It’s been a slightly disjointed 24 hours with technical issues/outages for most of the European morning resulting in a curtailed activity. Markets then gapped lower, trading down 1.5% following the reopening of German electronic trading platform Xetra at 11:00 London.
There were no overly significant catalysts, but several smoldering concerns beyond the usual Covid-19 headline reel were coming to the fore. There was an uptick in rhetoric from both the US and the UK again on Wednesday concerning China's auction in Hong Kong over the last 48 hours and cautious comments from Chancellor Merkel on the EU rescue fund may be weighing on risk sentiment.
With Hong Kong markets reopening after yesterday's holiday, risk will likely trade cautiously in early Asia, beyond the current short leash traders have tethered their risk appetites to ahead of the July 4th US long weekend.
However, global equity futures rose in exceptionally light volumes on vaccine hopes. Covid-19 vaccine data from Biontech and Pfizer is the best from any player so far, even though it’s only the first phase trial. I suspect the markets would have preferred it to come from a more recognized vaccine player which would offer a considerable sentiment boost – even more so if the patient numbers were more abundant. Still, the neutralizing antibody levels in the two-dose groups look better than what’s been delivered elsewhere, and that’s what’s essential. It suggests there could be a widely available effective vaccine sooner than anyone had thought – possibly as early as Q1 or Q2 2021.
US equities were a little stronger Wednesday with S&P rising 0.5% as investor sentiment was spurred on by the June manufacturing ISM beating expectations. The ADP report, which could anchor expectations ahead of Friday's NFP, was generally in line with expectations and confirms US employment is still moving in the right direction. The final June PMI for the US was also increased from the flash estimate.
The FOMC minutes overnight show the Fed has carefully studied the RBA's three-year yield curve target, in place since March, coupled with Japan's YCC experience, as well as the Fed's own immediately after WWII. Of the three, Australia's involvement was seen as "the most relevant" for the Fed currently, suggesting a front-end target would be preferred if the policy were adopted in the US. But, under the hood, the minutes raised several reservations indicating that YCC is not coming anytime soon.
Much revolves around gold
The gold price got hammered lower after the vaccine headlines but have since stabilized and are ticking gingerly higher.
A vaccine would be significant, however I don’t think it’s immediately or radically changing many house views on gold which are mostly predicated on the long and bumpy road to economic recovery. But the next couple of weeks may tell us much about how the rest of the pandemic develops.
Gold is still very well bid as the US remains mired amid health and political crises. The intense polarization of US political life and the outbreak of racial friction is making the implementation of a consistent and wide-sweeping health care policy difficult.
Sure, a vaccine would be the ultimate salvation, but by current indications, and in the absence of one, it will take longer for the US to fight off the virus than other developed economies. The strains are already showing up in the mobility data for the states most affected by the resurgence, suggesting it will be a slower recovery in the US.
For equities, the virus spread in the US is a risk to the outlook but the extremely low positioning outside the mega-cap growth stocks is less worrisome and slightly less favorable for gold. And, as we've borne witness over the past few months, gold continues to rise despite stocks moving higher while the Fed, as the lender of last resort, continues to paper over all the other credit cracks which are neither here nor there for gold in the current environment. However, lingering deficits will play into the currency debasement argument at later stages of the recovery.
But for gold it’s all about the longer-term outlook. The inflation/deflation debate likely rests on whether fiscal spending remains high after the pandemic eases as the monetary policy will probably be aggressive for all intents and purposes. Any signs of fiscal prudence will likely suppress the inflation impulse, but a move to an MMT-type world may change that view and be hyperinflationary and incredibly supportive for gold.
If you’re handling the currency hot seat these days, you likely feel tethered to the end of a very reactive yo-yo string as currency moves in one session are faded in the next.
Currencies have started the second half of the year where they left off in the first and outside of the "risk-on risk-off" see-saw currency appetite struggled to find any meaningful catalysts. With G-10 central banks at zero or below, in the absence of any significant monetary policy transmission that leaves currency traders chasing (or guessing) which countries’ activity data will outperform the others, and that’s getting enveloped around the dichotomy between current buoyant conditions and subdued future expectations striking both consumer sentiment and in financial-market indicators. It’s kind of a “heads I win, tails you lose” scenario for currency trading, where currency views continue to flip withing 12-24-hour purview.
The Malaysian Ringgit has been confined to tight ranges again despite improving risk sentiment, firmer oil prices and Asia currencies being back in focus thanks to being supported by improving Chinese economic data. But for the Ringgit there’s always that tug of war between the cyclical global upswing and lingering concern around the underlying long term domestic economic weakness that’s kept a wary bid under the dollar – especially this week as debt agency rating concerns are hanging over the proceedings like a dark cloud.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll