Risk assets defy US riots

Investors and traders were cautiously awaiting the market reaction to the violent protests in the US, as clashes between protesters and police spread out across American cities following the killing of George Floyd at the hands of Minneapolis police.

US stocks futures indices initially declined at the open with the Dow Jones Industrial Average falling more than 200 points, but it did not take long to recover with all major indices back into positive territory.

While riots and violent protests may harm economic activity, especially given that many states have just begun unlocking their economies, investors do not seem to be concerned at this stage and believe the impact is insignificant on their portfolios. However, if protests begin to develop further and spiral out of control potentially leading to viral transmission of Covid-19, then we may see a different reaction in markets.

Upbeat economic data from China and no specific new measures against Hong Kong from Trump’s administration on Friday also helped set the positive mood in Asia. Despite China’s factory activity growing less than anticipated, it remained in positive territory at 50.6, with services and construction activity appearing to be strong enough to boost confidence in the world’s second largest economy. Non-manufacturing PMI rose to 53.6 in May, up slightly from April’s reading of 53.2 and construction activity rose 1.1 points to 60.8 in May from the previous month.

Asian stocks rallied across the board early Monday, with Hong Kong’s Hang Seng index leading the gains and surging more than 3%. MSCI Asia ex-Japan index jumped more than 2% supported by a 2.5% rally in Shenzhen stocks, while Australia’s ASX and South Korea’s Kospi were more than 1% higher.

Strong gains were not just limited to equities. The risk-sensitive Australian dollar is the best performing G10 currency today, surging more than 1.2% against the greenback to a three-month high of 0.6756. The price of iron ore, which hit a record high today, is also another factor helping the surge in the Aussie.

If markets are right in their assessment of the global economy and the worst is truly behind us, we may see further gains in commodity currencies and continued selling in the US dollar. Investors will need to keep a close eye on how the US protests develop over the coming days and whether they become more violent, leading to a reconsideration of the impact on economic activity.

The other two big events this week are Thursday’s ECB meeting and Friday’s US employment data. After the ECB projected an expected contraction of 5–12% in 2020, the key question is whether they will extend the asset purchase program and if so by how much, with consensus expecting an expansion by €500bn into June 2021. This meeting will further help investors assess their decisions in adding risk assets to their portfolios. Meanwhile in the US, the unemployment rate is expected to jump to near 20%, with 8 million additional jobs being lost. However, it is not the absolute figure that matters now, but the rate of change and I think at this stage, the initial jobless claims figures provides a better indication.