Why Stocks Keep Rallying Despite Riots & Trade War

Okay, very good morning to you. It is Wednesday the 3rd of June. Hope everyone is doing well. Just a reminder before I begin, don't forget to like and subscribe to the YouTube channel. Lots more content coming 7 days a week from me and the rest of the team. But just having a look then across the charts, and as you can see this morning Another case of relative risk on equity index futures higher. We had a firmer close on Wall Street. The Dow futures already up another 150 this morning. The DAX trading up 175, but it's R1 in the futures. Consequently, gold down about $7, T-notes down 5 ticks, oil up a dollar. So who— despite what you're reading in mainstream media, which is kind of these ongoing size of protests in America and also reflected across some other parts of the Western world, as well as the ongoing risk of coronavirus and a second wave. At the moment, market appetite remains fairly optimistic in terms of a risk perspective, and equities continue to move higher. So yeah, that's the main kind of theme of this morning. And I guess one of the questions I've had— I woke up, I had a few people just asking me on, on Twitter. So my handle's there, I mean, feel free to follow and obviously ask me questions if you ever have any. But questions about why are we continuing to rally? I think it does feel a little bit unusual because it almost seems counterintuitive to the move that we continue to see. And I guess one of the things here, let's just make the S&P chart a little bit bigger to really put this into a bit of perspective. I was looking on a daily chart here, and obviously this was the, the big sell-off that we had when we peaked around all-time highs in February, and then we got to the, uh, the rout on the March 23rd low, which was this huge sell-off on the pricing in of the, the implications that the pandemic was going to have not just on the US but the global economy. Um, but since that point, obviously we've had just this amazing rally. Um, and if I actually look from a percentage point of view now, from where we were at the bottom to where we are now, we're up about 42.5%. Uh, technically now, I mean, we're trading the futures in the S&P. I'm looking at here 3090. Uh, obviously if this trend continues, I don't really see much in the way of obstacles until we get up to around 3113-14, which would be around those highs that we had on the 5th of March and also some area of relevant support and resistance around the Q4 of last year. Anything above there, well, then that starts to bring in— you can see that wick high that you had on the 26th, and also the low on the 8th of Jan, um, as well of this year, which would be at 31.80. So on the road to 3,200 once again. Above there, another interesting level would be those lows that we had, the bounce late Jan, and also a support area from early January as well of this year. So this all contingent, of course, that all things remain as they are at the moment. But I guess the question is, is, you know, why are we seeing this, this kind of ongoing trend here despite these obvious risks on the table that people keep talking about? And particularly now with things like the riots, obviously I myself have talked about the potential in the future for risk of further transmission of the virus, given the lack of social distancing, obviously, when, when you're having a protest, as well as other factors that might be risks, such as the trade war escalation that we've had. So kind of, I guess, listing out these reasons, there are a few. And if you— I mean, I talk about the, the risk of secondary waves And don't forget, that has not materialized as yet. I've seen a few people using, say, Iran as a bit of a reference point. I believe they had 3,000 cases reported yesterday, which is kind of right back up there at the peak. And they're, they're kind of, um, bar chart, if you're looking at cases, is kind of gone Phase 1, and Phase 2 is almost mimicking, uh, the same as Phase 1. I guess that would be a bit of a litmus test of maybe authorities not managing that situation in the best way they possibly could have done. But in the Western world, at least, it's continued to remain, cases plateauing in aggregate and compressed in some of the hardest-hit areas. So talking about the US and generally the UK and mainland Europe, Italy, Spain, and so on. The other thing is manufacturing gauges have showed a degree of economies somewhat stabilizing. We saw that in the Chinese data. Yesterday we did have some Chinese data overnight. This was the Caixin service PMI, and it was up sharply in May. And of course, this comes after the reopening of their economy. Um, it was the largest expansion in nearly a decade for this data set. The rebound was the steepest since October of 2010. So all of these things here are helping the narrative, but probably underlying the main crux of the matter of what's supporting markets of course, is the dual-fold mechanism of fiscal and monetary support. So from the government side, they've obviously fired a lot— trillions in fact— into the global economy in order to counteract this downturn from the coronavirus. And that's not stopping anytime soon. Obviously, the US going through various talks about potentially more kind of fiscal stimulus, and the same happening A second package was being discussed in Germany from Angela Merkel yesterday, but then also you've got things like the ECB tomorrow where, much like with other central banks, the ECB is going to go that extra step further. The likelihood is they're going to top up their quantitative easing program by a further €500 billion. And so these are powerful