USD, real yields, stocks, and gold have all interlaced.
USD, lower real returns, firmer stock markets, and higher gold prices are the governing themes during the curtain warmer to Wednesday's FOMC meeting.
All of which is excellent for risk assets as stocks will flourish even if gold is leading the charge higher. Did I just say that??
There are a host of reasons for gold's gains: most immediately, the safe haven factor hedging against a second wave of the virus in Europe and a steadily worse primary situation in the US. However, looking at gold's correlations and its relationship with the S&P is patchy at best— it can be both positively and negatively-correlated; it depends upon the circumstances of the moment.
With the Fed expected to run overtly dovish, it benefits both stock and gold markets alike as the " liquidity on" rally endures. It does not get much better than that.
Given there is scope for the Republican recovery bill proposal, currently at $1 trillion, to expand significantly where a middle ground of $2 trillion would sound about right. Risk markets continue to soak in the lather of government stimulus and a Fed that's about to wax as dovish as dovish can get.
As for the US dollar, the main risks to further near-term USD weakness include a COVID-19 vaccine that quickly normalizes expectations for US economic underperformance, a less dovish-than-expected FOMC outcome, or the US Congress passing a 2 + trn stimulus bill.
Yield-curve control is probably not needed, but worth mentioning, mainly to keep bond yields in check of if inflation moves higher as oil prices firm. The consensus on the FOMC about this issue has not been reached yet. A firmer commitment towards allowing above-target inflation to happen before raising interest rates could further pressure real yields lower, undermining the dollar and pushing gold higher.
The risk to this view is the absence of any material forward guidance from the Fed that they will allow the economy to run hotter could drive real yields higher.
US equities were stronger Monday, S&P up 0.7% following modest losses through Europe, and a mixed session in Asia. US 10-Y yields rose 3bps to 0.62%. A rebound in tech stocks led the US market higher, ahead of major tech company earnings reports later this week. Gold prices fell slightly for a record close. The recent rally in gold has been aided at least partly by US dollar weakness and escalating US-China tensions.
US Senate Republicans have unveiled their long-anticipated $1tn virus relief proposal, setting the scene for a significant knock em down drag em out affair with Democrats over the coming days. In fact, at writing House Majority leader Hoyer suggests the Republicans plan down to meet health and economic challenges.
Yet after another midsummer weekend with investors steeping on CV-19 related headlines, there should be no surprise to see Tech and the Stay-at-Home basket leading the charge higher. With COVID-related headlines via Major League Baseball games delays, and Google commentary about working from home until 2021 sees money rotate into Growth/Quality and out of Value. Starting to see a similar pattern on Monday opens.
As we get into the meat of the matter this week, the main highlights will likely be the FOMC forward guidance on Wednesday, along with a raft of earnings releases, including market leadership heavyweights Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), and Facebook (NASDAQ:FB), how much appetite traders have to add on risk is probably limited. But this is not a typical market with so much health and economic headline risk so best to keep on your toes.
Currency markets
Risk generally, is carrying on where it left off last week—bid. It seems like the market is ignoring the surge in COVID cases in Spain and focusing on the European recovery story after a durable German Ifo print on Monday.
The USD faces an uncertain time amid a growing focus on US policy stimulus. But it certainly feels that G-10 traders are morphing into selling the USD against the currency of their choice mode, making a currency analyst job quite easy.
EUR/USD has pushed above 1.17, helped by a better IFO reading, but mostly reflects USD weakness. But recent ECB rhetoric reflects some internal divisions around the merits of the EU recovery fund. Euroscepticism is starting to gather and likely the reason we are not trading above 1.1800. Indeed, this will be a crucial level for markets over the near term.
Gold market
Gold has moved through its all-time highs, setting a new high-water mark in 1965 this morning. In the main, the story continues to be Federal Reserve money printing coupled with the quarrels over USD1 trn fiscal stimulus package for pandemic relief.
Gold is jumping in Asian trading hours again and is taking the rest of the precious metals complex higher.
The latest surge in demand out of China suggests gold could easily break $2000, maybe even by the end of the week. US-China relationship strains further; concerns about inflation as oil prices firm up alongside the broad US dollar weakness which has gathered up speed. All of which makes for a perfect complimentary basket of drivers to push gold higher.
Some real concerns are seeping back into the fray that the eventual path of US-China friction will lead to a flat-out war on capital. This view is not new and dates back to the start of the recent intensification of President Donald Trump's hard-line on China. It has included wide-ranging grab barrels of policies and proposals that touch on everything from student visas to soybean purchases. But the most explosive might be the suggestion floated by some the US administration China hawks that the US could choose to default on some of the nearly $1.1 trillion in US Treasury bonds held by China.
Back in June Sen. Lindsey Graham, R-S.C., a close Trump ally, said on Fox News, "They should be paying us, not us paying China," and expressed support for a suggestion from Sen. Marsha Blackburn, R-Tenn., that the US should cancel its sovereign debt held by China.
News flow triggered the oil market which made a full round trip yesterday.
US healthcare adviser Fauci told Fox News that he is optimistic about the Moderna (NASDAQ:MRNA) vaccine. Indeed, this is positive in the sense that immunization is a one-stop recession stopper.
At the same time, Senate Republicans unveiled piecemeal portions of the new CV-19 relief proposal, which confirms the expected reduction of weekly unemployment benefit supplement to $200 from the current $600/wk. However, Senator McConnell was quick to throw the ball back in the Democrats' court, stating the proposal is "a starting place, can not pass without Democrats."
So we are still in the lurch with thee days left before the benefits expire, but people will undoubtedly notice the $ 400 drop-in their weekly stipend.
A series of different bits of news flow saw the oil market make a full round trip yesterday—reported infections and fatalities fell in several US states. In New York City, originally the epicenter of the US-based COVID crisis, case counts, hospitalizations, and COVID-related deaths have fallen back to early March levels.
Still, global CV-19 outbreaks threaten to derail demand recovery. The UK placed travelers from Spain back under quarantine orders over the weekend, for instance, as oil prices remain intricately linked to CV-19 news flows.
Oil markets are receiving support from expectations of the FOMC's firmer commitment in the upcoming policy meeting towards allowing above-target inflation to occur for some time, which should be viewed as incredibly positive for risk assets. And oil prices will continue to draw support from the Fed's dovish policy, which sees the US dollar move lower.
Crude Oil continues to sit in narrow well-worn trading ranges as traded volumes fall into the summer. Ultimately something will shake the trees and knock us out of the range trade syndrome.
But for oil prices to break out higher, there must be a significant flattening of the US Sunbelt CV-19 case count curve at a minimum. Still, besides staying nervous over the absolute number of CV-19 case counts globally, traders have one eye trained on the US supply as the first weekly increase in the US rig count could be a sign of things to come.
Indeed, we may be bottoming out on the US supply side with weekly data showing that shut-in production is being returned while Friday's Baker Hughes rig count recorded a +1 rig count increases week-over-week.
In my view traders, if they are indeed in the market, remain cautiously perched ahead of what could be a whippy few weeks, especially if they finally see proof of shut-in US production returning. And the moves could be exaggerated by summer trading conditions as liquidity will most likely taper into the August holiday season.