Asia Update: US stocks climb the ladder on economic stimulus idealism

It’s a different day but the same old story as US stocks climbed the ladder on enthusiasm and idealism that lawmakers will come to terms on a new economic stimulus package, bringing the critical global markets risk bellwether, the S&P 500, to the cusp of cleaning the slate and wiping off the entirety of year's losses. 

Gold extended gains amid speculation interest rates will stay low for longer with the Fed expected to put up little fuss about inflation rising. US equities were stronger Thursday, the S&P up 0.6% following losses in Europe and Asia. Better jobless claims helped the mood music, yet ten-year yields still slipped 1bp to 0.53% sending gold up a bit but oil traded down, decoupling from its higher beta to equity markets this week.

As of yet, there’s still no breakthrough on US stimulus talks between Republicans and Democrats, but in an election year it’s crazy to think politicians will take a fabulously frugal approach as penniless parenting is rampant across the nation, given the services sector beat down and loss of jobs due to Covid-19; this isn't about buying gasoline for the family sedan, it’s about feeding kids!

Well, we should expect some position squaring ahead of the NFP, but after the forecasting error exposed in the data-gathering causing revisions to the ADP reports to the magnitude of 2 million, I expect the data will be less trusted, encouraging the markets to default back to trends. But gone are the days when a strong NFP report made for a bullish US dollar day as the Fed cares little about positive economic prints as it’s unlikely, even an in the case of a double dose of inflation, to change their funds outlook any time soon.

Indeed, this is an environment where nothing goes down except, apparently, the dollar. In these baffling, pretzel logic, times FX traders will continue to follow one train of reasoning as the dollar will continue to revert to its counter cycle trend; the buck turns sour when the goings are good and the buck turns sweet when the goings are bad. But this gnawing FX toothache (which is a personal signal) I still think seems far too quaint in its simplicity as, at some point, growth differentials and the data will count. 

Low yields forever are the ultimate invitation to strap on risk as consensus works off the theme "do not fight the Fed." Equities, even at these elevated levels, continue to climb the ladder; gold similarly continues to power ahead; the USD is on a clear-cut weakening trend.

Currency Markets 

EM FX 

The Covid-19 shock is reshaping the EM landscape dramatically with Current Account deficits turning to surplus in many places as sharp declines in economic activity cause imports to compress. USD/EM pairs shot higher again following the USDTRY lead as recent pressure on the Turkish Lira extended further overnight, with the currency falling 3.6% against USD to a record low. Indeed, Turkey's macro imbalances are coming to the fore as FX reserves are depleted, offshore flows missing, tourism revenues at all-time lows and price pressure a severe concern as global supply chains remain in tatters.

Asia FX

It's been a stellar week for the Ringgit as a confluence of positives has combined to send the local unit on its longest winning streak since January. The favourable interest rate differentials between the USD and MYR are melding with encouraging regional growth outlook, driven by China economic engine firing on all cylinders as favourable Ringgit sentiment is getting enveloped by stable to higher oil prices again this week.

I would expect traders to take their foot off the accelerator today ahead of tonight’s NFP while taking a cautious approach to currency risk forward of the August 15 US-China trade discussions. 

G-10

EUR-USD is proving choppy near recent highs as it balances better economic data against poor Covid-19 data. While the GBP was initially the better performer as the BoE oddly sounded less downbeat than before, I went short cable into the BoE and, although it was the wrong call, I'm still short as the front end of the curve hasn't flinched. 

Signals about the health of US labor market conditions should be a key focus for the FX market, but after spending 20+ years in the currency hot seat I'm not sure what matters anymore other than to stick to bearish dollar view.

Pleasing the dollar bears is that NY was a USD seller again overnight, as that’s usually a signpost that American corporates are getting edgy about the dollar fortunes. I don't think it’s only because of a gut check. The longer-term dollar outlook is getting well defined while staring down the double barrels of US dealing deficits. But like every other professional Forex trader on the planet, I'm looking for the 24 hours trade today. Frankly, I don't see other options than to clean up the small GBP spillage I'm dealing with this morning as I don't want to take anything into the weekend that could in any way distract me on my mission to break 80 at Black Mountain Golf course in Hua Hin.

Gold Markets 

Make no mistake: this is not a gold fevered or emotional fear of missing out the market. Much to the contrary, this is a highly sophisticated market that’s modeled tangentially to the pulse of US real yields. 

Even with better economic data and US equities that continue to power ahead, gold continues to take its cue and climb the ladder based on lower US yields as the Fed’s lower for longer mantra, coupled with a strong likely hood of the introduction of some form of inflation targeting, continues to resonate in all gold circles, suggesting the market remains on course for testing the absolute inflation factoring gold highs of $2,800/ oz at some point in 2021.

Why?

I've been involved in trading gold for a very long time, and I honestly couldn't tell you where gold will trade next week or tomorrow. 

But it's the clear correlations to 2008 and the ensuing gold stimulus-driven rally through 2009-2011 that has so many parallels to what’s happening today. There’s never a wrong time to take profits, but even though gold has been making new all-time highs and the metal is up about 70% over the past 2-3 years, it's worth keeping in mind that a similar rally from 2009 to 2011 continued up to +120%.

But don't discount gold’s junior bother "silver" as that’s also mapping correctly to the 2008 GFC stimulus-inspired rally of 2009-11, only in a much more compressed fashion. And that would suggest there’s still a great opportunity here. Indeed the RCM will be running short of Maple Leaf one-ounce silver coins, that's for sure.