US equities fell Monday, S&P down 1.6%. Bonds rallied: US10y yields finished the US session 10bps lower at 1.19%, lowest since 11 February, after trading as low as 1.17% intraday. Similar moves in Europe. Driving sentiment: growth concerns as delta infections rise globally. And adding to the toxic mix, oil prices fell 7.4% after OPEC's weekend decision to boost output.

Indeed, that OPEC decision was a monumental revision to its output deal. With the street now drawing comparison to the December 2014 change to market share priorities, OPEC may be starting to shed layers of supply discipline making it challenging to envision a world with oil +$80 bbl. 

With equities going risk-off yet rates finishing off the extremes and stops going through, it does feel that the worse is behind us. But a Turnaround Tuesday? I do not think investors will be pretty eager out of the gates as there is still much dust to settle and numerous creases to iron out. 

That said, despite the S&P Spot falling lower, there was only slight panic across options markets, almost as if the street expected the sell-off .

Deutsche Bank's George Saravelos seems to agree. "We wrote about 'peak vaccine' optimism more than a month ago, and the market seems to be belatedly pricing this in," he wrote on Monday. "But the market's increased pricing of what we have dubbed 'secular stagnation 2.0' is about much more than the new delta variant," Saravelos went on to caution about "various warning signs on the post-vaccine transition including stalling consumption in high-frequency data in many economies," which he called "part of broader post-COVID scarring. (Deutsche Bank)

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Still, while it is difficult d to see what will change the direction of the long end, with core inflation, at 4% and the market pricing just two hikes by the end of 2023, there might be some more room to price sooner lift off in the front end of the curve. 

When it comes to explaining why the months-old bond rally suddenly morphed into a full-on risk-off trade, it is challenging to know which way to turn. Like the Delta variant, Sino-US tensions are nothing new. Yes, formal allegations by the US and the UK marked a severe escalation, but how many serious escalations does that make since 2018? There is an intense escalation every other week (at least). And it does not matter who is in the White House. (Heisenberg Report)

Still, the negative news keeps coming. The French government this morning said that the fourth wave of COVID had arrived with an "explosion" of cases and an "extremely strong dynamic" that would make this wave worse than the previous ones. (POLITICO). The tone of government communication has shifted towards a much more alarmist one over the past couple of days. Similar news flow from other European countries should be expected, particularly once the summer holidays are over.

Markets look set to attempt a slight recovery early in European trade after yesterday's sharp meltdown in broader markets; it feels like we are trying to hash out a temporary bottom. While yesterday may not have been " the big sell-off," there appears to have been enough of a capitulation for now.

The data point to watch - not just for the UK, but for all global assets - is the UK’s hospitalization rate. If the UK manages to make this strategy work, then risk markets will surge in mid-August. But if it doesn’t (and by the way, the medical profession is bracing itself), then a sub 1% 10-year yield is on the cards. Between now and then, the risk-off trade could remain the norm.

Forex

Sell EURUSD On Rallies

The UK reopening amid rising COVID case numbers is making the market increasingly nervous. Risk sold off yesterday, with stock markets across Europe down between 2-3%. After the initial selloff in EURUSD, the market focused on USD selling, with UST yields back to levels last seen in February, which caught some intraday positions off guard.

Sell GBPUSD on Rallies 

Blame it on the UK !! The US State Department and CDC have issued Level-4 warnings against travel to the UK amidst a continuing spike in COVID cases and further easing restrictions. Concerns over rising delta-variant cases, equity valuations, and the global growth outlook are weighing on Sterling.

Risk Selloff & CHF

The broader market selloff is influencing the price action in FX at the start of the week. However, the USDCHF is torn between dollar bids and franc demand, keeping the pair in a tight range. Still, with the US dollar in the driver seat, the Greenback should remain supported.