After getting an initial lift from house speaker Pelosi comments, the markets are in " show me the money" mode, perhaps erring on the side of caution, not holding their breath for an imminent deal in Congress. Sadly, this leaves the US real economy waddling and many businesses and millions of consumers getting the short shrift.
Still this remains a fluid narrative suggesting dips would continue to be bought. Indeed, the S&P 500 looks primed to crawl towards 3400. All the while the market is looking forward to the FOMC minutes released this week, hopefully offering up some potential clues on forward guidance and yield curve control, which should send everything higher—except the dollar of course.
The RBA says Australia's economic recovery is likely to be slower than expected earlier, due to the COVID-19 outbreak in Victoria. But the central bank reaffirms no need for adjusting its policy package at present. The RBA say it would change the policy package if circumstances warranted, buying government and semi-government bonds if market dysfunction resumes.
Kind of a glass half full for the Aussie straight up but provides a more favorable backdrop to trade the bullish AUDNZD view as near-term policy divergence (RBNZ vs. RBA) is back front and center
Gold and broader commodity prices are coming back in force, triggered by both stimulus expectations and improving economic conditions, which drag real yields lower despite the recent step-up in rates in the 10-year and 30-year parts of the curve. Favorable for gold, which continues to trade to the beat of lower real yields.
Oil is trading a bit softer in Asia but still favorably around its current center of mass. Brent $ 45.00. as back-end prices move into a gentle contango. Progress in the demand picture was collectively positive when viewed through the lens of inventory data complemented by even better airline numbers emerging.
But markets look very trendless after the initial Pelosi headline bounce as traderd wait to see how healthy the level of laggard compensation and general compliance commitment after the JMMC.
US equities were stronger Monday, S&P 500 rising 0.3% to close once again just shy of February's record high. European stocks were more robust as well but mixed in Asia. China's CSI 300 rose by 2.4% after a PBoC stimulus injection had investors speculating that it could mean a supportive monetary policy from the PBoC.
The Asia open has gotten off to a resounding start with the S& P 500 racing higher after US House Speaker Pelosi expects bipartisan support for House Coronavirus Bill. Indeed, this is one of the few positives we have heard in some time for the Democratic side of the floor. And one would suspect it would be politically advantageous timing for the Democrats to steal the limelight during the Democratic convention by announcing the stimulus deal.
Muggy, sluggish, and unsettled conditions are typically mirrored in markets at this time of year. Political malevolence and the lingering pandemic have only added to stresses in 2020. Still, it was another day where everything rallied except the US dollar. Indeed the ideal investor's situation where all assets are pretty much roped to the hip of US policy stimulus and the expectations of more to come.
Yes, big tech is doing its part, but when the bearish argument is centering on the failure to make new record highs on the S&P 500, it would suggest sentiment is in a pretty good place. And the high-frequency indicators that investors track for the US do not indicate that the recovery is falling off the cliff either.
The FOMC minutes should reveal a dovish narrative on yield curve control and average inflation targeting, which is already showing signs of soothing rates after the selloff last week. But given what's already priced, the market is unlikely to reassess the Fed's medium-term rate path meaningfully. At the same time, the policy is super supportive; still, it may disappoint those looking for the bazooka.
The equity vs. higher yield riddle is less of a puzzle this week as rising inflation breakevens have offset higher yields so far, but risks are rising. Wondering if we're seeing a small rise before the significant fall?
History does suggest the relationship between equities and inflation expectations has been powerful during the crisis as they rise from shallow levels. Inflation expectations themselves have been more correlated to small-cap stocks than they have to 10-year nominal yields, oil, or gold since 28-Feb.
As for the US-China escalation, drums are beating in the distance. Still, I'm starting to wonder if US investors even care anymore, viewing it more of an " Asia thing" or changing their tune if Trump makes a move in the polls which could embolden the US administration trade hawks.
Gold Markets
After plunging 10%, washing out leveraged players and retail buyers who arrived late to the party, gold, bullion has made an enduring comeback as strategic asset allocators bought the dip, only to be followed up as those very same players who were recently washed out we're getting back in the saddle, after a break of $1960 triggered reverse buy stops and sending more players back on to the golden rally bus.
