Stock Market Set Up Bounce Off Covid-D Concerns

The US Dollar came under moderate pressure during the London morning session, which pushed the narrow trade-weighted DXY index back towards yesterday’s low at 92.24, down from levels above 92.50. EUR-USD concurrently lifted above 1.1850, towards the three-day peak that was seen yesterday at 1.1868. Cable saw a similar price action, while the hard-hit dollar bloc currencies managed to recoup some of their losses seen during yesterday’s risk-off positioning rout. 

Risk aversion was off and running Thursday. Treasury yields plunged, along with Wall Street, as reflation trades were deflated. The 10- and 30-year rates dropped to challenge 1.2479% and 1.855%, respectively, before inching back up to 1.29% and 1.917% areas late in the day. The 10-year yield has dropped for 8 straight sessions, with the 30-year posting its 5th consecutive decline. The 2-year fell 2 bps to 0.198%.

Concerns that the Delta covid variant could derail the global recovery factored into the weakness in stocks with investors finally taking to heart the signal being sent by the drop in bond rates in recent weeks and months, reflecting doubts over the durability of the recovery. Some cited Japan’s decision to prohibit fans at the upcoming Olympics as a marginal factor.

Along with growth uncertainties, a short squeeze and technicals have impacted Treasuries and exacerbated the downdraft in rates. Meanwhile, the S&P 500 dropped -0.86%, with the Dow off -0.75%, while the NASDAQ slid -0.72%, but they were all off early lows. And additionally, Wall Street is coming off of record highs. 

The markets will continue to assess current conditions and market positioning. Several market research companies such as AlphaBetaStock.com remain generally upbeat on the economy but acknowledge the Delta variant and bottlenecks could limit expectations for very strong growth into year-end.

Bond bears were wrong-footed after the hawkish shift in the dots in June, as Fed officials have played down the inflation threat and have stressed a QE tapering is still off in the future, and that a hike is not even in the discussion.

Those have helped assuage inflation fears and helped knock rates lower. Treasuries were positioned too bearishly as well amid a steepening trade. the day’s calendar is thin with just wholesale trade.

Next week’s slate picks up with inflation reports including CPI, PPI, and trade prices, along with retail sales, industrial production, regional manufacturing PMIs, and consumer sentiment. Treasury supply is also on tap with 3-, 10-, and 30-year auctions.