Asia-Open: Milestones galore across markets, but what comes next?
Market Analysis - 6 Min Read Stephen Innes | 05 Aug 2020
US equities were stronger Tuesday, the S&P up 0.4% after a very choppy but August-like trading session. US10Y yields fell 5bps to 0.51%, near the record low set in March, while 5-year Treasury yields set a new record little at 0.19%, while rocketing gold prices to the stratosphere breaking USD2,000 per ounce Nirvana point, closing up 2.1%. It was the latest milestone for all that glitters and represents a breathtaking ~30% rally this year.
In US equity markets, it was one of those days where a close look under the surface is needed to see what is going on.
Indexes are all higher and there’s a lot of focus on earnings, but there’s a bit of broader rotation out of Growth/Momentum into Value/Cyclicals, despite rates moving lower. Mega Cap Tech was mixed with retail investors’ renewed love for AAPL brimming over and clearly visible once again. Still, regulatory headline risk seems to be growing by the day for the overall sector and could temper bullish sector ambitions over the short term.
Asian stocks looked set for modest declines Wednesday as local investors mull the progress of stimulus talks in Washington amid reports of a White House plan to review the U.S.-China trade deal, likely driven by concerns Chinese imports of energy products only being 5% of where they need to be by year-end under the terms of the agreed trade deal.
But taking on a more positive tact to the trade talks, US Trade Representative Robert Lighthizer and China's Vice Premier Liu He will participate in talks on August 15 to assess China's compliance with the Phase One trade deal.
Rising trade tensions between the US and China could open up an unwelcome can of worms. The market's primary thesis on what ultimately matters for growth assets is whether US-China geopolitical escalation morphs into an economic dustup.
Of course, this could be little more than US administration browbeating as quashing the P1 trade deal before the election is the last thing the US economy needs amid the Covid-19 recession. Ultimately rolling back the P1 trade deal would dent stock market sentiment, a causality that one would think President Trump would vehemently oppose in the run-up to the 2020 election.
But one would have to believe this is all part and parcel of the Republican election platform, which is the blame game and how the US administration views China's role in the spread of the coronavirus. It seems President Trump continues to peer around the curtain waiting to rush the podium at any opportunity to denounce China, which will continue to keep Asia risk markets on edge throughout the run-up to the 2020 US election.
The dollar bear trade was crowded and the dollar oversold, but the resulting correction has been mild so far and, clearly, the dollar has not lost its countercyclical beta. BTPs are rallying again, US real rates are making all-time lows and, after a clear out of weaker Euro longs, it feels like the USD higher correction trade will have extraordinarily little juice left to squeeze.
In addition, gold, silver and stocks have soared this week, and this impulse could be dragging currencies along for the ride as traders dust off their inflation caps.
The Ringgit continues to climb, primarily due to the weaker USD and favorable divergence between local MGS real yields and US real yields making all-time lows; as we noted yesterday, the Ringgit rally is being stoked by the global market unquenching chase for yield. Adding positively to that narrative, the monetary policy debate is centering on whether the BNM will offer up a cut or a dovish pause at the September 10 policy review. Also, oil prices are stabilizing which is always a positive thing when views through the lens of Malaysia’s depleted government coffers.
Concerns remain around a second wave of Covid-19 in Europe as daily case growth has started to accelerate from shallow levels in most countries. However, the levels are nowhere near that seen in the US, which is now on a downward trajectory.
Still, markets fear a second surge into the northern hemisphere winter, and the associated rise in volatility still favors gold as a defensive strategy.
But the economic damage is done, and even a vaccine is not going to bring back the 80 billion in global GDP that went up in smoke. The only real cure to claw back some of that lost GDP is global interest rates low for as far as the eye can see and even redoubled amounts government stimulus. All of that is highly positive for gold.
Drilling this fact home overnight, Federal Reserve Bank of San Francisco President Mary Daly said in a media interview that the US economy needs more support than initially thought as a resurgence in the coronavirus pandemic weighs on growth.
Indeed, there was an impressive rally in Treasuries Tuesday, seemingly without a catalyst, as economic data was robust and stocks finished positively. The TIPS buyback in the US morning may have helped boost duration and ongoing stimulus talks in Washington and fresh highs in gold.
The angst of what lies ahead is driving the US yields lower and propelling gold higher. It’s only the first week of August and traders are already pivoting to the September Fed bazooka, where it’s expected Chair Powell will introduce some form of inflation targeting, possibly through YCC which will be sure to serve the yellow metal well.
From a hedging perspective, gold investors care about the level of inflation, not necessarily the changes in inflation. With oil stabilizing and commodities ripping higher on better China data, from an absolute level perspective, gold as an inflation hedge will look a lot cheaper today than when inflation arrives after it’s all systems lift-off after a vaccine arrives while every conceivable asset will ride the tailwind from the incredulous amounts of global stimulus on offer, possibly triggering the biggest wave of inflation since the '70s.
From the trading perspective, given the spec market proclivity to run short positions in front of crucial milestone levels compounded by chatter suggesting many gold traders (who are all bulls) thought bond markets were nearing the end of the runway for lower US yields over the short term. So, several big traders were over-hedged for a downside correction, then on a break of this year highs, many "stop buy reverse" orders kicked in, which compounded the shift higher in thin summertime liquidity as investors at one point were tripping over one another for topside exposure.
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