forces underlying this general confidence in markets looking beyond the risks that are clear and apparent now and thinking about the pricing in of the economic recovery that might come in future. Obviously, when pricing the future, that outlook though is subject to change. So don't get me wrong, things can change. But again, these underlying reasons of why stocks are continuing to rally. Also yesterday, as a kind of footnote, we had oil prices. Again, you can see down here at the bottom, oil continues to rally. You know, so interesting looking at oil prices now. There was a chart here, I don't know if you remember, about 2 weeks ago I shared this chart and I had marked up. And the reason why I'd shared it is I was looking at this trend line, of which at the time we had broken. And it was the day after when we had printed on the candlestick, managed— after we broke it, we retested that trend line but closed above it, importantly, I thought. And I'd drawn this arrow of what I thought the future price activity might be. And, um, yeah, couldn't have gone more to what I was thinking in that respect. And really, it's hard to see now much getting in the way of us getting to the psychological, um, kind of $40 handle, which isn't too far above. And that would also bring into play then a full reversal of where we were around $41, looking on a daily continuation here from when we had that initial kind of fallout where OPEC+ had that meeting. You remember at the beginning of March they failed to make an agreement. That was when the Saudis retaliated, talked about flooding the market, underpricing competitors for new customers. And that was when we then eventually had that big kind of push down into negative prices on that whole cushion storage issue in the futures market. But since then we continue to recover. I'll talk about oil a little bit more because I do feel like oil is— I think technically, yes, there's some further room. Another $3 or $4 on the upside I don't think would be unrealistic, particularly if the general risk appetite remains as it has been. But there are certainly some expectations now for oil prices built around this upcoming OPEC meeting that we need to be aware of, which I'm going to talk about in a moment. So yeah, oil prices obviously moving higher, that kind of assists the general kind of risk appetite. Obviously, that, that very fleeting moment of people panicking about the negative price of oil, which realistically, yes, in some ways it, it, it was a reflection of severe kind of misplacement of fundamentals in respect of the the destruction of demand through the coronavirus and the, the massive economic impact the virus has had. Also, uh, just generally the oversupplied nature of the market with all of these competing producers who all have their own agendas— Russia, Saudi, America. So that, that created, and, and it was a true move lower, but then, you know, the mechanics of the futures market and the storage issue is what created that, that one week of volatility in oil. But, you know, that ship sailed and left town a long time ago. So that, that again is off the, off the table for the moment. And then from Brexit point of view, you know, cable does continue to remain pretty solid at the moment. You know, we're up there at one close to 126 handle. The Dixie a little bit weaker then this morning, the currency market. So both major pairs on the front foot. But obviously we heard yesterday that a potential compromise on Brexit— and this is a kind of a, another macro topic that's a little bit been on the sidelines in the shadow of the coronavirus and obviously the trade war— but that is important because there's a deadline looming, as we know, at the end of the month. Johnson, according to reports, will be told where the EU could potentially make concessions when him and the European Commission president meet in the coming weeks. But that's as long as the UK takes a similarly conciliatory approach. But overall, some kind of lukewarm signals that there could be some degree of coming off these kind of firm stances and meeting in the middle somewhere. So yeah, all of these things are positive short term. And what does that mean for the currency market? Well, you know, this is something I wanted to look at, and Traditionally, when people look at markets, they tend to think of— they tend to oversimplify things, I think, a little bit in a sense that they go, right, risk on, you're buying equities, and then risk off, you're looking at potentially strength in the yen, for example. So from a currency perspective, you're thinking about a flight to quality and things like the Swiss franc, the yen. But actually, the dollar has been quite a good barometer of risk sentiment. And just looking at a chart here dating back year to date of the Dixie, and you can see here quite a distinct and clear pattern. There was this big rally that came in March, and if you overlaid that with the equity market, it would be the complete inverse relationship. So as equities were selling off dramatically, the dollar was strengthening dramatically, and Although that might sound a bit strange, you might think, well, the US economy is going to get hammered here. You have to think about in broader global economic terms. This is the global reserve currency, and so in times of extreme strife like that, people would flock to the dollar in terms of it being the— in some respects, the greatest store of value comparative to the depreciation of other currencies in respect. So the Dixie rallied aggressively here, but one of the things at the moment is that you've been seeing a reflection of when equities have been moving higher. Generally the