Back from the Abyss and the 250-pt ride

Markets have a few more days of risk-on before Wednesday's FOMC meeting. Will this be a case of a quick ascent to 35090s in the DOW and 4400s in the S&P before Wednesday? Will we see 0.71 NZDUSD? More below.  At the start of the week, markets looked with panic into the abyss of another covid crisis. But a few days later the mood has shifted as the market weighs the risks as 10yr yields respected their 100-WMA and SPX held above its 55-DMA for the 3rd time in 4 weeks.  The Markit PMIs for UK and EU were disappointing, but didn't orevent yields from firming, further propelling yen crosses across the board. We turn to Canadian retail sales next. DOW30 and SPX completed their way to 35000 and 4390 with the help of a gradual ascent in yields as was foretold below on Wednesday to the WhatsApp Broadcast Group 2 days

The turnaround from Monday's pessimism has been impressive. The US CDC underscored covid risks on Thursday by highlighting a 53% week-over-week rise in cases and that some hospitals are reaching capacity. That led to a momentary drop in equities, yields and risk trades in general.

Once again though, the market shrugged it off. As we dwell on it, the ultimate question regarding covid is simple: Will vaccines work? Anti-vaccine sentiment is unfortunate but it's largely held by younger people who are totally active in the economy. They may get sick but they'll fully participate in the economy beforehand (and hopefully afterwards).

Of course, vaccine efficacy isn't a black/white question. There are degrees of success and problems – particularly in schools – if vaccines are spotty. The delta variant is problematic on many levels but data continues to show that all vaccines offer extraordinary protection. So unless (or until) there's a variant that truly beats the vaccine, then economic growth will recover. To be sure, the latest news could slow the trajectory of the recovery and stretch the timeline but we're confident that will be met with more fiscal and monetary support.

With regards to next Wednesday's FOMC meeting, there's talk of using the meeting as the start of real discussions on the timing and size of tapering, a topic that will be debated in more detail at the Jackson Hole symposium 4 weeks from now. The key then is how will Powell communicate this discussion at Wednesday's press conference.

There are challenges worth monitoring closely but AUD/USD is at 7-month lows, so much of that is surely priced in.China's crackdown on tech stocks is also weighing on the pair. 

What's less clear is how strong the response will be in reopening economies. We will get two data points on that question on Friday with the Markit US services index and Canadian retail sales. The latter report is for May but Statistics Canada is also releasing month-ahead estimates, so key on those as June was an important reopening month for much of Canada.