As riots engulf the US
The stock market’s feeling no stress
The bond market’s flat
The dollar’s gone splat
And Covid is yesterday’s mess

Risk is on this morning, and it appears that neither riots across most major cities in the US nor increased tensions between the US and China will do anything to dissuade investors from that mantra. I guess TINA is alive and well and living in every major financial center around the world. Of course, she does have a sugar daddy, the central bank community, who continue to spend on her by pumping massive amounts of liquidity into markets while cutting interest rates ever lower. Since April 1st, when lockdowns were beginning to spread rapidly around the world and social distancing became the watchword for personal interactions, every major equity market worldwide is higher, most by double digit percentages. Even Hong Kong’s Hang Seng Index is higher by 0.5% in that time, despite the fact that China has changed the law regarding the island’s quasi-independent status and certainly undermined a great deal of trust in the sanctity of private property there.

So why should today be any different than what we have seen for the past two months? One thought was all the rioting in the US. While there is absolutely no justification for the behavior of the Minneapolis policeman whose actions triggered this situation, there is also no justification for the looting and destruction of private property across the country. And, consider the timing; just as many businesses were starting to prepare to reopen, along comes a mob with the result being massive destruction of private property. This will certainly slow down the reopening of the economy to everyone’s detriment. I guess using the ‘broken windows’ theory of economics, the repair of all that damage and destruction will increase economic activity and be a net positive. (Alas, in 1850, Frederic Bastiat showed the fallacy in that theory by simply asking what those resources could have been used for had they not been needed to repair something that was perfectly fine beforehand.) The point is, the riots are a clear net negative to the economy.

And yet, after nearly two months of an incapacitated economy, which brought with it record unemployment levels along with record low readings across almost every economic statistic, the idea that equity markets around the world have recouped nearly two-thirds of the losses seen when the impact of Covid-19 was just beginning to be recognized is remarkable. Add to that equation the increasing tensions between the US and China, not merely the Hong Kong situation but also word that China is now halting purchases of US agricultural products and the potential death knell of the phase one trade agreement, and one is left scratching their head as to exactly what basis investors are using to make decisions. Since economic activity is clearly not the current driver, the only other choice is an unshakeable belief that the central banks, notably the Fed, will never allow the stock markets to decline substantially.

But that is where we are this morning, with equity markets in Asia having rallied after Friday’s presidential press conference made only vague threats about US retaliation for China’s actions regarding Hong Kong. In fact, the Hang Seng was the leading gainer, up 3.35%, but Shanghai (+2.2%) and the Nikkei (+0.85%) also enjoyed gains. Europe has generally followed along with both the CAC and FTSE 100 higher by 1.1% this morning. However, the DAX is having a more difficult session, falling 1.6% after final May PMI data showed Germany is lagging the Eurozone’s overall growth response. Meanwhile, US futures are basically flat on the day although they have rallied back from earlier losses in the overnight session.

Bond markets are behaving as one would expect in a risk-on session, with yields generally higher (Treasury +1bp, Bunds +3bps) but risk bonds, like Italian BTP’s seeing buying interest and declining yields (-3bps). In fact, another possible explanation for the DAX’s difficulties is the growing realization that Germany is going to be supporting all of the rest of Europe financially, which likely means that German companies may see less government support.

Finally, FX markets are really showing the diminished concerns regarding risk across all markets. Remember, during the peak of the concerns in March, foreign companies and countries were desperate to get access to dollars to continue servicing the trillions of dollars of USD denominated debt they had outstanding. As the basis moved further against them, they ultimately simply bought dollars in the FX market to satisfy those claims. Naturally, the dollar rallied strongly on all that demand. But to the rescue rode Jay Powell and his $4 trillion of liquidity and, voilá, the need to hoard dollars disappeared. So, with that in mind, one cannot be surprised that the dollar is softer across the board this morning.

Starting with the G10, Aussie is leading the way higher, up 0.95%, after its PMI data printed slightly better than expected and the market turns its attention to the RBA’s meeting this evening, where expectations are for no further policy ease for the time being. But we are also seeing strength in CAD (+0.5%), NZD (+0.4%) and GBP (+0.3%), as a combination of firming commodity prices and modest upward revisions to PMI data have helped underpin sentiment. The rest of the bloc is actually higher, but by 0.1% or less, and hardly worth mentioning.

In the EMG bloc, KRW (+1.1%) leads the way after announcing a $62 billion economic support package to help further mitigate the impact of Covid on the economy. That news was seen as far more important than the fact that their export data continues to crater amid ongoing slowdowns in global trade. But we are also seeing strength in RUB (+0.9%) and MXN (+0.75%) with the ruble benefitting from government encouragement for citizens to vacation in Russia rather than traveling abroad (thus reducing supply of RUB on the market) while the peso seems to simply be following its recent strengthening trend (+11.5% in May) amid an overall sense of dollar weakness. But here, too, the entire bloc is in the green, with the dollar simply under pressure universally.

Turning to the data front, this will be a big week as Friday brings the latest employment picture. But leading up to that, we have plenty to see as follows:

Source: Bloomberg

In addition to this data, tonight we hear from the RBA and Thursday brings the ECB, where expectations are for a €500 billion increase in the PEPP program to go along with the EU’s €750 billion spending program. Meanwhile, the Fed is in their quiet period ahead of the June 10th meeting, so, mercifully, we will not hear from any Fed speakers all week. Obviously, all eyes will be focused on Friday’s employment report in the US, but I sense that the ECB is really this week’s biggest event. Until then, the momentum certainly seems to be in favor of more risk, and accordingly, a softer dollar this week.

Good luck and stay safe
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