The Yuan
The markets appeared to have been caught off guard by the latest move higher in USD/CNH as traders were likely lulled into complacency due to the risk-on environment and the weaker US dollar in the past few days.
The PBoC is signaling a more hands-off stance amid the potential escalation of US-China tensions regarding Hong Kong. Traders are looking for the easiest and cleanest hedge to cover a possible US-China escalation and ultimately trade war risk. And shorting the bellwether CNH fits that need to a tee.
Risk Markets
Frankly, with the expected ruckus on the streets of Hong Kong today, the market's ability to compartmentalize US-China tensions away from the bullish risk-on reopening narrative, is a testament to the incredulous amounts of stimulus provided by central banks and government around the world. Currently, police are reportedly proactively breaking up the protest for now ahead of the national anthem debate, but things are bound to get unruly.
Stimulus Reigns Supreme
Stimulus measures are the topic of the day again as Asian bourses are trading up this morning with the Nikkei leading the charges as Japans government looks set to unveil another $1.1tn package helping the Nikkei to gain
Bloomberg reports that the Japanese government is preparing a new economic stimulus worth JPY117 trn. To fund it, there will be a new, second extra budget of $31.9 trn. The new package, which comes on top of another stimulus package unveiled just a month ago, will contain several loan guarantee schemes and direct spending measures.
US Senate leader Mitch McConnell has been one of the most vocal detractors of further stimulus in the US. Taking to the election soapbox in his home state of Kentucky overnight. He was quick to point out, "Many Americans have lost their jobs, so we need to make sure we have unemployment insurance properly funded for as long as we need, and that could well lead to yet another bill." Stock market investors absolutely love it when lawmakers cover Main Street back given that consumers will be expected to carry the bulk of the heavy lifting during the initial phases of the post lockdown recovery
Bulls Remain On Parade
Global equities traded up anywhere between 1-2% overnight. US equities closed off highs after late headlines suggested the Trump administration is considering sanctions on Chinese officials to punish China for its HK crackdown. Yet, US and European Equities futures are up in Asia after a more mixed session in ASEAN bourses in no small measure to government stimulus efforts amid reopening optimism. Bulls remain on parade as easy money, cash on the sidelines and no secondary outbreaks as economies reopening have investors lining up to buy stocks.
Gold Markets
Investors decisive risk on shift due to economic reopenings as viewed through European and US stock futures action triggered and continues to impact gold demand negatively even with the USD sharply lower.
Usually, this would weaken gold, but not in this case. Gold and the USD have been subject to investor demand as safe havens and have tended to rally together this year. Lockdown easing across Europe and news the EU Commission will present a plan for the recovery fund this week was seen as positive for financial markets but negative for gold.
Good economic news was bad news for gold. The US equity markets surged more than 2% at one point after US consumer confidence ticked higher in May. Consumer confidence will be vital to sustaining any economic recovery post-COVID 19 so a favorable read on any confidence data would be perceived very negatively for gold.