Chief Investment Officer
Summary: US markets continue to trade near or at the cycle high after data suggested American manufacturing activity is beginning to stabilize, albeit from a very weak level. Trump's talk about deploying troops to quell social unrest only having a small negative impact overnight. US-China tensions also receiving limited attention despite Chinese officials telling agricultural companies to pause purchases of some U.S. farm goods, thereby threatening an already under pressure Phase 1 trade deal. Crude oil holding steady near the recent highs with focus on whether the OPEC+ group of producers will extend the supply cuts when they virtually meet later this week.
What is our trading focus?
US500.I (S&P 500 Index)and USNAS100.I (NASDAQ 100 Index) – After managing to pull to new highs for cycle last week, the S&P 500 has now traded four days within a relatively tight range with the 200-day moving average at $3000 being the support. The Nasdaq 100 meanwhile closed at a new cycle high on Monday at $9599, just 1.4% below the February record high. Both futures trading softer this Tuesday as the market after President Trump promised to deploy large numbers of troops to quell social unrest across the country.
What is going on?
Riots in the US risks Trump deploying large-scale military personnel in the streets to control the situation. Riots are said to be the voice of the unheard and they show a society where the social contract is broken. The violent situation in the US will be a key test of technical sentiment in US equities that seems to be holding up this morning.
CBO (US Congressional Budget Office) says it could take 10 years for the economy to catch up after the COVID-19 economic shock which is basically a mirror image of what we observe in dividend futures on S&P 500 pricing in prolonged economic pain and low corporate profitability for years to come.
COVID-19 outbreak seems to be slowing down in some countries but WHO says this morning that evidence does not suggest that the virus is slowing down globally. Countries such as India and Brazil are both having problems bending the curve.
What we are watching next?
Chinalargest state-run agricultural companies halting US farm imports – Following comments from President Trump relating to China’s actions in Hong Kong, state-owned traders Cofco and Sinograin were ordered to suspend purchases of US soybeans and pork. Other sources have mentioned the import pause may also extend to US cotton. The move signals tensions between the US and China are flaring once more and the impetus to withhold trade commitments is waning. This puts the long-awaited Phase 1 trade deal in the firing line as China were already a long way from reaching purchase targets with the added economic pressures resulting from the COVID-19 pandemic.
Civil unrest – How will the large-scale protests in the US and curfews in some states play into the optimism relating to the US economy reopening. Risks of rising infection rates and ongoing business interruptions resulting from riots/curfews may have the capacity to dampen economic optimism.
Expectations are rising for ECB to expand its bond-buying programmes on Thursday to add stimulus while the political impasse in Europe continues to put the recovery at risk. The current €750bn ECB bond-buying programme PEPP (Pandemic Emergency Purchase Programme) will run out of bonds to buy by October in which the recovery will still be in a fragile recovery.
Civil unrest is mounting in the US, a scene that further exhibits the cratering divide between Main Street vs. Wall Street realities. Whilst not directly linked, the palpable anger relating to the death of George Floyd and the suffrage of Black Americans has likely been exacerbated by the depression era unemployment levels accelerating dissatisfaction with the prevailing establishment. However, these forces are complex, deep-seated and contain multiple moving parts, rendering both the cause and effect on society at large, as well as economies, rife with uncertainty.
Economic Calendar Highlights (times GMT)
0730 – Switzerland PMI Manufacturing (May)
0800 – Norway PMI Manufacturing (May)
1200 – Riksbank's Ohlsson gives speech
2230 – Australia Construction Index (May)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
