US equities were stronger Tuesday, the S&P up 1.3% with steady gains late in the session after a choppy session earlier, and oil and gold were both up a bit.
Improved US equity sentiment came with a positive start to Q2 earnings reports, with JPMorgan and Citi beating expectations despite citing "significant uncertainty" and increasing loan provisions. Bullish for markets was Fed Governor Lael Brainard reinforcing expectations for sustained fiscal and monetary support.
But the cherry on top has to be the positive virus vaccine update.
Optimism on the vaccine is more than a show stopper – it’s the ultimate recession stopper. The positive coverage on potential Covid-19 vaccine represents a rotating carousel of positive news that’s overwhelming rising virus cases in the US.
Although a mismatch between financial markets and the real economy remains in full effect, the removal of a single recessionary input (the virus) via a vaccine can pave the way for fast economic recovery. So, the positive news on the virus vaccine can go a long way to explain the dissonance between the shift in the stock market sentiment relative to the angst on Main Street.
The US CPI inflation bounce was positive for gold, as was the weaker US dollar amid the Fed’s Brainard’s call for more stimulus. The market responded bullishly and positioned to move higher, but news of a positive vaccine trial has taken some of the shine off the yellow metal.
Still, one should expect the world will face the most significant wave of asset price inflation/fiat currency debasement in recorded history. Once the economy returns to pre-pandemic all systems go, even with the help of a vaccine, the incomprehensibly large global stimulus will find its way into every liquid asset imaginable. And while this trade screams long silver and copper, gold should benefit as well from the inflation bounce.
The bigger picture for gold is that on top of the WWII-sized stimulus already injected into the economy and the Fed expected to remain at zero for as far as the eye can see, it's hard not to view a tsunami of asset price inflation down the road.
Euro patience rewarded
The USD traded bid early and was well offered later on Tuesday in a complete reversal to what was seen on Monday. With the Fed providing ample liquidity, equities bid into every dip and the market seemingly ignoring an increase in Covid-19 cases, it made for an excellent backdrop to stay short dollar.
It took a while, but the Euro has finally kicked into gear, with trading less burdened by the USD safe haven Covid-19 excess baggage while spreading its wings most optimistically, reflecting hopes for better news at the end of the week when EU leaders meet to negotiate terms of an EU recovery fund.
Should an agreement be reached, the EUR would be likely to benefit. Hence the constant bid and one-way directional flows on the EURUSD this week. Indeed, the closer we get to the critical weekend event, there should be a better buy-in for the long Euro trade.
While this week's Eurozone data has not been hugely inspiring, it wasn’t enough to offset recovery hopes as the market now sets sights on the bigger prize: a shift towards debt mutualization.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies