Capital Markets: "New Record Number of Covid Cases Doesn't Curtail Appetite for Risk"

From Marc to Market:

Overview: A new daily high number of contagions globally has been reported, but the risk-appetites have been stoked. Chinese stocks have been on a tear. The Shanghai Composite rallied 5.7% today to bring the five-day advance to 13.6%. Most other regional markets, including Hong Kong, rallied as well (3.8%). Australia was the main exception, and it pulled back by 0.7%. It is still up a solid 3.4% over the past five sessions. European shares are advancing. The Dow Jones Stoxx 600 is up around 1.4% near midday and has gained four of the five sessions last week. US shares are up around 1%, positioning the S&P 500 to open near the pre-weekend highs. Bond markets are little changed. The US 10-year is hovering near 70 bp. Italian bonds are rallying with risk assets, and near 1.22%, the yield is about half of the three-month peak. The dollar is trading lower against nearly all of the currencies. Among the majors, the yen and Canadian dollar are laggards, and in the emerging market universe, the Russian rouble and Indian rupee are heavy. Gold is trading in a narrow band on either side of $1775, and August WTI is straddling $41 a barrel.

Asia Pacific
President Trump has not signed legislation that would sanction Chinese officials involved with the new national security law in Hong Kong. However, the signals from Washington suggest further action will likely be taken in the coming days. Meanwhile, the UK government claims that a turn in the past six months demonstrates the danger China poses and looks to expedite the departure of Huawei from its 5G build-out. Underlying this is the US ban on Huawei, which forces it to use "untested" equipment whose security could be compromised.

The Reserve Bank of Australia meets tomorrow. It is unlikely to take new initiatives. The current policy stance, including targeting the 3-year yield at the cash target rate of 25 bp, appears to be working at the moment. The yield curve control, as has been the case in Japan, seems to require fewer bond purchases than one might have expected to maintain the target.

The dollar continues to find support around JPY107.30. Nearby resistance is seen in the JPY107.80-JPY108.00 area. Three-month implied volatility fell below 6% at the end of last week for the first time in a month before the weekend. There was little reaction to the news that Tokyo Governor and potential Abe successor, Koike, was re-elected to a second term. The Australian dollar is extending its advance for the sixth consecutive session and reached $0.6985, the highest in almost a month. Initial support now is pegged around $0.6950. Last month's high was set near $0.7060, and its the next important target. The PBOC set the dollar's reference rate a touch higher than the models suggested. It appears to be a mild attempt to limit the dollar's decline today. It is off by about 0.5%, which is one of its largest moves in the past three months. Separately, note that China reportedly has tightened the disclosure rules for large withdrawals, a step on the capital control escalation ladder.

Europe....

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