Rising Covid-19 Cases Keep Risk Assets Under Pressure

Investors are becoming increasingly worried about the momentum in the economic recovery given the resurgent numbers of global Covid-19 cases and lack of progress on a new US stimulus package.

Although President Trump signaled his readiness to back a bigger stimulus bill last week, the Supreme Court’s empty seat left by the passing of Ruth Bader Ginsburg is likely to complicate the matter. The fight between the President and Congressional Democrats on whether to fill the vacant seat now or wait until after the election is expected to lead to more delays in reaching a middle ground on a new fiscal package. Hence, we would expect that the much-needed stimulus will be pushed back until after the US elections.

Given that the list of uncertainties is growing, especially on the pandemic front, risk is now skewed to the downside. We have US elections just around the corner, hefty valuations in growth sectors despite the recent correction and the high stakes of possible national lockdowns in the UK and elsewhere all pointing to waning momentum in the economic recovery. All these factors indicate more volatile times for the next several weeks.

Datawise, investors need to keep a close eye on September’s flash PMIs coming out of Germany, France and the UK this week for further indications on how the big European economies are faring following the strong rebound in early Q3. Signs of weakness here will be a strong signal that the economic recovery is indeed losing its way and further action is needed from fiscal and monetary policymakers.

Currency markets are not yet reflecting the risk aversion seen in equities. The Dollar is trading slightly lower against its major peers, with the DXY -0.15% at the time of writing. The Fed is clearly the winner among other central banks in providing the most accommodative monetary policy, which means the long-term projections for the Dollar remain to the downside. However, if the selloff in US equities accelerates this week, expect the greenback to regain some support.

In commodity markets, Brent fell by 1% after trading slightly higher in early Asian trade. The battle between the bulls and bears is keeping prices rangebound between $40 and $45. At this stage, the demand outlook is far more important than the supply side. That’s why oil traders need to keep a close eye on the trajectory of the virus, especially if it’s going to lead to renewed lockdowns. Gold is also another commodity stuck in a narrow range as traders await new clues on the Fed’s policy approach towards inflation. This could happen later this week as Chairman Jerome Powell may provide new hints when he appears before the Congress on Tuesday.

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Are Stocks Heading for a Further Correction?

There was no specific trigger to the selloff but after extreme bullishness driven by monetary and fiscal policies, stock prices reached levels that could no longer be justified by fundamentals.

There is no doubt that the investment environment has drastically changed compared to a few years ago. Given the new approach of the Federal Reserve towards ’average inflation targeting’, investors are not concerned about tightening monetary policy, at least for the next couple of years. Theoretically, this means businesses will enjoy cheap debt financing in order to expand, leading to higher potential future earnings.

It’s true that valuing a company at a lower required rate of return provides a higher intrinsic value for the stock price, but what we have seen over the past several weeks was more euphoric and about momentum buying rather than rational investment. Fears of missing out on the rally also led many investors to jump into the market without doing proper analysis. While we still cannot compare the current environment to that of 1999-2000, investors need to be concerned about the price they pay to acquire stocks.

The steep correction seen on Thursday and Friday is healthy and much needed after the five-month rally, but it requires a more extended pullback to encourage long term investors to build positions. We probably need another 10 – 15% drop to end this euphoria and this will only happen if investors put more focus on current fundamentals that have been ignored for several months. Let us not forget that we have not yet found a cure for the virus and corporate bankruptcies will be on the rise as we approach year-end. Liquidity and low interest rates alone cannot be the solution to everything, so it’s essential to see continued improvement in economic data and an end to the pandemic for sustainable upside in risk assets.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

US Stocks Continue to March Higher Despite Rising Implied Volatility

That was well above the market forecast of 54.5 and the highest reading since November 2018. The leading indicator was supported by new orders which increased to 67.6 last month, but the employment component of the index continued to show weakness suggesting that factories are still slow to bring back employees. If the ISM services index due to be released on Thursday shows a similar reading, that would suggest jobs remains a weak spot in the US economy. However, investor focus today will be on the ADP employment change data which is expected to show 950,000 jobs were added in the private sector in August versus 167,000 in July. The ISM surveys along with the ADP report may provide an early indication of what to expect from Friday’s non-farm payrolls report.

Improving economic data, along with expectations that interest rates will remain near zero for several years, are great ingredients for risk assets. Investors do not seem to be worried about overstretched valuations as long as the Fed is willing to depress interest rates and continue providing the liquidity needed to keep yields in check.

