Duncan Donald

Fri, Jun 19

Markets pause for reflection as Retail buying is halted by fears of a second wave of Covid-19

Whilst we have become accustomed to high volatility of late, this week was far more somber as the markets switched from macro data watching to again monitoring the daily virus case numbers.  The recent resurgence has in both the US and China and has been met with the most opposite of responses. China has acted swiftly closing markets and schools in Beijing as well as air travel in the region to limit contagion, whilst the US remain in the stance that they will not lock down again, what could turn out to be an expensive gamble as cases grow in six states including Alabama and California.


Whilst the emergence of case increases had the markets sliding at the Monday open, since that time things have broadly stalled, not giving up the gains seen with all major indices holding in touching distance of the highs brought by the recent surge of buying seen in May and June. Much is being made of the source of the recent buying with it being linked heavily to retail investors, or in simple terms the man on the street. As a career long trader it was perhaps arrogant to assume that retail investors wouldn’t have the collective volume to dictate the pace and direction of the markets, but with volume lower and institutional players sitting underinvested it would appear they have been the recent driving force. For example, we only have to look at the plight of Hertz whereby the company filed for bankruptcy one day plunging price only to be bought up despite self-declaring worthlessness.


Whilst we perhaps enjoy a moment of almost normality in daily price action rarely seen this year, we have to look forward to predicting the next move. While the stock markets are absorbing the recent surge of risks brought by the diminishing Trump populism, even within his own party, fears of a full-scale second wave of the virus and a breakdown of US/Sino trade relations, the Foreign Exchange market has shifted towards safe haven buying, with the Japanese Yen, Swiss Franc and inadvertently the US Dollar all being bought up with the UK’s Pound and Euro somewhat on the backfoot.  For stocks, the obvious opinion would be for downside in the short term, but this week’s markets close then the weekend Covid case numbers data and Mondays open will be crucial, if we weather a potential storm then we could go on to test the highs. A resurgence of cases will see panic ensue in the retail sector who will see screens turn red before hitting the eject button sharpening the trajectory of the move.  


The Federal Reserve further deviated from the Trump plan this week as following the cautionary tone set at the Federal Reserve rate setting meeting, Jerome Powell and team further underlined their conservative and realistic outlook for the US economy for this year and next, a view that’s been supported by again a miss on more optimistic unemployment and retail estimates this week. 


In the UK the Monetary Policy Committee met on Thursday and whilst leaving rates unchanged at historic low levels as expected, question marks remained on the amount of asset purchases that would be announced and whether there would be talk of negative rates moving forward. On both counts the BoE kept their cards close to their chest, electing to add a more cautionary £100 bln stimulus and leave the ammunition of larger stimulus and negative rate talk to another day. Whilst there were Brexit talks this week between Johnsons team and the EU they were more preparatory for the meaningful discussions that kick off at the end of the month, the only notable action was agreement that the UK will leave the EU at the end of this year and extension remains no longer an option, for good or for bad!


The Week Ahead:


Monday: A relatively quiet day with the Reserve Bank of Australia's Lowe the only significant speaker at the start of the day. In the European session we get UK CBI Industrial Orders and the Bundesbank Monthly report from Germany before Eurozone Consumer Confidence in the afternoon. We also receive US Existing Home Sales and Canadian Governor Macklem speaks. 


Tuesday: Australian and Japanese PMI’s start the day before PMI data out of France, Germany the Euro Bloc and the UK early in the European session. US Manufacturing and Services PMI, New home sales and Richmond Manufacturing in the US session.


Wednesday: First up is the New Zealand interest rate decision. German IFO kicks off the European session in what should be a quiet day in both EU and US sessions. 


Thursday: Another quiet day of data from the UK/EU side. In the US session there is more in the way of meaningful data with Durable Good, Final GDP q/q and Weekly Unemployment Claims. 


Friday: Japanese CPI data comes early in the session before EU Money Supply and the Bank of England Quarterly Bulletin. In the US session we get Core PCE and Personal Spending data as well as University of Michigan Consumer Sentiment and Inflation Expectations numbers.