What is the alternative to the dollar?
That's one of the most-asked questions in the markets these days with the US at the epicenter of the COVID-19 crisis and states representing at least 40% of the population are reinstating some lockdown measures.
But the alternative currencies are not apparent. The yen is usually the go-to under such circumstances, but it seems to have decorrelated from all of its usual patterns. At the same time, Gold is already highly bid and in danger of a correction lower.
The euro comes to mind first, given the proposed recovery plans. Still, even long euro was a bit of a pain trade last week as Europe's banking system looks fragile, though, and it is a long way from having mutualized debt, let alone spending it.
While reasons to sell the USD mount, the greenback retains safe-haven appeal. There might not be sufficient conviction for any other G-10 currency to make a serious run higher. In Asia, FX is a bit of a different story; however, the CNH is starting to light up again due to the reflation trade underway in China, which I will touch upon below.
What about commodities?
The anomaly of rising commodity prices, which have been, for the most part, driven higher despite shaky fundamentals, has China to thank for the recent price surge.
At the nucleus of this inconsistency is the divergence in real-time growth rates between China and the US. As both rate and growth differentials widen, the dollar tends to weaken, which in turn leads to higher oil and commodity prices.
China targets both investment and economic growth recovery by leveraging the financial markets, whereas the US and the rest of the world are relying on government-support schemes. Private investment is a more direct and quicker way to recovery, hence China's outperformance. Re-leveraging investment regenerates growth rates, which fosters reflation. This reflation allows China to accept more financial risk, domestic conglomerate's re-lever. It accelerates their recovery, driving further reflation and creating a virtuous circle of growth through the continuous feedback loop.
Traders have been piling into commodities that are perceived to be less exposed to the new outbreaks in the US. We could add Europe to the positive end of the discussion, but at the core, its China versus the US, which is encouraging traders to go long on copper, silver and steel while remaining long on Gold.
In this environment, China, the world's largest retail buyer, outperforms the US on both the equity and recovery metrics, it is ideal for Gold, as Chinese consumers will buy more physical gold providing even more conviction for my $2000/ oz target.
Oil traders do like the positive medium-term outlook but to capture the upside risk from the weaker dollar and to hedge the short term weaker oil market fundaments created by the COVID-19 outbreak stateside; traders will go long Brent-WTI spread trade to gain exposure to a more robust economic recovery in Asia and Europe.
Last week AxiWeekender suggested until the US passes the virus, China will be the canary in the coal mine, and indeed that has proven to be the case.
Markets
Although news of positive results from vaccine trials provided an uptick of optimism Friday amid the most pessimistic market rally, the world has ever known. It is the constant drip-drip of bad news at the moment that goes beyond the current COVID situation in the US. Indeed, investors are probably less concerned about the virus because most have adopted a defensive skew with mega-cap tech as their key performers. So, while the virus spread in the US is a risk to the outlook. The extremely low positioning outside the mega-cap growth stocks gives investors some comfort to maintain those positions front facing gnarly COVID headlines. Not to make light of the issue as the market is clearly concerned about the uptick in COVID cases globally, but given the ample liquidity, backdrop money is finding it was into safer pockets of the market, which continues to support the indices.
But make no mistake, when a vaccine hits the market, it will be a crucial tool in putting an end to the pandemic. As such, markets will moonshot as I expect the world to face the most enormous wave of asset price inflation recorded in history. Once the vaccine is made readily available, all systems go, and the incomprehensibly-large global stimulus will find its way into every liquid asset imaginable.
Friday coronavirus headline de-risking was compounded as the Chinese equity market's winning streak had ended with the CSI 300 closing down 1.8%, breaking a run of eight straight days of gains. Large-cap shares were under pressure after two state-backed funds announced plans to cut some holdings, which were taken as a sign that the government wants to slow the pace of the rally. Also, last week, the regulator published a list of 258 illegal margin financing platforms while also warning investors to avoid unauthorized platforms.
That spilled over into renewed weakness in European and US equities in early Europe trade, and frankly, without the vaccine headline, no one expected risk to come back into the weekend.