The gold market struggled overnight as re-opening economic optimism boosted, triggering a surge into global equities as investors exited defensive bets as more risky and aggressive investment shifts took hold. Given the relative length of the market’s defensive structure in bullion hedges and speculative positions, it probably played a part with investors rotating from defensive into a risk-taking mode as Covid-19 case counts have dropped sharply in many European countries, despite many re-opening.
The stock market rally is not a game-changer in itself. Still, the length of the recent gold market builds that was probably sold on the view that bullion is a great defensive strategy for stock market weakness has perhaps caused some to rethink that view. It may have triggered an early gold position exit as the summer stock market rally could extend as investors shift out of growth into cyclical stocks.
But by no means is gold out for the count, given the economic runway is littered with post-Covid-19 potholes and craters.
And despite some encouraging signs from US dollar weakness, gold frankly struggled for traction as the gold inflationistas were dealt a weak hand when deflation came back to Japan when the Nationwide core CPI registered down 0.2% in April, the first deflation since December 2016. The main reason is a sharp 4.7% fall in energy prices.
From a gold and commodity trader perspective, it’s always hard to predict the return of GDP growth and inflation. Still, the unprecedented shock (Corona shock) that hit both demand and supply left the situation more complicated. Nevertheless, this shock is a deflationary event first as loss of aggregate demand through unemployment will be larger than that of total supply, and unemployment could linger for some time.
Re-opening optimism has triggered broad USD capitulation on global lockdown easing and risk sentiment improving (Japan ended its national state of emergency and the UK plans to re-open on June 1st).
Individual themes are very much still in play, including EUR topside since the Franco-German debt agreement, USDCNH and USDHKD spot and forward jitters, GBP movement around Brexit and EU negotiations, and the AUD and NZD strong risk beta correlations.
Asian currencies started the New York morning at session lows versus the dollar. Risk traded well overnight, sentiment improved on individual ASEAN pockets like the KRW on equity inflows and re-opening optimism, but CNH underperformed again. Hong Kong remains a key driver of local risk sentiment, though it looks like the effects are localized in CNH and HKD for now. The HKD curve continues to trade soft as the market awaits further information.
Deteriorating US-China relations are a crucial driver of China abandoning its growth target, and trade war risks will continue homing in on Hong Kong in the short term. Even with the dust settling quicker than expect over Hong Kong, FX markets will continue to price in a trade war risk premium in both CNH and HKD which should keep both currencies on the defensive for some time.
The Malaysian Ringgit
The Ringgit is caught between the tug of war of stabilizing oil prices and heightened US-China trade tension. Sadly, the latter will be a significant concern going forward since President Trump has made it clear that his election campaign will be laced with anti-China rhetoric. He and the US administration’s China hawks perceive China was less than transparent in how they handled the coronavirus crisis.
The Australian Dollar
AUDUSD vols are tumbling as S&P futures breakthrough 3000 following an uneventful weekend in Hong Kong. Arguably the levels feel like they are overextended, but trading by feel is a fool's errand.
AUDUSD is trading constructively with firm risk-on sentiment after China attempted to satisfy concerns regarding Hong Kong's judicial autonomy and optimism that preparations to re-open economies are gaining momentum. S&P futures traded above 3000 for the first time since early March. Hang Seng and Nikkei also printed decent gains. The Aussie dollar high beta to US risk appeal wins out all day long in the Axis and Allies war game.
Assuming there’s no imminent second virus wave, the Covid-19 recovery in Europe looks set to be much faster than in the US, aided by a more extensive social safety net. Initiatives such as the Recovery Fund are also boosting sentiment. Bund spreads are narrowing, suggesting that fixed-income investors don’t see the frugal four's opposition as material and equally suitable for the Euro higher.
There’s even evidence supporting the long EURUSD scenario in a sharp reversal in economic data surprises versus the US (currently around all-time lows). Signs from flash PMIs already point to a strong bounce from the lows, more similar to the PMI data mapped by China than the tepid one seen in the US thus far.
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Yields are up, but it was a tale of two divergent tapes in US equity markets; Oil heads lower as dollar strengthens; Gold takes the express elevator down