WHAT HAPPENED YESTERDAY
As of New York Close 2 Jun 2020,
U.S. Dollar Index, -0.26%, 97.57
USDJPY, +1.15%, $108.83
EURUSD, +0.45%, $1.1185
GBPUSD, +0.70%, $1.2581
USDCAD, -0.46%, $1.3511
AUDUSD, +1.71%, $0.6914
NZDUSD, +1.43%, $0.6383
S&P500, +0.82%, 3,080.82
Dow Jones, +1.05%, 25,742.65
Nasdaq, +0.59%, 9,608.38
Nikkei 225, +1.19%, 22,325.61
Gold Spot, -0.78%, 1,726.82
Brent Oil Spot, +2.71%, 38.72
Japanese yen fell to a seven-week low against the Dollar on Tuesday and risk-seeking currencies including the Australian dollar jumped, as the prevailing positive risk sentiment due to optimism that the worst of the economic downturn from the spread of the virus is in the past, triggered the stops of the leveraged speculative community.
U.S. stocks gained as cheer over business reopenings overcame concerns about U.S.-China tensions and mass protests across the United States. The AUD jumped 1.71% to $0.6914,, the highest since January 20. Australia’s central bank held rates at all-time lows on Tuesday and sounded less gloomy as the economy gradually reopens during what is likely to be the worst quarter since the Great Depression of the 1930s. Some attributed the nearly 5% move in AUDJPY to the recently completed $16 billion purchase of Australia’s largest brewer, CUB, by Japan’s Asahi.
S&P 500 increased 0.8% on Tuesday, pushed higher by all 11 of its sectors in a “pain trade” to the upside. The Dow Jones Industrial Average increased 1.1%, the Nasdaq Composite increased 0.6%, and the Russell 2000 increased 0.9%. The gains above reflected the persistent reopening enthusiasm, but the price action was described as a “pain trade” due to under allocated investors, awaiting a pullback, presumably giving in to chase the market higher. That’s what it felt like, at least, as many have been awestruck by the market’s furious rally off its March 23 low.
Visa (V 193.36, +2.01, +1.0%) and Western Union (WU 23.05, +2.34, +11.3%) were among the latest companies noting stabilizing/improving conditions in May, providing some assurance for bullish investors. Visa, specifically, saw total U.S. payments volume decline just 5% yr/yr in May versus an 18% decline in April. Western Union shares were also boosted by news that it’s seeking to acquire smaller rival MoneyGram (MGI 3.36, +0.77, +29.7%), according to Bloomberg Law.
Separately, Goldman Sachs (GS 204.14, +4.21, +2.1%) and Microsoft (MSFT 184.91, +2.08, +1.1%) received price-target increases to $230 and $250, respectively, at Wells Fargo. The turnaround in MSFT shares, which were down nearly 1% intraday, helped support the broader market in afternoon trade.
PERILS FOR PENTAGON AS TRUMP THREATENS TO MILITARIZE RESPONSE
Helicopters that could easily be mistaken for active duty U.S. military ones staged show-of-force maneuvers in Washington above people protesting the murder of an unarmed black man George Floyd at the hands of a white police officer in Minneapolis.
As Trump increasingly turns to militaristic rhetoric at a time of national upheaval, the U.S. military appears to be playing a supporting role — alarming current and former officials who see danger to the institution of the U.S. armed forces, one of America’s most revered and well funded.
At the core of the discomfort is a single idea: The U.S. military was designed to protect the United States from foreign adversaries and uphold a constitution that explicitly protects the rights of citizens to peacefully protest. Even the head of the National Guard acknowledged that responding to domestic crises makes his troops uneasy. So far, more than 20,000 National Guard members have been called up to assist local law enforcement with protests around the country.
IMPACT: The image and narrative surrounding the American Armed Forces is a key psychological strongpoint that Hollywood and the media have helped build up over the decades since World War 2. The reverence allies have for it and the enemy’s fear is a powerful political yardstick that helps the U.S. conduct diplomacy and solves geopolitical issues. Trump could tear the most powerful geopolitical tool by tainting the image of the U.S. Army. This will embolden China’s push within the Pacific and help advance their One-Belt-One-Road initiative.
