As if There was no Virus

A big question is to what extent the market will await the economic recovery to appear in the data, especially given that additional US unemployment benefits run out at the end of July. It's a heavy week for US economic data leading up to Friday's non-farm payrolls report, expected to show 19.5% unemployment. A new Premium trade was posted earlier before the NY close. Will the undervaluation in European indices relative to their US peers further drive the euro as was the case in 2017? More below. The weekly Premium Video has been posted below, detailing the thinking behind the trade and the accompanying trades.

One way to grasp the divergence between economic data and market performance is simply believing the virus has disappeared. Tuesday was another huge day for risk assets with AUD leading and JPY lagging. The BOC decision will be closely followed with Macklem leading for the first time.

The virus won't last forever. It continues to rage in parts of the world, but the market is acting like it's terminated. Along those lines, there have been good signs. ICU numbers globally are falling even as infections continue. Some say it's a sign of a mutated virus or the effect of low viral loads. In any case, the market is looking to a future where the virus is gone and yet ultra-easy central banks and loose fiscal policy continues. As tough as it is to look past the virus, that's truly what the market is doing.

There was chatter of Congress ready to hash out another stimulus spending bill in light of the current US riots. That speaks to the theme of elevated US government spending and that should spill over into commodities and commodity currencies first. Meanwhile the real economy remain a deep concern despite the ongoing enthusiasm in markets. The May ISM manufacturing index was at 43.1 compared to 43.7 expected; up from 41.5 in April. All the underlying metric showed only modest improvement.

DAX and the Great Catch-up

In equity markets, Europe is playing catch-up to the US indices, with sharp equity market gains. The spill-over to the euro is beginning to percolate. It's tempting to say it can't continue but it goes on day after day. Ashraf raised the question whether market recovery in Europe will intensify to the benefit of the euro as was the case in  2017, following the Eurozone gloom of 2014/2015.  Markets await this week's ECB meeting and whether it will committ to higher asset purchases. On Tuesday the moves were spectacular with yen crosses slammed lower and EM currencies soaring, including LatAm currencies where the virus is currently raging.

Obviously the fear is that when everyone piles into the trade it will reverse. Certainly Wednesday's economic data will be another test with ADP employment, the ISM non-manufacturing report and factory orders on the agenda.

Yesterday's RBA decision boosted AUD after Lowe said it's possible the depth of the downturn will be milder that expected. The BOC may strike the same tone on Wednesday at 1400 GMT but the main thing to watch will be Macklem in his first press conference as BOC leader. He already slipped up with a garbled comment about negative rates in his introductory appearance and now the real pressure will be on.