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Asia Open: As summer trading gets underway, investors are more prone to book profits and move to the sidelines. Got gold?

Market Analysis - 3 Min Read Stephen Innes | 08 Jul 2020

US equities were weaker Tuesday, the S&P falling back 1.1% with no clear headline narrative driving sentiment (other than the usual Covid-19 bombardment) after losses in Asia and Europe; China was a notable exception with the CSI300 rising a further 0.6%. 
And wow, is market priced liquidity terrible or what?! Anecdotally, investors are unusually quiet, suggesting that they’ve taken books down a level or two with few, if any, convictions. Even those set in the best ideas are not finding inspiring enough catalysts right now. Indeed, they don't seem keen for trading the day-to-day swings like they did last month, knowing it’s far too easy to get whipsawed when summer liquidity runs low. 
 
As summer trading gets underway, investors are more prone to book profits and move to the sidelines. With reduced liquidity, that tendency did seem to have a snowball effect overnight.
 
Currency markets

Forex markets are trapped in the low liquidity July void while traders remain utterly unconvinced in one the direction or the other due to the lack of follow-through price action from one-time zone to the next.
 
"Risk on" currencies are on the defensive this morning as enthusiasm for risk reverses as the Covid-19 "hot spots" remain evident, with the reimposition of a lockdown in Australia's second largest city of Melbourne perhaps giving the story extra gravitas.
 
Economic data points to a long and bumpy recovery ahead with weaker numbers from Germany and Australia and a marked decline in Japan's household spending during May. 
 
With the path of global recovery still uncertain, traders are again trying to factor in the likely policy response, suggesting those currencies with the most significant fiscal room for maneuver will outperform.  
 
EUR-USD has slipped back once again from 1.13 with German data and EU Commission forecasts providing a headwind. The recent run of weak EU data was echoed in the EU Commission's latest economic forecasts.
 
The USD is stronger this morning, aided by risk aversion and perhaps the continued run of surprisingly strong US data. However, the US data's comfort blanket is being throttled by the rising Covid-19 case count in many US states that might point to renewed economic headwinds ahead.

The market's primary headline focus has been on Atlanta Fed President Bostic, who told the FT that "there are a couple of things that we are seeing, and some of them are troubling", while both centrist Fed Barkin and Quarles echoed similar views overnight. 
 
Gold markets
 
Gold is getting supercharged by Covid-19-related accommodative monetary and fiscal policies, while trade and geopolitical risks simmer on the backburner. The unprecedented fiscal and monetary response to Covid-19 supplies gold with two massive bullish inputs: liquidity and debt.
 
The US budget deficit is historically frightful right now; not only has it has never been this bad going into recession, it’s never even been close to this bad.
 
Low-interest rates, monetary accommodation – including balance sheet expansion – and massive fiscal spending for as far as the eye can see will probably cement and extend gold's rally well into 2021. 
 
Massive investor response to Covid-19 has pushed ETF holdings to record levels, which has counterbalanced the decline in physical.
 
USD weakness will eventually be an essential element in the gold market rally as the bear case reality trifecta will most likely kick in sooner than later:

  1. The US dollar is no longer a high yielder, and the Fed is increasing dollar liquidity.
  2. The US twin deficits are widening rapidly and are already at an unprecedented historical level. 
  3. The USD's reserve status is weakening, and the revolving carousel of political issues in the US point to an erosion of the dollars safe-haven appeal. 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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