Risk Hangover? Monday Markets Subdued

Asia and the EU

• EU IP -17%

Markets reversed their Asia opening euphoria to trade flat at the start of the European session, as the relentless bid for risk abated a bit.

European stocks were down, driven by profit-taking in oil and lack of any fresh positive news.

After Friday’s massive risk-on rally driven by surprisingly strong US Non-Farm employment data, both equities and FX markets were on pause as traders now looked to the Fed meeting midweek.

The NFP numbers were a massive upside shock to the market, coming in much better than anticipated. But in the end, it turned out that fully 3 million workers were misclassified as employed over the confusing PPP instructions from the Bureau of Labor Statistics. Although the BLS noted the error in a post-news release, markets chose to ignore the clarification and the rebound trade raged on.

This week, however, some of that enthusiasm may fade if the market perceives even the slightest hint of reduction in either monetary, or fiscal stimulus. To that end, there are reasons for bulls to worry. In the last few weeks, the Fed has tempered its purchases of bonds for its QE program, while over in the Senate, Mitch McConnell has told the President that the next stimulus bill will be about $1 trillion. While that figure sounds large it is actually less than the market is anticipating and that may prove to be a barrier to further gains in risk assets.

For now, the upside move in the markets is driven purely by the assumption of government largesse, as all of the hopes of consumer V-shaped recovery are just that – hopes. The consumer has actually increased their savings in light of the economic uncertainty and it's doubtful that spending will ramp up quickly in the next few months.

Therefore, after a massive rebound rally, risk assets are now vulnerable to a correction and less-than-anticipated new rounds of government stimulus may be the catalyst for the move.