Despite this optimism, investors need to re-think how to approach a market that’s sitting at record highs with two months remaining to the US presidential elections. Latest polls have shown the race between President Donald Trump and former Vice President Joe Biden have narrowed significantly over the past few weeks. According to Real Clear Politics, the difference is now less than 1% point in favour of Biden. The narrowing gap has translated into a sharp rise in future contracts for the Vix volatility indices. At the time of writing, the October Vix contract is sitting above 33 while spot Vix is hovering near the top of August trading range at 26. A rising stock market with elevated volatility is not a healthy sign and usually indicates turmoil ahead. So, expect risk to be skewed to the downside with big moves as we head into October.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors Continue to Build on Best August in 36 Years

The S&P has gained 7.24% so far this month, the Dow Jones Industrial Average is up 8.42% and back to positive territory for the year; meanwhile, the Tech-heavy Nasdaq 100 continues to outperform with 10% gains.

The August run reflects an accommodative Federal Reserve, a weaker US dollar, better than anticipated economic data, moderating Covid-19 cases in the heavily US-hit Sun Belt region and positive news towards a vaccine. These factors continue to provide investors with the green light to go risk on.

Few may disagree that we have reached overbought levels on US stocks. RSI’s on the three major indices are all trading above 70 and any valuation metric you look at provides the same signal. However, there needs to be a catalyst for a correction and that’s why upcoming US data and events will be of great importance.

The monthly US jobs data, due to be released on Friday, will indicate whether employers continued to hire following the easing of lockdowns that began in May. Economists are anticipating that 1.55 million jobs were added in August, a slight drop from July’s 1.76 million, but still a healthy figure given we are in the middle of a pandemic. However, initial jobless claims which rose by more than 1 million over each of the past two weeks are slightly worrying, especially if the government does not act soon to introduce a second stimulus package that reaches most unemployed Americans.

Tensions between the US and China may rise again after TikTok app owner, ByteDance is now required to seek Chinese government approval to sell its US operations. Depending on how this situation evolves and how it impacts other Chinese companies in the tech industry, we may see more volatility in the days ahead.

In currency markets, the US dollar continued to hover near its two year lows against a basket of currencies. Bears are looking for a break below 92.12 in the Dollar Index, but given that short positions are at extremes we may see more consolidation before another downside move. Gold will continue to be one of the best beneficiaries of the dollar’s weakness so expect to see a retest above $2,000 in the upcoming weeks.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors Awaiting Fed’s Powell Speech Before Making Their Next Move

Inflation is the keyword and the policy framework to target it will determine whether we see more upside to risk assets in the months to come.

So far, we have only seen rising prices in asset classes such as stocks in particular, but throughout the past decade, the consumer price index has averaged around 1.5% so missing the Fed’s 2% inflation target. The FOMC’s dual mandate has been to maximise sustainable employment and keep prices stable and while they have been successful in the former (prior to the pandemic), they have failed miserably on consistently hitting their price target.

‘Average inflation targeting’ is the new formula expected to be endorsed by Powell today. It’s a policy framework that allows inflation to run above or below the 2% target, but given that inflation has been running below target for several years, the objective would be to allow price rises to overshoot for more extended periods before tightening policy.

However, the idea of allowing inflation to run above target for extended periods is hard to sell to politicians, so it will be interesting to see how Powell is likely to package the new policy framework.

The positive sentiment in US equities continued yesterday with the S&P 500 and Nasdaq hitting new record highs ahead of this week’s key risk event. It seems expectations may be too high as Powell will need to be overly dovish to meet these expectations. No one believes that he will disappoint the markets but given the scale of the latest rally in stocks, chances of a pullback are high before bulls resume their march higher.

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Fed Minutes Put the Brakes on Stock Rally

After a brief celebration of a new intraday record high on the S&P 500 and a two trillion Dollar market cap for Apple on Wednesday, the music suddenly stopped and with it, the ‘rally of everything’. All major US indices began to stumble, the Dollar woke up from a 27-month low, Oil declined and gold lost 3.5% in value.

Asian and European stocks are following Wall Street lower today and US futures are also indicating further declines to the start of the trading session across the pond.

The change in mood has been clearly down to the release of the minutes from the FOMC’s July meeting which reminded investors that the economy is still not in good shape. The surge in Covid-19 infections over the summer has muted the recovery and anyone still believing in a V-shaped recovery needs to do some reassessment. However, this was not the only reason why investors turned defensive. The fact that the Fed appeared reluctant to step up further stimulus efforts imminently, disappointed the bulls who were expecting further clues on the trajectory of monetary policy.

