Asia Markets: The remarkable ridiculousness of the equity rise

Markets 

US equities were more robust before the usual after-hours profit-taking set in on Wednesday. 

The S&P rose 1.4% to 3380 and closed just shy of February's record high of 3386. The fact that equities have mostly recovered all pandemic losses even as the real economy is nowhere near achieving that seems so remarkably ridiculous that I'm also finding it difficult to comment.

Investors have this proclivity to continually turn a blind eye to the lack of any progress on the US fiscal front while content to fade the always-cautious Fed. And the thinking is probably correctly: the more worryied they are, the longer rates stay low. 

But even worries around stalled US fiscal talks are partly offset by the US administration's conciliatory tone on China's compliance with the "Phase One" trade deal. The upcoming six-month assessment seems unlikely to prompt any significant fireworks, while investor optimism remains high on a vaccine cure that’s no longer being viewed as a pie in the sky. Not to mention investors continuing to run with the premise that during an election year no politician wants to wear the "Frugal Freddy" moniker.

But the long and winding economic road ahead was underscored by pessimistic Fed commentary overnight, with Boston Fed’s Rosengren (hawk) noting that the recovery may be losing steam and that continued stimulative monetary and fiscal policy "is critical".  Mary Daly (dove) from the San Francisco Fed indicated the recovery would not be V-shaped.

But don't tell President Trump that as he was out in full glory after the close, touting that the US economy is performing significantly better than Europe and the 50% rebound in the stock market signals a V-shaped recovery is in play.

After another choppy and busy day, risk assets held sway as the latest fiscal storm has passed – at least it appears that way for now. Despite rates higher again, there’s been a reversal of the past few days' actions with mega-cap tech back in the lead, healthcare acting much better, and most cyclicals underperforming. 

Forex

USDAsia traded with a bid tone in the Asian morning session yesterday as precious metals took a hit and the US dollar, in general, turned stronger but has partially reversed as, despite some paring of USD risk tactically, local Asia FX traders like to stay small-dollar shorts in select pairs while looking for better levels to sell at again on any potential squeeze higher ( CNH, KRW, and MYR).

But, overall, in G-10 and Asia FX the consolidation pattern in FX continues with some modest USD weakness again overnight. With stocks higher and the dollar lower, FX markets revert to trend which shows the USD is still very much in risk-on risk-off mode (stocks higher, dollar down, and vice versa).

Of course, the ambiguity of which direction the dollar should take is a bit head-scratching. It seems the lack of a US stimulus agreement is good for the dollar when logic would suggest the failure to secure a deal would cause the USD to weaken, given the threat it would pose to the recovery. Who said FX trades in a logical pattern these days?

The Ringgit 

My main view for the Ringgit, which has been consistent all along, has been that provided we clear the trade talk risk hurdle with China reaffirming the P1 trade deal, the local unit will revert to its newly found positive trend supported by higher oil prices, a better than expected global economic recovery and the likely shift to a weaker US dollar ahead of the September FOMC. However, rising US yields present a challenge to that view.