Asia Market: The second-wave US states are driving the risk-off tone

US equities were lower Wednesday, the S&P down 2.6% following slightly more significant losses in Europe and another mixed day in Asia.

After lingering in the background for days now, market sentiment around the 'second-wave US states' took center stage, driving the risk-off tone. Arizona, Texas, and California reported daily infection records on Tuesday, with the governor of Texas describing a "massive outbreak" there. Meanwhile the governors of New York, New Jersey and Connecticut have decreed that travelers from states with high infection rates must quarantine for 14 days.

The hope is that the soft lockdowns and social distancing will change the tide in the case count data that has no end in sight. But the bigger question remains: will consumers ever feel safe to leave their homes without a vaccine in hand or, at minimum, effective therapeutics regimen readily available. 

While we cross our fingers that consumer self-regulation in the "second wave states" proves useful, these systemically significant state economies are underperforming economically based on measures of small-business activity, restaurant bookings and consumer spending. This is particularly acute in Arizona, Florida, South Carolina and Texas, suggesting behavioral changes can hinder the economic recovery even if states don’t reimpose lockdowns. And that’s the problem: there’s no way around the fear factor in the absence of a vaccine.  

Currency Markets

The US dollar continues to benefit even when risk-off is being driven by adverse US events like the rising Covid-19 case count headlines. And the first order of business was to reduce positions in high beta G-10 and commodity currencies where both the Canadian and Australian dollars entered the spotlight for all the wrong reasons. 

The Loonie remains especially prone due to the possible escalation of trade tension south of the border around aluminum tariffs. Also, Fitch Ratings could be accused of "piling on" after trimming Canada's sovereign credit rating by one, from AAA to AA+.

Gold price action is mirroring post-GFC patterns to a tee

Gold is trading lower this morning due to the strong US dollar, which is the yellow metal’s biggest safe-haven competitor when risk market turns south on Covid-19 related headlines. While the newsreels remain awash with gold fever, the deflationary impact of super spreader Covid-19 beat-down encourages people to sell gold for consumption purposes.

Still, this week's gold demand has been built around the notion (prematurely, in my mind) of a recovery in inflation expectation where everyone was pointing to the rise in oil and hard commodities as the primary reflating principle. 

The big gold houses were backing up the truck at the vault in anticipation of the powerhouse combination of growth-linked commodities (copper & oil) rising, S&P higher, USD lower and a wider negative global output gap are foreshadowing that gold can reach $2000 this year.  

They’re not buying gold to defend stock falling as many junior and senior gold analysts would mistakenly write; it’s the other way around when it comes to buying gold or reflationary hedges. 

Based on my views, the reason why gold is trading lower is the potent combination of factor that has driven gold higher over the last fortnight – those critical growth assets SPX -copper and oil – are showing signs of fatigue. 

On April 7, 2020, I was at my gold cheerleading peak when I suggested that over the next year or so we could bear witness to the most massive wave of asset price inflation/fiat currency debasement in recorded history. Once the economy starts to show signs of liftoff, the tail with the unimaginably massive global stimulus will find its way into virtually every nook and cranny of every liquid asset imaginable. A resurgence of Covid 19 hurts and does not accentuate that view.

Still, more economic worries mean more stimulus, so gold should remain a buy on dips to $1,750 near term.

Oil markets 

As for early oil market chatter, discussions centered on the lackluster refining demand which remains a significant headwind for crude prices, still ~23% below seasonal levels.