Liquidity Gusher to Keep Risk on Front Foot While Virus Persists

(Bloomberg) -- The Covid-19 pandemic may be far from beaten but investors won’t mind as long as policy makers keep offering them the hand of reassurance.

While central banks led by the Federal Reserve continue to ensure markets are awash with liquidity, risk assets -- principally stocks -- will remain on the front foot. The S&P 500 Index ended Friday in the red as data showed record levels of the virus in Florida and Arizona, but it merely dented the gauge’s fourth weekly advance in five. Moreover, volatility as measured by the Vix index eased back after the previous week’s surge.

“People are afraid of missing out this next rally,” Saed Abukarsh, the co-founder of Ark Capital in Dubai, said in an interview with Bloomberg Television. “The narrative this week will remain market-supportive.”

As ever, signs of the risks loom large. While stocks climbed, the dollar held firm against its most-traded counterparts and U.S. 10-year Treasury yields ended the week little changed at 0.70%. Middle East markets were subdued Sunday, with Israel’s benchmark stock index falling 1.5% as the country paused plans to further reopen the economy after an increase in coronavirus cases.

The following is a round-up of comments looking ahead to a week in markets:

A team at Bannockburn Global Forex LLC in Cincinnati:

• “The recent price action, and in particular, the sideways trend in many segments of the capital markets, reflects the challenge investors are having in separating the wheat from the chaff.
• “The strong co-movement of risk assets has weakened. There is a lack of near-term visibility and contradictory signals, while the trends in place since March have stretched valuations and complicate risk-reward calculations.”

Zach Pandl, a New York-based strategist at Goldman Sachs Group Inc.:

• “Even though market concerns about new infections have centered on a few U.S. states, the dollar can still benefit from ‘second wave’ fears due to its traditional safe haven properties and its role as an international currency.
• “At the moment we do not see major risks of a second wave in the U.S. or other large economies, and our economists forecast a relatively steep rebound in activity over the next few months. Indeed, they revised up their near-term forecasts last week. This should allow for a continued pro-cyclical rotation across assets and renewed Dollar depreciation.”

Saed Abukarsh, the co-founder of Ark Capital:

• As the U.S. and Europe continue to reopen, “we do expect a rebound in cases but unlike in previous months, I think it will be more centralized events rather than a thematic idea.
• “We will see some coronavirus rebound in certain states. The government’s response is very different now.”
• When looking at equity markets, “we’re pricing in so much a super V-shaped recovery. I think the market got a bit ahead of itself in terms of expectation.
• “I think we need to wait until next month, when I think we’ll have some tangible data out of Europe and the U.S. will reflect any hiccup in growth.”

Timothy Fox, the head of research and chief economist at Emirates NBD in Dubai:

• “The dollar was firmer last week as the equity markets hesitated, but the extent of its gains was small. Market enthusiasm for economic stimulus measures remains high, and data has also improved overall, but concerns remain about a second wave of coronavirus and there were also geopolitical tensions last week between India and China.
• “Global bodies like the OECD and World Bank are increasingly downbeat, as were the Fed and the BOE, and the IMF is expected to downgrade its forecasts later this week as well.
• “Markets may also be noticing that the Fed, for all its talk of maintaining its current pace of QE, has been “tapering” its purchases of U.S. Treasuries to about $20 billion a week. Its message on policy rates has also been very dovish and the futures market does not expect any increase in the fed funds rate before the end of 2023.
• “So long as a further crisis sparking extreme risk aversion is avoided, the aggressive cuts in U.S. rates over the last three months and the prospect for them to remain low into the medium term is not particularly bullish for the dollar, especially given the U.S.’s twin budget and current account deficits.”

Stephen Innes, the chief global markets strategist at AxiCorp in Bangkok:

• “The speed and size of the fiscal response to the downturn have helped to cushion households through this downturn. But if the flu continues to spread, consumers will feel unsafe to leave their homes. Still, store closures and possible government-mandated lockdowns will hamper consumers’ ability to spend that money. They could bring large sections of the U.S. economy to its knees.
• “Given it is a reasonably quiet but backloaded docket, the week ahead focus will remain squarely stateside where the most unsettling economic tail risks exist.
• “On the U.S. economic calendar, Thursday’s initial jobless claims data will be incredibly valuable, as that data gives a high-frequency peek into the state of the labor market. Last week’s data only showed minor improvements in both initial, as well as continuing, claims, suggesting that labor market progress may be stalling out since May’s blockbuster jobs report.”

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