull-flattening the 5s30s by ~7bps. 10-year yields moved to the bottom of the range since March, and Bloomberg’s Edward Bolingbroke says a move below 0.54% could trigger convexity flows with the potential to turbocharge a rates rally, possibly pushing 10s all the way down below 0.32%.

Little wonder, given the action in rates, that big-cap tech trounced the S&P for a seventh straight session.

Remember, bull-flattening is synonymous with outperformance from secular growth, and any day characterized by risk-off sentiment and a rally at the long-end is likely to see tech (and other “slow-flation” expressions in equities) outperform at the expense of cyclicals, high beta, and value.

This is part and parcel of the whole “if the market believes in a ‘V-shaped’ recovery, it sure has a funny way of pricing it” story, as told by Morgan Stanley’s Andrew Sheets this week (see here). This manifested in all the usual places Thursday, in lockstep with the action in rates.

The flip-side of the visual above is a near 6% weekly gain on the Dow Jones US Thematic Market Neutral Momentum strategy.

Broadly speaking, this is a market that looks poised to tip over into “growth scare” mode, even as these long, summer days feel sleepy and aimless.

That’s something to keep in mind, because the closer we get to that tipping point, the more damage one negative headline can do.

That’s especially true when liquidity is impaired, and we’re headed into August, a time of seasonally thin markets.