While the Fed did not rule out the idea of yield curve control or targeting specific maturities on the yield curve, policymakers do not seem committed to following this path yet. The other disappointment came from a lack of commitment towards more forward guidance on the path of the federal funds rate. That was a significant change from the previous minutes which indicated the need to provide longer-term forward guidance and to only raise rates when specific economic thresholds are met. Despite the fact that the Fed has been clear that rates will remain low for a long period, market participants needed more assurance and they did not get this.

The failure of Wall Street to build on Tuesday’s record closing high may be worrying. The rally over the past five months has been mainly driven by Tech firms which have become a defensive sector in the Covid era, but there were hopes that the more economic sensitive sectors, commonly known as ’cyclical stocks’, would follow suit. Now with concerns over valuation in tech stocks growing bigger, improvements in economic data likely to cool down and the scale of fiscal stimulus still unknown, expect to see further profit-taking and a return to a more volatile market.

The problem that many investors will face today in a market downturn is the high correlation between asset classes. There is no place to hide and diversification is no longer effective in such connected markets. The only way to protect portfolios is through increasing cash allocations and buying expensive put options.

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S&P 500 Returns to New Highs at a Record Pace

2020 cannot be compared to any other year in terms of the brutal plunge in the S&P 500 and the speed of its recovery. During the 2008 Great Financial Crisis, it took 1,381 trading days for the S&P 500 to return to its 2007 record highs. Following the dotcom bubble in 2000, it took 1,841 trading days to hit a new record. This time around, only 121 trading days were needed for the index representing the 500 largest US publicly traded companies to complete a full turnaround from a peak to trough to a new peak again.

The S&P 500 was only 6 points shy from closing at a new record on Wednesday following a 54% rally since hitting a bottom on March 23. More than $10 trillion in market cap have been recovered in less than a 6-month time span. And despite more than 80% of reported earnings beating market estimates, profits in Q2 have dropped 33%, which marks the largest year-on-year decline since Q1 2009.

However, the biggest difference between this recovery and past bear-bull market cycles is its breadth. As of Wednesday, 282 constituents of the S&P 500 are trading lower for the year and 200 companies are below their 200-day Moving Average. The Tech sector now represents 35% of the index weight, with the biggest 5 Tech companies (Apple, Microsoft, Amazon, Alphabet, Facebook) representing almost a quarter of the S&P 500 market cap, with a total value of $6.9 trillion. These are the companies which have driven the index to retest its record highs. Meanwhile, sectors like the Financials, Industrials and Energy have been left behind and the gap between them and the Tech companies is getting ever wider.

This tells us that the world we live in today is different from the one we saw six months ago, and our lives will be dominated by Tech like never before as returning to normal ways of living remains far from reach. If that statement is true, then the price tag for these Tech firms is justified despite them looking extremely overstretched when looking at current valuation metrics. However, if the big Pharma firms succeed in delivering a vaccine in the next couple of months, we should see rotation from the Tech titans to more cyclical ones.

Going forward, expect volatility to increase as investors try to figure out whether to take profits or continue the wild momentum ride. But my concern is that without having a strong contribution from the cyclical sectors within the S&P 500, the current rally looks distinctly unhealthy.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Latest Surge in Risk Assets to Be Challenged by Data and US Congress

US futures are steady as investors have lots to digest including important jobs figures, renewed US-China tensions and a key ruling on the new stimulus package from Congress.

In currency markets, the Dollar could not maintain an early morning rally. After marching towards 93.70, the DXY returned to where it started at 93.45. Low interest rates remain the biggest challenge to attracting Dollar inflows, with current 10-year bond yields stuck near 0.5% and real yields sitting around -1% when deducting for inflation. Large twin deficits along with negative real rates is a depressing formula for any currency, even if it is assumed to be a safe haven one. However, given the bearish bet on the USD has risen again to the largest overall since April 2018, we may see some sort of short squeeze going forward leading to some spikes in the US currency.

With the earnings season coming closer to an end, the focus will shift back to data and the decision by Congress on the next Covid-19 stimulus package. Discussions between the Democrats and Republicans are making some progress especially as both are on same page with regards to the direct cash payment of $1,200 to Americans, but unemployment assistance remains a key sticking point and a middle ground doesn’t seem to have been reached yet. Democrats want to keep the federal assistance as the previous package of $600 per week, while the White House is calling for a third of this amount. The longer the disagreement persists, the higher the chances of a market correction.

