Known unknowns and unknown unknowns

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, June 30, 2021. REUTERS/Staff/Files

July 1, 2021

A look at the day ahead from Julien Ponthus.

The death of Donald Rumsfeld, the controversial architect of the Iraq war under President George W. Bush, brought back memories of heated news conferences and memorable quotes.

Notably, his 2002 news briefing about Iraq’s alleged weapons of mass destruction and his take about “known knowns”, “known unknowns” and “unknown unknowns”.

Such phrases appear suddenly relevant to the two main worries of markets on the first day of the second half of 2021: COVID-19 and inflation.

We know inflation is picking up, we know we don’t know if it will prove temporary and we know we don’t know about unforeseeable events, such as a global crop disaster (given a record heat wave in Canada) or a financial black swan (hello Archegos!) that could quickly alter the monetary policy outlook.

With that in mind, it’s not surprising that investors are in no rush to decide whether to dump the reflation trade for defensives and growth stocks before Friday’s U.S. jobs report.

Economists polled by Reuters expect a gain of 690,000 jobs for June, up from 559,000 in May but the variation is large to say the least, from 400,000 to more than a million.

And with the 10-year Treasury yields steady at about 1.47%, the U.S. dollar hit a 15-month high against the yen and hovered near multi-month peaks against other major peers.

Turning back to COVID-19, we know the Delta variant spreads faster, we know we don’t know how hard it will hit the world economy and there’s no debate that this pandemic, prior to 2019, was the definition of an “unknown unknown”.

Uncertainty on that front is high with countries from Indonesia to Australia and Britain to Russia all battling new outbreaks. In Europe, tightening restrictions for unvaccinated British tourists has hit travel and leisure stocks hard.

European stock futures seem nevertheless upbeat prior ahead of the open, after the S&P 500 nabbed its fifth straight record closing high last night.

Key developments that should provide more direction to markets on Thursday:

– 181st Meeting of the OPEC Conference gets underway

– BOE Governor Bailey speech

– Switzerland Inflation

– France, Germany PMI

– German retail sales recover in May

– Sweden rate decision

– Russian June factory activity shrinks

– Japan business mood at 2.5-year high

Grinding higher https://graphics.reuters.com/USA-MARKETS/qmyvmdgojpr/chart.png

(Reporting by Julien Ponthus; editing by Dhara Ranasinghe)





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