Dollar trading a bit weaker, and some pre-FOMC positions squaring it taking place. And while the latest bout of volatility has likely shaken gold investors to the core, the broader macro backdrop remains broadly unchanged, suggesting more and more stimulus will be needed to mend and repair the global economy severely fractured by the coronavirus. So gold remains a viable diversifier asset in this type of environment. And all the while, the US-China escalation drums beat in the distance as Taiwan formally signed and agreed to buy F-16 jets in a move that is likely to be denounced by China.
Gold traded firmly in Asia and Europe but jumped in late European and early US hours. The reason for the rally was not immediately apparent as the markets started the week with no exasperating economic or political drivers. US-Sino tensions appeared more relaxed, given the US Administration's more conciliatory tone on trade. The fresh injection of liquidity by the PBoC seems to support Chinese equities and may have also helped lift gold. Japan reported weak Q2 GDP data, which may have boosted safe-haven bullion buying. The latter underscored just how fragile the market remains to another secondary coronavirus shock.
A weaker USD helped the rally with the move up reinforced by lower US yields. The yield on the 10-year Treasury fell to 0.66% from 0.71% previously. Lending support to gold was the rising tally in coronavirus cases globally, notably in India.
Slightly higher UST yields are not a rally capper; it means something else needs to do the heavy lifting. So with commodity and oil markets getting a bounce for the PBoC liquidity injections, it benefited gold as inflation breakevens rose to offset the slightly higher yields from last week.
Currency Markets
The dollar is doing what is should do falling on lower US yields as dollar bears take their last kick at the can before the release of the FOMC minutes, kind of on script.
Interpreting what the lack of progress on US fiscal stimulus means for the USD remains difficult. When politicians are more concerned about the price of stamps in the age of e-mail than putting food on people's tables, I'm not sure what to think of the messy state of US politics, which is enough to encourage perma dollar bulls to sell the greenback anyway.
But with the congressional bill close to a deal, the USD implication depends on whether the market views the "risk-on " element in the countercyclical narrative. Were positive risk sentiment even if driven bu US exceptionalism sees the dollar weaken. But the levels of ambiguity remain thick, trading the dollar straight up is not the cleanest trade ont he book.
With USD short positioning already so massive, there could be some concerns that the FOMC minutes don't check off enough dovish boxes that could see another unwind of oversold dollars. A clear break is needed for the momentum to extend. The level is pretty much in-line with the previous highs in EURUSD coming in at 1.1910/20.
The ringgit
The Malaysian ringgit should trade more favorably as the US dollar weakens on positive risk sentiment. Still, traders may hold a defensive posture not willing to test 4.18 ahead of tomorrow's FOMC minutes. I suspect the ringgit will take its cue from the broader G-10 dollar movement today. Additionally, oil prices are trading at 5-month highs, which should be favorable for the ringgit.
Oil
It was a bumpy 24-hour session for oil on Monday as markets were toeing and froing as concerns about demand resurfaced in the face of rolling lockdowns globally. But prices eventually started to sail on the favorable side of the wind jumping to a five-month high tracking broader risk sentiment.
As crude oil price volatility reverts to pre-March levels, prices continue to melt upward. Traders are following the US equity markets, which are packing in more optimism about the economic recovery stateside where the general feeling is that the economy is recovering quicker than anyone had imagined. And this confidence is playing out favorably for the oil market as traders are taking prices higher speculating on more robust crude demand in the not too distant future.
Also, global risk sentiment was bolstered by liquidity injections from the PBoC, who are attempting to strengthen a sleepy retail sector. And investors speculated, most favorably for oil markets, that going forward, it could mean a supportive monetary policy from the PBoC.
On the supply side, the OPEC+ JMMC meet, and metrics around compliance will unquestionably be the topic of the day after quotas were eased at the start of the month.
And lower Baker Hughes rig count on Friday indicated there is no visible pick-up in activity in US shale even as previously shut-in production is being brought back online, also favorable for oil prices. This suggests CAPEX issues will be the challenge for shale oil's Phoenix to rise again.
Still, oil's rally could remain capped by recent surges in coronavirus cases around the world, which never stray far from the primary demand narrative.