While most agree that the bottom in economic activity is behind us, the question has now become whether the US recovery is showing signs of cracking and the Non-Farm Payrolls figure due to be released on Friday will probably answer this. After 7.5 million jobs were created over the months of May and June following 22 million job losses in the prior two months, markets expect another 1.65 million jobs to have been added in July. However, expectations vary greatly with some even expecting a contraction given two consecutive weeks of increases in initial jobless claims. The way forward is likely to be bumpy as several US states are re-imposing lockdown measures after spikes in Covid-19 cases. This probably won’t show up in the data until the release of the August figures in September. Investors should also keep their eyes on other US data releases out this week for further evidence on whether the economic recovery is stalling including manufacturing and services activity, motor vehicle sales, factory orders and the weekly initial jobless claims.

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After the Fed’s Reassurance, It’s Time for Fiscal Policymakers to Deliver

Market participants are growing more confident that interest rates will remain near zero for a long time to come, even if inflation starts to tick higher. That is one risk-supporting factor investors do not need to worry about in the medium-term. However, the line added to the Fed’s press release stating that ’the path of the economy will depend significantly on the course of the virus’ should be taken into consideration as to how much risk needs to be in portfolios.

While some of the worst affected US states have shown that Covid-19 infections have peaked, the virus is not taking a break. Deaths in the US exceeded 150,000 on Wednesday and with a vaccine not expected to hit the market until later this year or 2021, more measures need to be taken to control the pandemic which suggest more economic pain. That is especially the case when we look outside of the US with Brazil reporting a daily record of 69,000 new cases on Wednesday and new outbreaks seen in Asia, Spain and Australia.

Now the pressure has turned to the fiscal side and chances for disappointment are high as Democrats and Republicans are nowhere close to a deal. Both parties are struggling to find common ground and with millions of jobless Americans facing the expiration of their $600 a week unemployment benefit, any further delay could lead to serious economic shocks. We still believe that both parties will eventually come to an agreement, but the more compromised the agreement is the more pressure it will put on market sentiment.

Asian equities traded mostly higher this morning and European equities are expected to show slight gains. However, with US futures turning negative after yesterday’s strong performance, these may not hold. There are a lot of earnings releases from Europe and the US today, but the most watched results will be from the four Big Tech names Amazon, Apple, Alphabet and Facebook who report after the market closes. Those companies, including Microsoft, have been the major force driving US equity indices higher, so expect to see a lot of volatility in the next 24 hours.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Gold Hits New Record as Dollar Continues to Struggle

Following six days of steep gains, Gold has finally broken the 2011 record high of $1,921, reaching $1,943. Meanwhile, the Dollar seems to have lost the title “King,” at least for now, as it continues to be dragged lower despite all the negative news which used to attract inflows from global investors.

Against major currencies, the USD is trading at a 4-month low against the Yen, 15-month low against the Australian Dollar, 22-month low against the Euro and 5-year low against the Swiss Franc. That is clearly broad weakness in the Dollar and not driven by risk-on/off behaviour. Plunging risk appetite is no longer translated into a strong Dollar, otherwise the tit-for-tat closures of the Chinese and US consulates which sent global equities lower last week should have driven inflows into the Greenback. This didn’t happen.

I am still afraid to call the Dollar’s decline a structural change in the currency’s outlook. The US Dollar still represents more than 60% of global currency reserves, so it’s only when this figure begins to decline that we might possibly call the Dollar’s weakness a structural change. However, several factors are driving the Greenback lower, with real yields being the dominant factor as the Fed is likely to continue holding interest rates lower for a prolonged period of time. For this same reason, Gold is today trading at a new record.

Negative real yields and trillions of Dollars in monetary and fiscal stimulus are threatening to create bubbles in several asset classes, and I believe many tech stocks are already in this territory. The question several investors may be asking now – is Gold also in a bubble?

In terms of real price, bullion is still under the 2011 peak when inflation is accounted for, and well below its peak in 1980 when the price reached $835 per ounce. On both occasions, the price tumbled over the following months and years. Back in the 1980s, inflation was skyrocketing and US 10-year yields were trading at 13% in early 1980 and peaked at around 16% in 1981. There was a strong belief that inflation would remain at double digits which caused the buying spree in Gold, but over time this fear diminished and then the longest bull market in treasury bonds occurred until today. In 2011, it was a similar situation as central banks across the globe, led by the Federal Reserve, began lowering rates and pumping liquidity into financial markets during the Global Financial Crisis. However, several years later, the risks of deflation were still greater than inflation. Here we are again in a similar scenario, but the measures taken today have far exceeded the ones in 2009 in terms of fiscal or monetary stimulus.

