Market Drivers For June 1, 2020
China halts some soybean purchases
Risk turns negative
Nikkei 0.84% Dax -1.65%%
UST 10Y0.64
Oil $35/bbl
Gold $1741/oz
BTCUSD $9546
Asia and the EU
EUR Manufacturing PMI 39.4 vs. 39.5
GB Manufacturing PMI 40.7 vs 40.7
North America Open
US ISM Manufacturing 10:00
News that China may be halting purchases of US soybeans sent S&P 500 futures lower in morning European trade, as US-China tensions appear to be the only factor that could derail the relentless rally in stocks.
Over the weekend, almost every major US urban area – responsible for the vast majority of the country’s GDP – looked like a war zone, with protestors clashing with police forces over the state of the country's race relations. There was looting and low-level violence in nearly every major metropolitan area. But equities shrugged off the chaos, rallying to close the opening gap lower as the bullish momentum remained unstoppable.
However, the news from China quickly changed the mood, and equities were firmly lower by 50 basis points into the European open as investors quickly dumped risk assets. China is clearly playing a game of pressure with the US, trying to aggravate a weakened agricultural sector, which had already been devastated by the pandemic and prior trade-war tensions.
The rhetoric between Beijing and DC may overshadow all else this week, as markets have clearly decided to discount all of the bad economic news, as well the unprecedented levels of civil unrest, on the assumption that global economic recovery will resume with a vengeance, aided by ultra-accommodative monetary policy and record fiscal stimulus. Yet the bet on the resumption of global growth depends on the world’s number one and number two economies coming to some sort of trade detente. For now, those prospects look dim as both Trump and Xi play to nationalist impulses at home in order to boost their political standing.
The markets may also be underestimating the risk of a geopolitical mistake. The Chinese may press too hard, on the assumption that Trump is too distracted by domestic problems to respond forcefully to any action on their part. But Donald Trump is the most impulsive president in modern history and any escalation of tensions from Beijing could elicit a much more disproportionate response from DC.
For now, the markets continue to ignore all risks and remain only slightly lower despite the economic dangers ahead. The bulls continue to trade on the “Fed has got our back” assumption, but how long that thesis can last remains to be seen.
In FX meanwhile, risk currencies are unfazed with AUD/USD up by more than 1% on the day, while the greenback remains weak across the board. Part of the reason for buck’s weakness, as we noted last week, may be the view that the US is no longer the safe-haven asset it once was. But another factor for the dollar’s weakness may be the simple fact that the currency market does not necessarily believe that the US recovery will the fastest from among the G10.
On the docket today the market will get a look at the ISM Manufacturing data, which is projected to improve slightly. Any upside surprise could keep the risk-rally alive, but if the manufacturing print misses, both equities and USD/JPY could turn sharply lower as the day proceeds.