Dixie's been moving lower and vice versa. And this morning, another case in point, Dixie is down about a quarter percent, major pairs are up, T-notes are down, gold is down, equities are higher again. And so yeah, I just thought it was quite interesting to see here then about what does this mean for other, other currency pairs. And started looking at the EURUSD last night, and I just want to bring the EURUSD chart into my screen, so just bear with me one second here. So this is EURUSD, and I'm going to switch it over to a weekly chart. So obviously when I put it on a weekly candlestick, the axis you're looking at the bottom goes back to 2016, '17, 2019, 2020 to where we are at the moment. So this is bringing in a multi-year view. And one of the things here I was looking at last night was a note out of Deutsche Bank. And Deutsche Bank have said the broad nature of dollar weakness highlights the unwinding of the risk premium that substantially benefited the reserve currency. So as we were just describing, they've said the dollar should be about 10% weaker in narrow trade-weighted terms to fully take out this risk premium that was priced in. So again, if we go back to what we're looking at with the DXY, you could argue that if we go back to where we were, then obviously we're trading around 97.5 in the DXY at the moment. Well, we could get back down to sub-95 at this point in time. Obviously, if that's happening, the dollar's weakening. Well, by default, then euro-dollar pair is moving higher at this point. And for Deutsche Bank, they say that so far that move— then remember they said the dollar should be about 10% weaker in narrow trade-weighted terms to fully take out that risk premium— they say the move at the moment's only been about 3%. So put those together, then there's still some more room to run over the medium term. And they're forecasting, DB, that EURUSD could go to 1.15. Now 1.15 I've marked up here this would be this area. So if I just put a rectangle around what, what DB are looking at is here, this would push us right back up to those March 9th highs at this point. Before we get there though, there are certainly— we're coming up to a fairly interesting point as we trade a 112 handle now. So looking on the weekly, 112.44 was that weekly high that we printed on the week of the 16th and also resistance on on in the end of December of 2019. We're kind of close to it again during the October period. It's been numerous occasions it was acting as support as well over the case of Q4 and Q1 of 2018-19 respectively. So quite a key level coming up there on that horizontal just to keep an eye on. But then, you know, do we come up? Uh, kind of got this trend line here as well that I'd be keeping an eye on, but then you can see the significance of the 115, obviously psychological at the handle, but then that was a key top for price activity in March and June of 2019. Also, even going all the way back to 2016, it was a real firm area of resistance that then saw EURUSD come sharply lower in the, in the 12 months thereafter. It's also acted as support before. So yeah, just looking on a slightly longer time frame, and about these, these kind of views. Obviously, from an ECB point of view, the ECB are going to be adding more stimulus in the form of more quantitative easing. But at the moment, you know, a lot of that is priced in. Don't forget, if the ECB do not deliver on stimulus tomorrow, it would be an absolute shock. And so at the moment, the EURUSD price that you're seeing in front of you on your screens is the real price. It's moving higher that's— the market's already priced in that additional stimulus at that point. So again, the risk appetite is a bit strange at the moment. It's more like, um, the increased assistance by the authorities, whether the central bank or the government, helps assist the economic recovery, which helps economic risk sentiment globally, which then typically sees an unwind of the risk premium in the dollar. And that's lifting those dollar-based currency pairs at the moment. I know it's quite, quite a lot to take in, but hopefully that makes a bit more sense. The other thing as well I did see last night that I thought was quite interesting was this. This is a graphic via the FT, and it's looking at Wall Street's performance. So the S&P 500's total returns percentage, and it's looking at the performance downplays civil and political unrest. So one of the things I'm quite interested in was just looking at a bit of kind of almost backtesting of any other previous time in his recent history that we've had some kind of civil or political unrest, and what type of impact has that then had as a consequence on the S&P 500 over that given year. And this of course comes after we've had thousands of people marching in protests in New York and Los Angeles last night. This comes irrespective of those curfews in place and doesn't look like anytime soon that that's gonna, uh, tail off. So there's 5 different examples here, um, some you might be more familiar with than others, but Occupy Wall Street was a protest that happened in 2011, much more smaller to— than compared to some of the others I'm about to describe. The other was the Clinton impeachment, and so this was the kind of period there of the— we're looking in the late '90s Then you've got the LA riots, that would be 1992, and then the Martin Luther King and Kennedy assassinations of 1968. Now these were all times of extreme, um, uh, kind of political unrest. Some of them, particularly '68, obviously being more in regards to a race issue similar to what we have at the moment. But as you can see here, the percentage return on every single