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Risk on prevails pushing stocks higher

Risk on prevails pushing stocks higher

It is a firing start to the trading week as significant indices are in the green as risk on prevails. The SP500 reached a gain of 3%, breaching that psychological 3,000 mark. Although bears took some control near the end of the trading day, the sentiment was overall bullish.

I feel as though we have seen this repeatedly for the past 2 weeks. Restrictions on lock down are loosening, major central banks are providing unprecedented amounts of liquidity, and the backbone of the US economy, the consumer, is shopping again. However, recent economic data is disastrous; central bankers' words don't match the markets, and tensions between geopolitical parties have only gotten worse. Why has the market been so detached from real life recently?

SP500 popping off at the start of the US trading week for the past two weeks

Risk on in a low yield environment, killing institutional investors

With interest rates all around the world nearing 0%, institutional investors are grasping onto any positive yields in the market. It could also be due to an influx of all around the world retail investors "buying the dip". Another reason could be traders moving big lots taking advantage of the risk-on / risk-off dynamic. Whatever the case, it is evident that this risk on/risk on dynamic will continue to prevail in the markets if there is no vaccine.

However, there are some real markers of the economy recovering

The AUD/USD pair typically associated with risk on has been rallying in the past couple of weeks. With manufacturing across the world slowly starting up again, signs of economic activity have been showing. With summer arriving in a couple of days in the United States, a pick-up in oil demand is predicted to occur as Americans scratch the urge to take a holiday in a period where air travel still leaves a distaste in many peoples' mouths.

Tensions are rising in this risk on rally

It would be reasonable to think that in times like these, where a virus had ravaged the world out of nowhere, there would be unity and cooperation between all geopolitical powers. However, it seems like China has setting many bridges on fire lately. China against the United States, Hong Kong Taiwan, Australia – is not the sign of unity. However, it is not just China throwing hands. United States cutting ties and funding with the WHO is another example of how politics gambles with regular people's lives.

As China and Hong Kong protests start up again, concerns over the future of Hong Kong become real. 3 days ago, China's parliament said that it would impose a new national security law, with Hong Kong Citizens fear that this may be the last straw before the freedom that they have had enjoyed under colonial the United Kingdom's colonial rule. A Hong Kong expert at the Shanghai Institutes for international studies, Zhang Jian, told the Financial times that the national security law "Will reignite the protests but that's not a reason to give up [with regards to Xi's power move into Hong Kong] ".

We have yet to see an ounce of certainty in the past two weeks. Traders should be cautious and keep an eye out on any news that may fundamentally affect their trading strategy.

Andre Almeida has brilliant analysis technical on USD/CAD. You can watch it here.  

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