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Not As It Seems

As we wrote in our weekly report yesterday, with Trump’s support eroding, expect the rhetoric against China to be ramped up in the days ahead and volatility to remain high. So, it begins…

23 Jun 2020


As of New York Close 22 Jun 2020,


U.S. Dollar Index, -0.75%, 96.89
USDJPY, +0.01%, $106.90
EURUSD, +0.90%, $1.1278
GBPUSD, +1.16%, $1.2501
USDCAD, -0.74%, $1.3505
AUDUSD, +1.40%, $0.6930
NZDUSD, +1.34%, $0.6494


S&P500, +0.65%, 3,117.86
Dow Jones, +0.59%, 26,024.96
Nasdaq, +1.11%, 10,056.47
Nikkei 225, -0.23%, 22,426.50


Gold Spot, +0.68%,1755.53
Brent Oil Spot, +2.74%,42.75


Risk sentiment started the Asian session weak after a weekend of heightened political worries stemming from fresh allegations by Bolton’s book of Trump misconduct and escalating cases of Covid-19 in several states in the US. However, as the day progressed, buyers appeared out of the woodwork and risk currencies outperformed, with the AUD rallying 1.40% to $0.6930 against the greenback. Emboldening buyers of the AUD, Reserve Bank of Australia (RBA) Governor Philip Lowe said the currency’s recent rise was not a problem and the impact of the pandemic would not be as bad as feared.

U.S. Treasuries finished little changed after starting the session with small gains. The 2-yr yield was unchanged at 0.19%, and the 10-yr yield increased one basis point to 0.71%. The U.S. Dollar Index declined 0.75% to 96.89. WTI crude futures rose 2.2%, or $0.86, to $40.60/bbl.

S&P 500 gained 0.7% on Monday, but it was the Nasdaq Composite (+1.1%) that continued to steal the spotlight. The tech-sensitive index closed at another record high and rose for the seventh straight day amid strength in the mega-cap technology stocks. The Dow Jones Industrial Average increased 0.6%, and the Russell 2000 increased 1.1%.

Notably, Apple (AAPL 358.87, +9.15, +2.6%) and Microsoft (MSFT 200.57, +5.42, +2.8%) gained more than 2.5%, hit fresh all-time highs, and boosted the top-weighted S&P 500 information technology sector (+1.9%) to the top spot today. The utilities sector (+1.3%) followed suit, while the health care (-0.4%) and financials (-0.5%) sectors lagged.

Apple received a lot of attention today due to its annual Worldwide Developers Conference, although most of the stock’s gains came prior to the widely-watched event. On a related note, Cowen raised its price target on AAPL to $400 from $335 before the open. Microsoft and other tech giants rose on no specific news catalysts.

As for the virus situation, the U.S. exceeded 30,000 new cases on Saturday for its highest daily level since May, but some of the hotspots in the country did report a lower count on Sunday. Vice President Pence also called attention to the increasing rate of infections among younger people, according to ABC News.

In other developments, Nike (NKE 99.51, +3.73, +3.9%) received a price target increase to $112 from $96 at Piper Sandler, American Airlines (AAL 14.92, -1.08, -6.8%) announced plans to raise $3.5 billion in capital through stock and bond sales, and Virgin Galactic (SPCE 17.39, +2.39, +15.9%) partnered with NASA for a private orbital astronaut readiness program.

On the geopolitical front, White House trade advisor Peter Navarro said on Monday the trade deal with China is “over,” and he linked the breakdown in part to Washington’s anger over Beijing’s not sounding the alarm earlier about the coronavirus outbreak. “It’s over,” Navarro told Fox News in an interview when asked about the trade agreement. He said the “turning point” came when the United States learned about the spreading virus only after a Chinese delegation had left Washington following the signing of the Phase 1 deal on Jan. 15.

However in rebuttal, Trump’s chief economic advisor Larry Kudlow disputed comments from Trump’s trade advisor Peter Navarro, who said Monday night on Fox the U.S.-China trade deal is “over”, maintaining that the U.S. remains engaged in the deal signed on Jan 15.

U.S.-China relations have reached their lowest point in years since the virus pandemic that began in China hit the United States hard. Trump and his administration repeatedly have accused Beijing of not being transparent about the outbreak.


Indian and Chinese military commanders met on Monday to try to ease tensions at their disputed Himalayan border as the public mood hardened in India for a military and economic riposte following the worst clash in more than five decades.

Major Indian traders called for a boycott of Chinese goods and the state of Maharashtra, home to India’s financial capital of Mumbai, put three initial investment proposals from Chinese companies worth 50 billion rupees ($658 million) on hold, just days after signing the agreements.

An Indian government source said commanders met in Moldo, on the Chinese side of the Line of Actual Control, the de facto border dividing India’s Ladakh region from the Chinese held Aksai Chin. The meeting lasted several hours, with the Indian side pushing China to withdraw its troops back to where they were in April.

