Chief Market Strategist at FXTM
“Coronavirus
deaths topped 500,000 worldwide”, is the first headline to grab investors’
attention this morning. The mission is unaccomplished and the virus is still
winning the fight in several countries, particularly in the US, Brazil and
India.
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Hopes
of a robust economic recovery following the pandemic are now shattered. The
risks of re-imposing lockdowns are high, and monetary policy stimulus which
explains most of the recovery in asset prices from the March lows will become
less effective going forward if it doesn’t translate into a rebound in economic
activity and better prospects for corporate earnings. Risk asset valuations
remain elevated and the next few weeks ahead will tell us whether they will
continue to hold or get bumped.
At
this stage, there is a lack of visibility as even technical indicators share a
similar view. The S&P 500 closed Friday 11 points below its 200-day moving
average and is just hovering around the psychological 3,000 level. If the index
trades for two to three days below these two benchmarks, that will attract more
sellers and could drive the index 5 – 10% lower from current levels. However,
holding above may have the opposite impact but that will lead to a further
divergence from fundamentals, which in theory should not hold for long unless
the Administration provides new fiscal stimulus plans.
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The
divergence is not just among asset prices and fundamentals, but also within
assets themselves. US 10-year and 30-year treasury yields are sitting at
one-month lows of 1.37% and 0.64% respectively, indicating there’s still huge
demand for the safety of US government bonds. If yields on long term maturities
continue to head lower that should mean the big players are reducing their risk
exposure heading into the third quarter. While the trajectory of the Covid-19
infections and deaths remains the most effective barometer for risk, investors
need to keep an eye on several other factors this week.
The US
job’s report will be released on Thursday instead of Friday due to the
Independence Day holiday. Markets anticipate the headline figure will add three
million jobs in June following 2.5 million added in May. Given the volatility
in the employment data, we may see another surprise although a positive one is
needed to prove that economic activity is gathering pace. Investors will also
be focusing on Fed Chairman Jerome Powell when he testifies before the House
Financial Service Committee tomorrow for any hints on new monetary policy
measures, while also needing to closely scrutinize the FOMC minutes on
Wednesday.
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Longer-term,
market participants need to keep an eye on US election polls. So far Joe Biden
is leading by a significant margin and that doesn’t seem to be priced in
yet. Biden made it clear that he will
roll back Trump’s corporate tax reforms, and that requires substantial
revisions for earnings expectations in 2021. If he continues to lead in the
polls, expect a further pull back in stocks.
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