On Monday, the struggle continues to unfold between positive macro data and signals of the “second wave” which can be challenging to dismiss. Asian markets closed in deep red while European stocks are trading slightly below the opening in response to reports that some US states are reviewing plans to lift lockdowns or partially reinstate them.
A 6% increase in industrial profits in China in May YoY looks like an encouraging macro update, however details of the report show that growth concentrated in technological sector while other sectors lagged behind. In addition, reduced costs accounted for the better part of the profit growth, which of course includes increased layoffs and wage cuts which puts dent on consumer spending outlook in the month ahead.
The COT update from last Friday showed that large speculators sharply reduced short positions in S&P500 futures:
In June, the biggest net short position on S&P500 (long positions – short positions) was around -40K contracts, the lowest level since early 2016. As of last Tuesday, there was a sharp turnaround: the number of bets on decline fell by 28.7K contracts. However, bets on the rally of the index fell as well, albeit slightly, by 2.8K contracts.
Swift liquidation of short positions suggests that some market participants are finally dropping their “second dip” prediction, which in turn adds arguments that we may see the next leg of the rally after proper consolidation near the level of 3000 points. Nevertheless, the rally is currently being hindered by a “storm” of headlines about a second wave of Covid-19 and negative shocks in the form that some states are making adjustments to lockdown removal plans.
As for the other “hot spots” of the Covid-19 pandemic, the accelerating number of new cases in India is striking:
Over the past two weeks, the number of new cases per day has doubled – from 10K to 20K. Growth is concentrated in five large states (Delhi, Gujarat, Maharashtra, etc.), which account for 43% of GDP. Such a development of the situation prompts us not only to revise down the country’s GDP forecast, but also the forecast for oil consumption, as India accounts for 4.81% of world oil consumption (3rd place in the world).
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