Virus Resurgence a Match for Liquidity? Virus Resurgence a Match for Liquidity? Virus Resurgence a Match for Liquidity?

Virus Resurgence a Match for Liquidity?

Summary:  Following the relentless run up in risky assets off the March lows, we are seeing 2-way price action return to the market. USD strength is resuming as risk sentiment sours and gravity is visible once again in risk assets.


Last week’s price action underscored that despite the aggressive rebound off March lows, a degree of fragility remains. Of course, markets are all about 2-way price action and it is fair to say, prior to last week’s sell off, price action had been very one-sided, with sentiment and positioning reaching extremes. Bankrupt companies were flying, the put-call ratio was close to 10-year lows and sports betters were morphing into fully-fledged portfolio managers. Speculation was rife and complacency a foot. However, the pullback we saw on Thursday, although warranted given extremes in positioning, revealed more than just the extreme speculation driving markets higher in recent weeks. The realised move in the S&P 500 was far greater than the implied daily move in the S&P 500 from the VIX index. Here, there are a number of conclusions we can draw:

  • We know markets are not normally distributed in any case, but last week’s 4 standard deviation move in the S&P 500 confirms active fat tail risk is in play
  • Despite meeting the technical definition of a bull market (20% off lows), price action is not characteristic of a secular bull market, revealing an underlying fragility
  • As my colleague Peter Garnry notes, VIX not indicative of a bull market
  • Combined, we urge caution.

However, these are unusual and uncertain times. We know that fundamentals are wildly disconnected from market pricing, something my colleagues and myself have discussed at length in recent weeks. However, does that mean we are ready to call time on the liquidity induced mania revealed in recent weeks.

At this stage we would argue that although fundamentals will eventually trump liquidity, the liquidity driven narrative has proved strong and tough to break, particularly as the lack of appealing alternatives and the expectation that rates will remain low for an extended period drives investors up the risk spectrum into equities (TINA). Conditioned by the central bank put to “buy the dip” these investors are reaching for yield and piling into risky assets (FOMO). The existence of this dynamic perversely dictates one need not be positive on the expectations of a swift economic recovery, to be long stocks (and by default short cash/efficient markets/price discovery). Post consolidation/retracement these factors are likely to remain key drivers of continued upside and will persist in lending an underlying support to risky assets.

As we said last Tuesday, prior to Thursdays sell off, for short-term traders, now is the time to tighten stops and book gains. We maintain this defensive stance on risk.

The news cycle has certainly turned for the worse and it is clear the world still has a COVID-19 problem. Fresh lockdowns in Beijing, an uncontrolled first wave in the US and EM’s (India, Peru, Brazil, Chile, Pakistan) struggling to control the pandemic locally corroborate a cautious stance. In Beijing, “The risk of virus spread is very high, and resolute and decisive measures are needed to prevent further spread,” vice premier Sun Chunlan said during a state council meeting on Sunday, as reported by state media.

Without a vaccine, as lockdowns are lifted a persistent and growing first wave presents a clear risk for a true second wave resuming in the Northern Hemisphere once colder weather remerges. This would be a real hurdle that extended valuations fail to reflect. These risks are now being more adequately considered, but for how long is the question. In the current paradigm, when the only bull market is in intervention, the cynic in me wonders how long until the newswire, “a vaccine is close” crosses!

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.