At some point economic numbers need to match the market enthusiasm, doesn’t it, asks Adam Button.
A big question is to what extent will the market wait for the economic recovery to appear in the data, especially given that additional U.S. unemployment benefits run out at the end of July. It's a heavy week for U.S. economic data leading up to Friday's employment situation report, which is expected to show a 19.5% unemployment rate.
One way to grasp the divergence between economic data and market performance is simply believing that the Coronavirus has disappeared. Tuesday was another huge day for risk assets with Aussie dollar (AUD) leading and the Japanese yen (JPY lagging). The Bank of Canada decision on interest rates will be closely followed with Tiff Macklem presiding as Governor for the first time.
The Coronavirus pandemic 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. Intensive Care Unit 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 U.S. riots. That speaks to the theme of elevated U.S. government spending and that should spill over into commodities and commodity currencies first. Meanwhile the real economy remains 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.
In equity markets, Europe is playing catch-up to U.S. stock 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 Laidi raised the question of whether the 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 commit to higher asset purchases. On Tuesday, the moves were spectacular with yen crosses slammed lower and emerging market currencies soaring, including Latin American currencies where the virus is currently raging.
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 Reserve Bank of Australia’s (RBA) decision boosted the Aussie dollar after RBA Governor Philip Lowe said it's possible the depth of the downturn will be milder than expected.
The Bank of Canada may strike the same tone on Wednesday, 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.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
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