S&P Futures Storm Higher Ignoring Riots, Chinese Halt Of Some US Imports

The honey-badger market is back.

After initially dropping more than 1% at the start of trading on Sunday in a kneejerk response to the worst US riots in decades, stocks recovered all losses by the time Europe opened for trading, then just after 4am ET reports hit that that state-owned traders Cofco and Sinograin were ordered to suspend purchases of some American farm goods including soybeans. At the same time, China also accused the US of undermining bilateral relations and said its comments regarding Hong Kong “disregarded facts,” days after President Donald Trump moved to rescind the city’s special trading status.

Futures dropped quickly on this news, but then once again quickly recovered and erased most of the loss as the market is fully in "ignore all negative news" mode. As a result, the Emini was just up from the Friday close, trading at 3,044 last, after dropping as low as 3,008 overnight.

 

And so, once again hope and optimism over the global reopening prevailed, helping push world stocks near three-month highs despite some wild moves in the dollar amid boosted risk appetite, despite worries over riots in the United States and unease over Washington’s standoff with Beijing. Traders also ignored the reality that if indeed the virus is poised for a second wave, then the weekend riots which clearly ignored social-distancing rules, will only accelerate it.

Having risen a whopping 35% from a late March trough, stocks looked set to kick off June with more gains. The MSCI world stocks index has recovered two-thirds of the losses it incurred in the aftermath of the coronavirus outbreak. Investors were also relieved that President Donald Trump left a trade deal with China intact despite moving to end Washington’s special treatment for Hong Kong in retaliation for Beijing seeking to impose new security legislation on the city.

Incidentally, just last night we cautioned that "there is a clear risk—if not a likelihood—that US exports to China will fall short of the Phase 1 deal." So far, the administration appears to be taking a wait-and-see approach to this and could continue to do so for a while, since the export targets were intended to be met over a 1-2 year timeframe, and the deal was only signed four months ago. But if Trump decides that China has not met its commitments under the Phase 1 trade deal - which it clearly hasn't - he would take the initial step of taking the tariff rate on Tranche 4A back to 15%, according to Goldman." It didn't take long for China to acknowledge that there is no way the Phase 1 deal would ever happen and did so by making a clear political statement.

 

In Europe, stock markets were up 0.8% led by virus-hit sectors such as travel & leisure, banks, and miners but volumes were subdued as Germany, Switzerland, and Austria were closed for holidays.

"The Trump rhetoric against China and trade impediments against Hong Kong could have been a lot worse, hence the performance of those markets this morning, which has helped the risk backdrop for the European open," said Chris Bailey, European strategist at wealth manager Raymond James.

In Asia, stocks closed higher, led by China on signs that parts of the domestic economy were picking up. Hong Kong managed to rally 3.4%, while Chinese blue chips rose 2.7%. India's S&P BSE Sensex Index rose 2.7%. Trading volume for MSCI Asia Pacific Index members was 44% above the monthly average for this time of the day. Japan's Nikkei added 0.8% to also reach a three-month peak as the Topix gained 0.3%, with Akebono Brake and I'rom Group rising the most. The Shanghai Composite Index rose 2.2%, with Zhejiang China Commodities City and Markor Intl posting the biggest advances.

In FX, the safe-haven dollar meanwhile, hit an 11-week low dented by risk-on mood among investors and riots in major U.S. cities over race and policing; the dollar pared losses after news China will halt some U.S. soy imports, adding to tensions between the two countries, which however were roundly ignored by equities.  Commodity currencies rallied as the greenback’s haven appeal waned. The euro rose a fifth consecutive day against the dollar, the longest streak since March.

Much of the dollar’s recent decline has come against the euro which has been boosted by plans for an EU stimulus package. The European Central Bank is also widely expected to say on Thursday that it will raise its asset-buying by around 500 billion euros to 1.25 trillion.

The pound reached a three-week high against a weaker dollar, with some traders positioning for a positive surprise from this week’s Brexit negotiations. The Australian dollar rallied by more than 1% against the greenback and the New Zealand dollar advanced amid short-covering in high-beta currencies and a rally in commodity prices and Asian equity markets.

"I agree the riots are not good but the perception is that this is a local issue...and the uncertainty has spilled over into a lower dollar."

In rates, yields on 10-year Treasuries were trading steady at 0.66% having recovered from a blip up to 0.74% last month when the market absorbed a tidal wave of new issuance. Bailey added. German bund yields DE10YT=RR were stuck near minus 0.42%.

The turmoil in the U.S. was a fresh setback for the economy which was only just emerging from a downturn akin to the Great Depression. Following poor data on spending and trade out on Friday, the Atlanta Federal Reserve estimated economic output could drop a staggering 51% annualized in the second quarter.

Looking ahead, the May jobs report due out on Friday is forecast to show the unemployment rate surged to 19.8%, smashing April’s record 14.7%. Payrolls are expected to drop by 7.4 million, on top of the 20.5 million jobs lost the previous month. “Current unemployment numbers go far beyond what has been experienced in any post-war recession,” Barclays economist Christian Keller wrote in a note. “To the extent that some sectors may never return to pre-pandemic business-as-usual.”

In commodity markets, gold added 0.5% to $1,735. Brent crude futures were off 8 cents at $37.76 a barrel, while U.S. crude fell 35 cents to $35.14.

Looking at today's US economic data, we have Markit and ISM manufacturing PMIs.

Market Snapshot

  • S&P 500 futures down 0.4% to 3,028.50
  • STOXX Europe 600 up 0.6% to 352.33
  • MXAP up 1.7% to 153.12
  • MXAPJ up 2.3% to 487.07
  • Nikkei up 0.8% to 22,062.39
  • Topix up 0.3% to 1,568.75
  • Hang Seng Index up 3.4% to 23,732.52
  • Shanghai Composite up 2.2% to 2,915.43
  • Sensex up 3% to 33,386.32
  • Australia S&P/ASX 200 up 1.1% to 5,819.15
  • Kospi up 1.8% to 2,065.08
  • German 10Y yield rose 1.7 bps to -0.43%
  • Euro up 0.3% to $1.1130
  • Brent Futures down 0.08% to $37.81/bbl
  • Italian 10Y yield rose 5.0 bps to 1.305%
  • Spanish 10Y yield fell 0.3 bps to 0.559%
  • Brent Futures down 0.08% to $37.81/bbl
  • Gold spot up 0.5% to $1,738.74
  • U.S. Dollar Index down 0.3% to 98.02
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