MORNING BID-The second wave is building

A look at the day ahead from Senior FX Correspondent Saikat Chatterjee. The views expressed are her own.

A second wave of infections in the United States and China threatens to undermine the equity market rally, with U.S. and European stock futures in the red and risky currencies such as the Australian dollar struggling.

Several U.S. states including Oklahoma, where President Donald Trump plans a campaign rally on Saturday, reported a surge in new coronavirus infections. The daily count of infections also hit a new benchmark in California and Texas.

In China, the resurgence of COVID-19 in the country’s capital over the past week has infected more than 100 people and prompted authorities to shut schools and neighbourhoods to prevent wider contagion.

The People’s Bank of China also chipped in with a 20-basis-point cut in the 14-day repo rate on Thursday, but the wider concern is the V-shaped recovery priced into equity markets.

World stocks have rebounded nearly 40% since March on expectations the global economy will quickly recover in July-September after a dismal April-June, but that theory is unravelling with the latest data offering no relief.

Australia’s unemployment rate jumped to the highest in about two decades in May as nearly a quarter of a million people lost their jobs because of coronavirus-driven shutdowns.

The Asian Development Bank on Thursday now expects developing Asia, a group of 45 countries in the Asia-Pacific region, to barely grow this year, reflecting the impact of the lockdowns on economic activity.

The Bank of England is expected to announce an increase of at least 100 billion pounds in its bond-purchase program. Money market futures are predicting the central bank will take its key interest rate into negative territory next year.

In Switzerland, the central bank is widely expected to leave the policy rate unchanged at minus 0.75%. Authorities are likely to renew their pledge to keep the franc weak, although the recent rise in the euro/franc exchange rate will relieve some pressure on Zurich.

The increasing divergence between markets and data has prompted some major investors such as Jeremy Grantham at GMO to cut net exposure to equities in recent weeks. The S&P 500’s forward price/earnings ratio, a closely followed valuation metric, now stands at 22, a level that was last seen 20 years ago, during the dot-com boom.

Indications remain that investors are clinging to tail-risk hedges to protect their portfolios from the risk of falling markets.

The cost of purchasing puts on the S&P 500 index remain near 2020 highs while the dollar has been the currency of choice in the currency markets this week. Even in the bond markets, the widening spread between U.S. 10- and 2-year Treasury bonds, often considered a sign of a recovering economy, has stalled this week.

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