BIDEN VOWS TO HEAL RACIAL WOUNDS
Democratic presidential candidate Joe Biden on Tuesday blasted President Donald Trump’s response to U.S. protests over racism and police misconduct, vowing to try to heal the country’s racial divide and not “fan the flames of hate.” He said the killing of George Floyd, the African-American man who died at the hands of Minneapolis police last week, was a “wake-up call” for the nation that must force it to address the stain of systemic racism.
Biden was particularly critical of Trump’s visit on Monday to a historic church across from the White House, which was preceded by law enforcement authorities dispersing a crowd near the church with smoke canisters and flash grenades.
IMPACT: Biden, who served eight years as vice president under Barack Obama, the first black U.S. president, cast himself as the candidate who best understands the longstanding pain and grief in the country’s black communities. As we have noted in yesterday’s piece, the protest will be used for political leverage, expect Biden to ramp up his attacks on Trump, creating supercharged tensions as we head into the November elections. Risk assets led by S&P 500 are grinding higher, given the uncertainty and volatility to come in global geopolitics and domestic upheavals, we must remain cognizant that things can turn south on a dime.
AFTER FB STAFF WALKOUT, ZUCKERBERG DEFENDS NO ACTION ON TRUMP POSTS
Zuckerberg told employees on Tuesday that he stood by his decision not to challenge inflammatory posts by Trump, refusing to give ground a day after staff members staged a rare public protest. They complained the company should have acted against Trump’s posts containing the phrase “when the looting starts, the shooting starts.”
On Friday, Twitter Inc affixed a warning label to a Trump tweet about widespread protests over the death of a black man in Minnesota that included the phrase “when the looting starts, the shooting starts.” Twitter said the post violated its rules against glorifying violence but was left up as a public interest exception, with reduced options for interactions and distribution.
IMPACT: Some critics posted calls on Twitter for Facebook’s independent oversight board to weigh in. But the board will not review any cases until early fall, and users initially will only be able to appeal to the board about removed content, not content that Facebook has decided to leave untouched. The board, which can overrule Zuckerberg, will only review a small slice of content decisions.
The contrasting measures taken by Facebook and Twitter may seem insignificant but might seed a greater divide in tech stocks that have social platforms. In today’s world, Politically Correct, Morally Responsible, and Environmental Friendliness are key attributes Millennials and Generation Zs hold onto, turning activists if these are violated. Coupled with the network effect of social media, ideas and causes can spread like wildfire. This rift of leadership may be a crack that can cascade into something big, do keep an eye on the development as tech stocks seem to be skating on thinning ice as the days go by.
BOC Meets Later Today
The CAD may show fresh volatility later today after the Bank of Canada’s new chief holds his first policy meeting. Interest rates are expected to remain steady, while additional lending through corporate bond purchases cannot be excluded if the central bank wants to help more amidst lingering Covid-19 uncertainties and elevated domestic risks. Yet, what could attract greater attention, and hence move the CAD, is the central bank’s forward guidance as markets are looking for clues on where monetary policy may be going next under the new governor.
Macklem, Poloz’s successor, will likely say that plans for additional support may remain on the cards, but at the current reopening phase he may keep the powder dry in the main policy tools, which are at their limits, and see how the gradual reopening will play out before the board commits to injecting more liquidity.
OVERALL SENTIMENT: Déjà vu, all over again. Protests continue all over the US, and the POTUS continue to talk tough and make no attempts to address the underlying issues, but stocks grind higher yet again. The flood of money remains the primary driver of markets. With risk sentiment being strong, shorts in risk-seeking currencies such as AUD and NZD got carted out as stops have been relentlessly triggered. The pain felt by the leveraged speculators is real.
Of Bubbles and Froth
This relentless rally in stocks reminds me of the famous “irrational exuberance” of the dotcom bubble. Now, as it was then, all the famous market legends and market commentators were lamenting the stretched valuations and the professional speculators/investors were all short. “Fundamentals did not justify the lofty levels” was a constant refrain.
And yet, the market climbed and climbed. Through it all insiders were selling, and companies were just adding .com to their names to get a boost in their stock prices. It carried on, until it finally didn’t. While it did, all those who stood in its way suffered financial ruin.
Do not try to make sense of bubbles. They make no sense. Think of tulips, internet stocks, and credit products. All that matters is to survive till the cracks appear. When they do, then the game is on. Until then, try to survive!