With inflation expectations returning to pre-Covid-19 levels, the issue becomes how long the Fed can afford to keep inflation running above target to support their employment mandate. The longer they keep rates low and the higher inflation expectations go, the more likely we are to see Gold benefiting, and I do not think this relationship will break any time soon. Looking at open interest in the futures markets, there does not seem to be excessive speculative positioning. This suggests physical buying and exchange traded funds are currently the key factors driving the price, which means a break above $2,000 will likely lead to increased speculative positioning that could push prices even higher.

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Deteriorating Us-China Relations Is Not Yet Reflected in Markets

After ordering the shutdown of China’s consulate in Houston and claiming two Chinese hackers targeted US companies working on the virus and stealing information, we are yet to see the Chinese response. US-China relations have already been worsening since the beginning of the year on several fronts including the handling of the coronavirus, cutting Huawei’s operation in the US and abroad, revoking Hong Kong’s special status after China imposed a new national security law on the city and several other issues. However, the closure of a consulate is unprecedented and could take the cold war onto a new level.

The market reaction to the latest developments has been muted. US stocks managed to end Wednesday’s session near their multi-month highs, the Dollar continued its downward trajectory against its major peers and the damage was limited to Chinese equities and the Yuan to some extent – which is trading back above seven against the Dollar. Hopes for another round of US stimulus and better-than-expected earnings from the big tech firms is keeping the rally alive despite valuations becoming extremely overstretched. But if worsening US-China trade relations lead to re-imposing trade tariffs, then it’s likely to mark the short term top in equities.

Better than anticipated earnings from the likes of Tesla and Microsoft are not the true reason why stocks are at current levels. It is because monetary and fiscal intervention have left few options for investors to park their money. Consider that high investment grade bond yields dipped below 2% for the first time ever yesterday and that US 10-year Treasuries are yielding 0.6%, which when subtracting inflation, will leave investors with a negative return of 0.9%. That is a huge disruption to how markets function in normal times, but policymakers on the fiscal and monetary side are obliged to take these steps to prevent the economy from collapsing, even though they know their measures are creating bubbles in several asset classes.

Gold continues to be a safer bet than chasing overvalued stocks. With yields expected to remain low for a long time, inflation projections likely to head higher in the months to come and geopolitical tensions on the rise, some great ingredients are present for the precious metal to continue attracting inflows. Only $50 away from the all time high, it is only a matter of short time for the yellow metal to see a new record.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

China’s GDP Beat Fails to Energise Bulls

Given that China has managed to largely control the spread of Covid-19 since April, it wasn’t surprising to see an improvement in economic activity, especially given policymaker’s support through stimulus packages, lowering taxes, slashing lending rates and reducing the required reserve ratios for banks. However, the recovery did look uneven during the quarter as industrial production rose by 4.8%, while retail sales fell 3.9%. This is a clear indication that consumer confidence remains low and will be alarming if we see such a trend in the developed economies.

Investors seemed to put more weight on the consumption data and have pulled out of riskier assets. Asian equities have declined, led by the Shanghai composite which has shed more than 2.3% at the time of writing. European stocks have also retreated from yesterday’s rally and US indices are pointing towards a lower open.

Another risk event that may drive volatility later this afternoon is the ECB meeting. After raising its Pandemic Emergency Purchase Program by EUR600 billion to EUR1.35 trillion in June, bond purchases by the central bank declined significantly in the final week of that month. While we do not expect to see a change to the program or any of the monetary policy tools, the ECB President Christine Lagarde needs to reassure market participants that more tools will be deployed if required. After all, central banks have been the key driver of the equity rally and any signs of a retreat will hurt sentiment.

The Euro’s recent steep rebound will also be tested. After rising to a four-month high yesterday, the single currency failed to retest the March peak of 1.1492. While the ECB meeting may turn out to be fairly quiet, Friday’s EU Summit is likely to determine whether we see another leg higher or further retreat from the critical 1.15 level. The focus will be on the ambitious EUR750 billion recovery fund and how united the EU leaders are towards the union. Approval of billions in fiscal stimulus will send a strong signal to markets and encourage further long positions in EURUSD, otherwise expect the currency pair to remain capped around 1.15.

