Yield Curve, Sector Rotations & Covid-19

07/13/2020 9:10 am EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

Adam Button breaks down major market activity going into this week.

Global stock indexes sent mixed signals as a result of more bad news on the Coronavirus pandemic front, which was partly offset by positive findings from Gilead Science Inc. (GILD). A study showed that GILD’s remdisivir Coronavirus treatment indicated a 62% decline in death risk vs standard care.

As the S&P 500 and EUR/USD currency signaled a Golden Cross (its 55-day moving average crossed above its 200-day moving average) the U.S. Dollar Index experienced a death cross (200-day/55-day moving average cross.

Forex Update

Relentless dip-buying in tech supported equities Thursday but the bond market painted a more-troubling picture. The Canadian dollar (CAD) was the weakest currency at the of last week alongside the Australian dollar (AUD), despite an upside surprise in Canada's employment numbers.

The Japanese yen (JPY) and British pound (GBP) lead the way Friday, with the pound revisiting Thursday's 1.2660s high, keeping Thursday's Premium long in cable +160 pips in the green.

At 17:30 Friday London time, the Nasdaq was down -0.2%, while Dow Jones and S&P 500 indexes were up more than 0.5%. Risk trades soured Thursday on stubbornly high U.S. unemployment claims and troubling Coronavirus signs, but after a minor rout, Nasdaq dip-buyers stepped in once again to limit the damage.

However, it was a different story in the bond market as 10-year Treasury yields fell 5 basis points and the U.S. 30-year Treasury bond fell 8.6 basis points as the long end of the yield curve struggled, creating an unwind on the steepening yield curve trade.  Long bond yields are now at the lowest since May 15 in a growing sign of the demand for safety.

Florida Coronavirus cases breached the seven-day moving average, while Arizona's rise matched its average. Schools closed in Hong Kong due to a sharp rebound in cases, while a shrimp market in China was closed. 

As Ashraf said to his WhatsApp Broadcast Group, he expected more buy-the-dip in stock indices in select levels as long as US crude held $39 and subsequent $37.80. 

One of the things market bulls frequently cite is the low U.S. mortality rate, but that's showing troubling signs as well. California and Florida both reported record one-day highs late last week. 

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