Gold struggled for traction early in the US session, falling below $1,713 at one point as the US stock market soared on reopening exuberance. Gold pivoted higher as investors turned their focus to rising US-China tensions after President Trump's economic advisor, Larry Kudlow, said China is making a "huge mistake" over Hong Kong.
The S&P 500 quickly shaved off 1% as the market speculates that the risk of HK going to one system will trigger the wrath of Trump and the US will soon reimpose tariffs on China, effectively scuttling the phase one trade deal. Increasing tariffs or taking any other measures that could destabilize the global economy adds another level of economic uncertainty to the nascent recovery. Indeed, increased economic uncertainly has an uncanny way of lighting up gold any day of the week, especially as it pertains to trade war risk.
After riding the wave of the stock market and reopening jubilance, currency markets – mainly the China risk-sensitive baskets – are yielding to trade war escalation risk into Asia open. Asia risk traders are seeking temporary shelter under the US dollar trade war umbrella.
Trade war headlines are an easy target for speculators. The nature of headline risk trading follows the herd mentality, and then the momentum strategies kick in. The global market is so disjointed at times and historical correlations are meaningless, which compounds the increasing level of uncertainty.
If heightened US-China tension risk evaporates into a non-tariff event, the HK going one system risk becomes a tempest in the teapot for gold and global currency markets over the near term and will quickly give way to the reopening narrative as there’s way too much cash backing this recovery. The extraordinary global monetary and fiscal policy stimulus could still protect risk assets from a sell-off this time around, regardless.
With gold struggling to make new highs, the market prefers silver, which has lagged gold considerably in this year's rally, and positioning does not seem to be a factor. Even the typical fast money momentum traders are avoiding selling silver these days.
The 3%+ jump in equities this month suggests a medium-sized USD sell program into month-end. Of course, traders will ponder the considerable catch-up gap between European and US equity performance this month and if that matters (DAX up 8%, the USA up around 4.4%). Month-end trading is not always a sure bet, but history suggests when testing the month-end stuff, the US performance dominates everything else and the foreign vs. US differential barely moves the needle.
EUR bullishness continues to build as a durable EU rescue plan is taking shape. German Chancellor Merkel warned that the negotiations will be tough and will not be finalized in the June European Council meeting. Things may not be as straightforward as some would have hoped, but this is a step in the right direction. Accordingly, there’s been an unwind of some bearish Euro positions (this has been ongoing for a few days).
But, as we’ve seen week in week out in the Covid-19 environment, currency trends have been prone to give way in 48-72 hours, so the June 18 EU summit and a possible July vote on the EU stimulus/bond proposal feels like an eternity. Can EUR bulls stay long? It could be a tough sled.
The Australian Dollar
AUDUSD price action has been choppy in the past 24 hours. The bullish high beta has mostly dominated trading via US index plays which have given way midway through the US session to trade war risk buying of EURAUD.
The Malaysian Ringgit
A recovery in oil prices overnight was positive for the Ringgit, but bullish ambitions continue to get thwarted by a possible escalation in trade war risk. As with the broader market, the Ringgit remains embroiled in a tug of war between reopening jubilance and escalating US-China tensions.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll