Rioting in major US metropolitan neighborhoods got pretty gnarly over the weekend and the market continues to struggle with the elevated level of market optimism versus the real economy, creating a psychological mismatch. And while the anarchy is the US street is likely to be a short-term phenomenon, since investors have not well balanced the psychology of the US being locked down for almost three months, Fridays Non-Farm Payroll data could take on more considerable significance, especially if it comes out worse than expected.
Geopolitical risk remains supportive amid a plethora of bullish for gold themes while anarchy on the streets in the US could dent the nascent reopening recovery. But gold investors are also taking note that early reopening states are seeing a rebound in new cases. On May 30, California increased 3273 claims, the highest one day increase ever. Texas increased in 1714 cases. On the margin, the US three-day growth of infection numbers increased to 4.2%, the highest in a week (vs. 3.4% three-days ago).
Gold rallied right out the gate, going higher as anarchy in the streets is not only threatening to derail the reopening optimism but could severely dent President Trump's approval ratings. which will heighten US election risk and could drive more demand for gold
There’s a laundry list of negatives that continue to weight on President Trump's approval rating; his job disapproval rate has risen since November and heightens US election risk, which will gradually factor into the overall US capital market sentiment and be bad for the US dollar.
The lifting of lockdowns globally and further stimulus was keeping risk sentiment buoyant, until anarchy in the US raised its ugly head and threatened to derail the risk recovery.
The Euro continued to benefit from the relaxing in lockdown measures across Europe, and as the existential tail risk of a Eurozone break-up has evaporated. With the EU zone moving closer to debt mutualization – something the market has been craving basically since the creation of the currency – the Euro has been in demand. Still, there’s been some selling off the top, though not unusually large. After the move over the last couple of days, the pair seems vulnerable to profit-taking, and with month-end rebalancing approaching the market is getting increasingly nervous.
It was a dynamic week in Asia in the real sense of the word. This week could be another flashpoint for Hong Kong's risk as June 4 will mark the 31st anniversary of the Tiananmen Square protest and there’s been an annual Tiananmen vigil gathering in Hong Kong for the past 30 years. Large scale street protests in Hong Kong can happen, especially given the passage of the national security bill and rising US-China tension.
There were mixed signals out of China on Saturday, with manufacturing PMI's worse and services were improving.
Asia FX has been focused on the USDCNY fix, which has drifted higher over the past week. But the Fix has consistently come in close to expectations and capped USDCNH below 7.20 so far. For broader market concerns, it’s all about crossing key barriers where a break of 7.20 will be the truthsayer. But given the tamer reactions to the HK law by President Trump, we’ll see a pullback in bearish CNH bets – even more so if China does not respond.
The Ringgit appears destined to be caught in the risk-on risk-off vortex over the short term. But with oil prices stabilizing on the Saudi Arabian and Russian pledge to remain compliant and a less combative response from President Trump to the HK law, local currency sentiment should gradually improve – even more so if the US dollar continues to lose its safe-haven appeal.
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