Wall Street investors will continue to monitor corporate earnings. The earnings beats from big banks like Goldman Sachs, JP Morgan and Citi were all impressive. However, it was the surge in trading activity that led to such performance, rather than other traditional banking services which the economy relies on. We still expect to see earnings decline by around 40% for the second quarter, but it’s what executives say about the upcoming quarters that matter the most and so far, we still have a gloomy outlook. The latest surge in equities was driven by hopes for a coronavirus vaccine, but as we have seen, such news is short-lived as the S&P 500 has so far failed three times to hold on to positive territory for the year. That is a negative sign for a bull market which has been driven by a narrow group of stocks.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stocks Rise Ahead of Earnings Season

While market watchers will keep an eye on the global rise of COVID-19 cases, central banks in Europe, Japan and Canada will provide some insight into whether cheap liquidity will continue to flow over the foreseeable future. China’s GDP is due to be released on Thursday and is likely to mark a steep recovery from the 6.8% contraction in the first quarter, and EU leaders gather on Friday to determine the fate of an ambitious recovery fund. There will also be several pieces of US data that will indicate whether the rebound in economic recovery remains in place. However, it is the earnings season that is likely to determine if stocks continue to move higher from current levels.

According to Factset, the S&P 500 is expected to report a decline of 44.6% for the second quarter. Assuming the aggregate earnings beat forecasts by 5%, the index will still end with a 39.6% fall in profits. Even the most optimistic scenario will show the largest year-on-year decline in earnings since the Great Financial Crisis. If investors were taking the loss in Q2 earnings and revenues into consideration, it follows that stocks should not be trading at current levels. In fact, investors are looking post-Q2 with the hope that lost revenue will be recovered in the second half of this year and into 2021. That is the V-shaped recovery every stock market bull is betting on.

What CEO’s say on earnings calls will be of greater influence than what the numbers say. In the last quarter, only 10% of S&P 500 companies issued EPS guidance compared to an average of 20%. Given that we are already more than six months into this pandemic, corporate leaders should have more clarity on how their businesses will operate over the second half of the year. To keep the bull market alive, it requires an optimistic tone reflecting the V-shaped recovery that confident investors are looking for. That is especially the case for Tech stocks that have led the surge in equities. If investors sense the V-shaped recovery in earnings is misplaced, expect companies with extreme forward P/E ratios and those with weak balance sheets to be punished the most.

Monetary policy, the key driver to market performance over the past several months, will gradually lose influence to the earnings outlook. After all, prolonged low-interest rates are already baked into asset prices and that is evident in most valuation metrics you look into. Meanwhile, the chances of Joe Biden winning the upcoming US election and reversing some of Trump’s tax reforms is the other risk which does not seem to be priced into markets yet. Even a limited reversal in the 2018 corporate tax cuts will have an impact on investor sentiment, given the levels where stocks are currently standing.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Record US COVID-19 Cases Can’t Halt the Equity Rally

The record daily increase in US COVID-19 infections and the sharp rise in deaths has proved no barrier to the bulls. Rises in Apple and Amazon stocks sent the Nasdaq Composite to a new record high of 10,492, while the S&P 500 and Dow Jones Industrial Average advanced 0.78% and 0.68% respectively.

The current environment has led to the closure of the $2.8 billion Lansdowne Partners’ flagship equity long/short hedge fund. The lack of short winning strategies may even force more hedge funds to follow Lansdowne’s footsteps. The stimulus-driven market has made life for long/short strategies extremely difficult as relying on traditional valuation metrics to find short opportunities have failed throughout the latest bull market, and even throughout much of the previous 12 years since the Great Financial Crisis.

Fundamentals and valuations appear to be of limited influence on investor’s decision making. The fear of missing out, or “FOMO”, monetary and fiscal policy actions, low yields, lower interest rates for longer, are some of the factors that have led to this structural change in markets. If the Fed can keep zombie companies alive by keeping the lending taps open, why wouldn’t investors profit from these actions? However, the Fed cannot keep running these measures forever, and for many corporates relying on debt to stay afloat, sooner or later they will fail if they can’t return to profitability.