one of these occasions has been positive, if not very positive, illustrating then how equity prices reflect a focus on underlying economic and corporate earnings narrative at the time rather than societal and political upheaval. So is this going to be any different? I don't think so. I don't, I don't think, um, at the moment at least, the massive support— and it is massive for from the Federal Reserve, fiscal stimulus from Washington is putting confidence in the ability for the economic recovery. The only, you know, the real risks here are, as I said before, I still think it warrants quite a lot of vigilance to look at these coronavirus cases as we go through the next week or so. I've said this before, I'll say it again. And then of course you've got to keep an eye on the trade war. But you know, when it comes to the trade war, Yes, it has escalated, but I guess it's one of those where we kind of end up in that same situation again. It's almost self-harming in a way, particularly in a political campaigning year when the economy is already depressed on the back of a pandemic, for Trump to really push it too far. So yes, he has to have an anti-China rhetoric in order to cultivate his base into an election, but he knows full well that he's got to manage it in a certain type of way and as we've seen many times before, that infinity loop of kind of the trade war cycle. You know, are we just going out of the negative, we go back into a positive phase? Well, yet to be seen. So yeah, a couple of interesting things there I thought I'd cover. Final things then are in oil. Oil, as I said, has been moving higher, but I'm getting a little bit of déjà vu, to be honest, because it doesn't matter how many times OPEC say something and don't deliver, and then they say this and they change it to that, people still generally buy into what they say. And, you know, this isn't just oil moving on the back of expectations that OPEC+ are going to roll over their existing supply cut. There's obviously, as I've said, you know, a bit of a bounce back in some of these indicators, particularly in China, that their economy is stabilizing on the manufacturing, the service numbers pretty strong overnight. You know, these other factors are helping. But whether or not we have the meeting this week brought forward or next week, the consensus at the moment is emerging around proposal to cut or to extend the cuts for 1 month. Saudis are still pushing for 3, but the talk of the town is at the moment, if they can get Russia still on board, which of course is imperative for the cuts to have any type of impact, then it's more likely to be at the lower end, one month. But yeah, just given the, the kind of the move that we've had consistently higher in oil, I do think that perhaps it could be one of those where an extension of one month becomes somewhat of a disappointment, just given the fact that it's kind of buy the rumor, sell the fact type price activity. Because as per usual, I'm sure there's going to be some real speed bumps along the way that isn't going to make this smooth sailing in order to get a Saudi-Russia compromise at this point. So just be aware of, um, API oil inventories came out last night. Obviously this comes as the front run for the DOE's this afternoon. The crude headline figure was a surprise drawdown. So again, another factor just helping support prices in the short term, at least intraday. Crude, a drawdown of just shy of $500,000. Expectations were for a build of $3.5 million. Cushing and Draw, $2.2 million. Gasoline build, $1.7 million. Distillate, $5.9 million. Looking at the calendar for today, uh, what have we got? Well, all of these service PMI numbers, uh, these will be the eurozone final readings, so probably not too much in terms of market moving potential. We do have some German unemployment rate and change coming up in just over an hour's time or so. Perhaps worth keeping an eye on the unemployment rate in Germany, expected to tick up to 6.2% from 5.8%. Got a range of 5.9% to 6.8%. Uh, the UK service PMI final reading, that's coming out as well a bit later, um, this morning, and that'll be at 9:30. And then you've got the Eurozone unemployment rate at 10 o'clock. Um, the focus then in the US session turns towards the build-up for non-farm payrolls. Of course, that's coming on the jobs report on Friday. So today we get ADP. ADP is expected to show another quite stark negative reading. The expectation is for -9 million, the range -12 million at the low to a high, most optimistically, of just -200,000. But remember, -9 million in private payrolls is a pretty huge number, but is actually an improvement because the prior month, of course, we had a loss of 20.236 million of jobs. So something similar that we're anticipating there for payrolls. So an accumulation unemployment rate obviously is going to go up on a median basis up to expectations are just shy of 20%, but a bulk of that had already come uh, in the April reading. Remember, in May, part of the US economy had already started reopening, hence the number's not going to be as just, uh, or not as dramatic in that sense. Otherwise then, other than ADP, you get the US factory orders coming out 3 o'clock. You get ISM manufacturing PMI as well. You've also got the Bank of Canada interest rate decision, uh, rates expected to be be left on hold at 0.25%. Then you've got the oil inventory numbers in the afternoon. So that's it, not gonna go any further than that. Gonna let you guys get on with your day. Any questions, please feel free to, to leave a comment on the video. And remember to subscribe to the channel, and I'll see you guys tomorrow. All right, thanks very much.