- The number of new Covid-19 cases has surged to record highs, as the US improvement sharply lags the European one, while the virus is vivid in selected EM countries.
- But financial markets are celebrating the reopening of the global economy, exemplified by the far better than expected US employment report for May.
- Financial rotation has accelerated, with laggards and cyclicals assets catching up with a vengeance. The rotation may continue into summer – with much greater moderation – as the global economy springs back to life and global investor pessimism fades.
- RIDE the dollar pullback… Extraordinary debt monetization, dovish forward guidance from the Fed and the November election may well feed the fast pullback of the dollar. This would be generally positive for risk assets, and most beneficial to EM equities, which have lagged in the recent catch-up.
- … But FADE the bond sell-off. A new chapter in the cyclical recovery trade has seen bond yields jump higher. This may be the single biggest threat to the risk rally. We cannot exclude a positioning flush – but see the rise in yields as clearly unsustainable.