As always there is the good and the bad news. Depending on where investors put more weight is what drives asset prices and that is what leads to extreme highs and lows. Looking at where US stocks stand at the moment, it seems lots of the good news is already priced in. So even if bulls decide to keep pushing higher, the upside is likely to be limited from current levels unless we learn that an effective vaccine will hit the markets before year end and will be available for most of the population. If investors truly believed that the economy was returning to pre-pandemic levels soon, Gold wouldn’t be standing today at 9-year high, so it’s evident that investors who are participating in this risk-on rally are also hedging their positions by adding safe havens for their safety net.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Risk Assets Soar as Coronavirus Cases Reach a New Record

Sentiment remains bullish despite the many question marks around economic prospects over the medium and long term. We may have seen a positive rebound in several releases of economic data over the past couple of weeks, especially the surprising 4.8 million addition in US jobs, but the rise in Covid-19 cases has begun to force a number of US states and some other cities across the globe to either stop their openings or reintroduce new lockdowns. That will certainly threaten any shape of expected economic rebound.

Some may argue that despite the rise in infection cases, the death rate continues to decline and so does the hospitalisation of patients. While this may sound optimistic to some, the virus itself has not become less harmful but it is now infecting younger aged people and will lead to a disaster if the spread gets out of control, especially from those who are asymptomatic. Without a vaccine in place the upturn in economic activity will go through many twists and turns along the road to full recovery.

The stock market is behaving as if all these risks are behind us. China’s blue-chip stocks has jumped more than 5% at the time of writing and US futures are indicating a more than 1% gain at the open. Of course, there are factors contributing to the rally. With an unprecedented amount of cash in the system, equities and high yielding bonds are attracting a lot of interest from investors in the absence of acceptable yield from money markets and longer-term government bonds. That may continue to push risk assets higher, although valuations are approaching extreme levels. To keep this rally alive, we need more intervention from fiscal and monetary policymakers and for investors to believe that policies will be generous enough to provide further liquidity.

However, the more asset prices disconnect from their core fundamentals, the more likely we will see a sharp correction occurring in the future. The earnings season needs to provide some clarity after more than two thirds of companies failed to provide guidance in the first quarter. Without this, analysts’ expectations will diverge further leading to poor decision making from investors. Almost five months into the pandemic, companies should have some projections for revenues and profits. If investors have been forgiving in Q1, they will become more demanding going forward as they can’t remain blindfolded for much longer.


Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

More Volatility Ahead as Virus Spreads

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.

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.

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.


Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Bull Market is Showing Signs of Weakness

However, up trends may not be sustainable for a long time if they are not supported by fundamentals. By fundamentals we mean sustained economic recovery and improved earnings. As of now, many investors believe those earnings next year will return to 2019 levels for the S&P 500. If that’s the case, the steep rebound in equities seen since March 23 is justified and given that interest rates will remain near zero for a prolonged period, the reflation trade may still have a further way to go.

On the economic front, several indicators have bounced sharply since the coronavirus pandemic, that is especially true for leading economic data such as PMIs from across the US, Europe and China. But let us not forget they are picking up from an exceptionally low base and will only become meaningful if sustained.

Over the past 10 trading days the equity market has sold off twice, on June 11 and 24 with the S&P 500 declining 5.9% and 2.6% respectively. Such big moves are clear signs of anxiety. The index is now flirting with the long term 200-day moving average and a break below may be a threatening sign for the bullish trend. Short-term pessimism among investors has risen to unusually high levels according to the latest AAII sentiment survey and that may translate into further profit taking if the index breaks below the 200-day moving average.

These are all warning signs for the 3-month bull market. After a significant run, the question now is if there is still further fuel for the rally or are we on the verge of a reverse in trend? Of course, there are reasons to become cautious. Recent spikes in Covid-19 cases in several US states and across the globe is putting the re-opening of economies into question. Whether we’re seeing a second wave or just a continuation of the first wave, the outbreak may reverse actions taken by governments to re-open their economies, hence curbing hopes of a smooth recovery.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Gold Remains an Attractive Investment Option Despite Latest Surge

The resurgence in the precious metal price has coincided with a record increase in global coronavirus cases and as of Friday, the SPDR Gold Trust holding saw a rise in net inflows of 2%.

While many investors do not like gold as an asset class given that it pays no interest, those same investors may find the precious metal a better alternative to many other asset classes.

The stock market rally is clearly losing steam and there isn’t much incentive to keep the bull market running much longer. Equity prices have already discounted the actions taken by central banks across the globe and another big round of stimulus is not likely at this stage. Assuming the S&P 500 remains in the range of 3,000 to 3,200 until year end, it will be trading at a price to earnings multiple of 24 to 26 times for 2020, and 19 to 20 times for the end of 2021. That is considered the most expensive market since the dot com bubble. This isn’t to say that equities are due a sharp correction, but to continue moving higher they need a fundamental positive surprise on two fronts, economic and earnings, which is currently far from the base case scenario.

