Time to be Bullish?

The market’s reaction to this week’s macroeconomic events shows that it’s going to take more than the boy who cried wolf to stop the recovery.

The recurring theme this week is that it’s going to take something much more substantial to sustain downward pressure on the market.
Although the outcome of the EU Summit has the potential to move markets, it would not surprise me to see assets remain rangebound through early next week and I have highlighted five reasons to be bullish about an economic recovery.

The boy who cried wolf:

Reason one: No sustained impact following Donald Trump’s escalation of the US-China trade war.

 

If you don’t follow Donald Trump on twitter, you’re missing out in more ways than one. More than any prior president, Mr. Trump’s use of social media has profoundly impacted market sentiment. However, has the market finally lost patience with his back and forth over the US-China trade war?

Setting aside the Covid-19 developments in California for a moment, on Monday the market nevertheless reacted negatively to Washington rejecting China’s claims in the South China Sea. The unusual nature of such a public stance on this matter was treated as an escalation of the trade war tensions, resulting in a large sell off in the S&P500 late on Monday (Highlighted on Diagram 1. Source: CMC Markets). Previously, this escalation may have resulted in a sustained depression, however, within 24 hours the market had already reversed the move (Highlighted on Diagram 1).

Interestingly, President Trump’s statement on Wednesday, indicating his wish not to escalate the trade war, had little market impact, perhaps reflecting the market’s growing immunity to his posturing. This suggests that we need to look elsewhere for the catalyst of Monday evening’s sell-off.

 

 

 

Covid-19 Developments:

 

Reason two: The most prevalent macroeconomic factor influencing the market nevertheless sees sell-off reversed within twenty-four hours.

 

Mainstream media reports that daily confirmed Covid-19 cases in the US are rising. However, US daily tests have risen from a 100,000 7-day average on March 28^th, to a 650,000 7-day average by July 4^th. Increased testing may be leading to more mild cases being confirmed, as illustrated by the flatlining of the amount of US hospitalised Covid-19 cases.

 

This excludes California, Florida and Texas who represent nearly a third of the US population. Therefore, a development such as California closing indoor operations statewide, resulted in an S&P500 sell-off at the close of wall street on Monday. This clearly indicates that the market is currently more sensitive to Covid-19 developments than US-China relations. As such, California’s announcement was most probably the catalyst for the aforementioned movement highlighted in Diagram 1.

Similar closures are being considered in other states, experiencing the highest number of daily confirmed cases, yet the lack of persistent downward pressure and a speedy reversal of Monday’s sell-off, suggests the market isn’t bearish over these developments.

 

Rangebound Movement for Oil Commodities:

 

Reason three: Despite a pop, price movement in oil has seen a faded reversal and remained rangebound.

 

The API inventories announcement on Tuesday saw the Crude and Gasoline levels far lower than expectations. A notable -8.322 million draw in crude (the largest since December 2019) and a -3.611 million draw in Gasoline. Despite causing a pop in oil prices overnight – to just over 40.73 – this move was faded out by Wednesday morning. Similarly, the market was prepared for OPEC to follow through with the expected tapering back of supply cuts and so the price has remained rangebound with no sustained breaks to the upside or downside.

 

Dovish Rhetoric Fuelling Bullish Sentiment:

 

Reason four: A naturally centrist FED Governor advocating a dovish approach fails to cause market to question recovery in the medium-term.

 

Lael Brainard ramped up the dovish rhetoric on Tuesday, as she suggested that new policy tools may be needed to support a weak economic recovery. Conversely, this may have provoked the

market to be bullish in the medium term, as her announcements resulted in little movement. I believe that bullish sentiment may become self-fulfilling as traders see the depressed reaction from the market and confidence continues to grow.

 

Real Narrow Money vs Broad Money:

 

Reason five: The view that broad money is a positive indicator of a v-shaped recovery.

 

Central banks across the globe are experimenting with a combination of fiscal and monetary stimulus, and we have seen a sharp increase in liquidity. ‘Real narrow money,’ is often seen as ‘financial money’ that doesn’t reflect liquidity levels throughout the wider economy. Real narrow money graphs showed an instant increase following a central bank’s decision to implement QE, however, broad money remained consistent.

 

An increase in ‘broad money’ means that liquidity is moving through the system and recent increases may incentivise investors to choose more economically sensitive positions in H2. Using broad money as a key indicator of economic recovery, we can anticipate a v-shaped recovery.