IMPACT: The Confederation of All India Traders (CAIT), which represents some 70 million traders, has asked federal and state governments to support a boycott of Chinese goods and cancel government contracts awarded to Chinese companies. China is India’s second-biggest trading partner, with bilateral trade worth $87 billion in the fiscal year ending March 2019, and a trade deficit of $53.57 billion in China’s favour, the widest India has with any country.

Quoting from yesterday’s commentary, “The India-China conflict is key to watch as this event is a huge tailwind wind to the anti-china rhetoric that is gripping most of the western and “democratic world”(i.e. Australia, Philippines etc). India is the perfect counterweight to China in terms of size (almost equivalent) and demographics (superior demographic, largely young vs an aging Chinese population). Watch out for the Trump administration to throw its weight behind the situation and ramp up the rhetoric against China. In addition, India might be the beneficiary of the reshored supply chains out of China for the western world.”


Health authorities in South Korea said for the first time on Monday it is in the midst of a “second wave” of Covid-19 infections around Seoul, driven by small but persistent outbreaks stemming from a holiday in May.

On Monday, KCDC director Jeong Eun-kyeong said it had become clear that a holiday weekend in early May marked the beginning of a new wave of infections focused in the densely populated greater Seoul area, which had previously seen few cases.

As of midnight Sunday, South Korea reported 17 new coronavirus cases, the first time in nearly a month that daily new cases had dropped below 20. It was a drop from the 48 and 67 cases reported in the previous two days.

South Korea has reported a total of 12,438 cases, with 280 deaths.

IMPACT: Quoting from our yesterday’s commentary, “First it was Beijing reinstating restrictions, now it’s Australia. The commonality between these two is that they have been extremely successful in containing the virus and having to deal with another rise in cases after lockdowns have been relaxed is a leading indicator that a second wave is inevitable.” To add, South Korea was also relatively successful in containing the virus, to see a resurgence in cases in these countries only means the world will get hit by a 2nd wave, it’s almost an inevitability at this point, but how will asset prices react this time?

Quoting from our 8th June 2020 commentary, “The 3rd — 4th Week of June will be a crucial period to watch for rapid reinfections. Our view is equity markets may sell off very briefly while bond yields fall and gold rises. However, we do not think equity markets will fall for very long on a potential 2nd wave before they begin screaming higher (paradoxically) on expectation of another shutdown, followed by the Fed re-accelerating their balance sheet growth meaningfully (remember, they just added $3T in under 3 months.)

We continue to believe that Gold, Silver and Nasdaq will outperform.


The world recorded more than 183,000 new coronavirus cases on Sunday, the most in a single day since the outbreak started in December, WHO chief Tedros Adhanom Ghebreyesus said. Global cases surpassed 9 million on Monday, with the United States, China and other hard-hit countries also reporting new outbreaks.

IMPACT: Quoting from our previous week’s commentary, “It confounds us to think that the world (mainstream media) thinks a 2nd wave is a tail risk event for markets. Given the amount of data collected with regards to Covid-19 (transmutability, infection curve etc) and amount of compute power we have in these times, it would have been relatively easy to model the resurgence of another wave given the data inputs of mass protests globally and lack of adherence to lockdowns. We would like to believe that the “smart money” already have this information and are positioned into the rally in anticipation of central banks backstopping any selloffs.”

What surprised us was the laggard reporting and acknowledgement by organizations and governments that a 2nd wave is inevitable. Given the lack of adverse reaction from markets to this piece of news from the WHO, it leads us to believe that our initial thesis of market positioning to be intact.



New Zealand is one of the few countries that can claim it has successfully eradicated the deadly virus, and the RBNZ will probably be feeling good when it meets on Wednesday, as the economy has exited the lockdown much faster than policymakers assumed in their latest forecasts. That allows for a faster return to economic growth.

But the RBNZ will be careful not to sound too optimistic, for fear of propelling the kiwi even higher. The currency has gained 17% from its March lows and is now comfortably above its pre-crisis levels, which is a problem as it makes the nation’s exports less competitive abroad. Furthermore, even if New Zealand is virus-free, its borders will still remain closed for a long time, which could decimate the tourism industry.

The point is that recent developments have surely been better than expected, but the economy is not out of the woods and many risks linger. Hence, the RBNZ will probably maintain a balanced tone, highlighting the encouraging news but simultaneously reaffirming that it stands ready to do more if needed, thereby keeping a lid on the kiwi’s advance.


OVERALL SENTIMENT: Risk sentiment started the week on a weak note during Asian hours but progressively strengthened throughout the day for no obvious reason. Stocks closed near the highs of the day and continued to trade strong to start the Asian trading until White House advisor, Peter Navarro, reportedly told Fox News that the Trade Deal with China is over. Stock indices dived more than 2% and AUD more than 1% as risk aversion took hold. Within an hour, Navarro clarified that his comments were “not as it seems”, and the market reversed. As we wrote in our weekly report yesterday, with Trump’s support eroding, expect the rhetoric against China to be ramped up in the days ahead and volatility to remain high. So, it begins…


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