What is more important for gold is where fixed income markets are heading next. Today the US 10-year real yields are trading at -0.61%, and when excluding the one day drop to -0.98% on March 9, that’s the lowest level for real yields since 2013, the year when the Federal Reserve delivered a huge shock to financial markets by revealing their intention to withdraw stimulus.

Real yields in Europe are even lower than those in the US, especially in Germany and that is terrible news for people approaching retirement as it seems they are now assured of a pension that will fall in value if they don’t take a riskier approach. And with the trillions of dollars in government and central bank stimulus since the start of Covid-19, we shouldn’t be surprised if inflation begins edging higher. That will be another hit for savers.

The notion that central banks will follow Japan in targeting yield curves is growing. Keeping short and medium-term yield maturities under pressure may sound like good news for risk taking, but again the price will be paid by the elderly as real yields fall further into negative territory. This should make gold a great hedge against negative yields, devaluation of currencies, an unexpected surge in inflation or deflation, poor economic performance and shocks in equity markets.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Will the Second Wave of Covid-19 End The Current Rally?

After a violent sell-off in March, governments and central banks came to the rescue led by the US Federal Reserve. Many economies will see their GDP’s shrink by the fastest rate on record in the second quarter, but valuations are near historic highs, particularly in the US. That is simply because market participants believe monetary and fiscal policies are solid enough to fill the gap for growth that has been lost.

The new story making headlines today is fear of a second wave in the coronavirus. Several US states have reported a surge in infection cases with California and Texas hitting a new record. Meanwhile, millions of people in Beijing are now under lockdown restrictions again after more than 100 cases were reported, which are linked to a wholesale food market.

The belief that the global economy will swiftly recover during the third quarter is now uncertain. The faster economies reopen, the more likely we will see a second wave of infections translate into new lockdowns. Hence the path over the coming months will be murky.

Equity markets began to reflect this risk last week when the S&P 500 plunged 4.8%, but it quickly recovered some of these losses after the Fed announced it would start individual corporate bond purchases in secondary markets, as opposed to buying corporate-credit ETF’s.

Covid-19 and the Fed’s actions are influencing a herd mentality to financial markets where rational risk and reward calculations are no longer in place – the first sign of trouble sees investors flee to safe havens, and when the Fed plays the put, they take the opposite side of the trade. This kind of environment will keep volatility heightened in the near-term.

In my opinion, the problem that the Fed and other central banks have caused over the past couple of months is that retail investors are bidding up some of the worst performing companies just because they believe the current policies will keep them afloat; the classic example being the car rental group Hertz in the US which declared bankruptcy last month. This is leading to the creation of a big bubble in asset prices and the further it grows, the more damage it will make when it bursts.

No one knows how all this will play out eventually, but we must understand from previous experiences that bubbles tend to grow much bigger before they burst, and there could be a lot of money to be made if the timing of your exit is right. Currently, the two forces in play are a second wave of Covid-19 cases and policy actions. The one which proves to have the stronger influence will lead the next move in markets, but you need a lot of courage to play this game.


Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Volatility Returns With Surge in New Covid-19 Cases

After dropping below 24 in the first week of June, the CBOE’s VIX almost doubled on Friday, reaching a high of 44 before settling at 36. The broad shift in mood was sudden on Thursday with US stocks experiencing their biggest declines since mid-March. The rally, driven by monetary and fiscal stimulus, suddenly appeared on shaky grounds as if investors realised they can no longer be detached much further from economic fundamentals. But once again, the surge in Covid-19 cases was to blame.

The road ahead is likely to be bumpy. There is no clarity on economic growth projections, earnings expectations and most importantly, the pandemic path. The resurgence of coronavirus cases in Beijing, parts of the US and Japan as economies further release their lockdowns is sparking fears of a second wave, and without a vaccine in hand, the second wave could be more threatening than the first.

At the time of writing, the Dow Jones Industrial Futures Index has plunged more than 800 points, indicating sharp losses for the first trading session of the week. The beneficiaries, as usual, have been the US dollar and the Japanese Yen along with US Treasuries. It seems investors are running for safety as the tranquility in markets has come to an end.

Fear of missing out or ‘FOMO’ could turn into regret aversion where investors prefer to stay out of markets, so it will be interesting to monitor sentiment in the days and weeks ahead. Cyclical sectors, especially Energy, Industrial and Financial stocks will be hit the most as they were the latest drivers of the equity rally.

Traders will need to monitor the term ’second wave’ very closely as it may become the key driver for asset classes.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.