BoK surprise hold, Fiscal Pump? FX markets non reactive while Gold languishes in no mans land

Risk Markets

Concerns over the global spread of the coronavirus continue to weigh on markets with equities remaining soft and yields near the lows. Still, the follow-through into G10 FX remains relatively subdued, especially on USDJPY.

I think everyone is on the same page now; more virus spread terrible for stocks.

Bank Of Korea

The biggest surprise of the day has come from the Bank of Korea (BoK) after they unexpectedly left the policy rate unchanged at 1.25%. This pause drills home just how uncertain central banks are about calibrating a monetary policy response to the coronavirus outbreak, echoed by Fed Vice Chair Clarida earlier this week. Let's face it South Korea was one of the proxies hardest hit by the secondary virus cluster effect suggesting its a supply-side boost that is most needed

Fiscal Pump

We know the banks can't boost the supply-side dynamics, so they remain in" wait in see" demand damage control mode. But of course, what's most desperately needed is a fiscal response, which has been lacking so far, outside of recent measures in Singapore and HK.

A g-20 response is likely coming, but for those looking for shock and awe, fiscal delivery, there's always a strong chance they will be disappointed.

But its the fiscal pump that could be what's holding gold prices back at the moment as expansionary fiscal policy could increase global bond yields precipitously. At a minimum, the lack of a significant dovish central bank impulse isn't great for gold markets either.

Currency Markets

GBP

Concerns that the weak economic outlook and the coronavirus could defer spending and tax cut proposals into Autumn as well as the souring mood into UK-EU trade negotiations keep weighing on GBPUSD.

AUD 

The G-10 China hyper beta, the AUDUSD, remains on the back foot as the selling pressure seemed to louden overnight ahead of next week's RBA. It has not looked back since breaking the short-term triple bottom at 0.6580-90. AS for the rest of the ASEAN basket, traders have turned a bit neutrals today.

 CNH

USDCNH bounced off the overnight low and remained better bid in a confined range as onshore spot continues to face reportedly strong equity outflows again. But with the Yuan remaining anchored to the PBoC policy guidance, volumes have rather light.

Gold markets

Gold is stabilizing, but a series of lower lows and highs don't bode well for the bulls over the short term. I still like the buy on the dip since I'm not running to much short-term risk, but the lack of intraday volatility is making things a bit challenging to keep one's focus Expect support at $1620 before $1600. A daily close below $1580 would be a bit of a trap door event I would think

Jewelers I chat with are crying about the considerable drop in physical demand since the virus hit. So, the bearish aspect of reduced consumer demand amid the economic slowdown could be depressing prices as physical does remain a significant demand channel.

Fundamentals still lean towards a bullish bias as stocks remain under pressure yield structures are pointing lower while the US dollar is trading weaker vs. the Euro all correlate gold higher. And my best guess is it will take a significant US turn in the virus spread headcount to spook investors out of their long gold position.

Virus spreads stateside 

The US CDC confirms a possible instance of community spread of COVID-19 in California. (Reuters) And if this virus spread intensifies stateside, it will most definitely be the straw that breaks the market back, which supports my cross-asset running super spreader narrative

Things have gone a bit quiet, so taking a look at some of the more odd moves over the past 24 hours.

Risk appetite takes an unusual shift

Tuesday's price action on both EUR/USD and gold was telling The EUR seemed to establish itself as a beneficiary of the adverse risk environment, while gold stages one of the oddest reactions I've seen it make in years in the face of a sharp equity slide.

Twenty four hours after the fact things are much clearer and besides the confirmed gold liquidation of good positions to help with losing ones and facilitate equity-related margin calls, the bulk of the moves likely came down to positioning and nothing more sinister than that.

Firstly, some of both the EUR and Gold reactions are about extended spec positioning, both short leveraged EUR, and more obviously long gold.

However, on a cumulative basis, the fundamental case for gold responding favorably to adverse risk events like the COVID-19 virus seems far too compelling of a storyline to ignore and should win the day while the fundamental story revolves mostly around monetary policy.

The Fed Funds Futures market has decided the coronavirus represents just such a "development": the drag on the US and global economy will be such that the Fed will have to revise its economic view and its policy profile. At the start of the year, the December 2020 contract implied just 19bp of cuts -- less than one cut -- this year, and it has now risen to 53bp or over two cuts. A fifth of that adjustment occurred on Monday alone.

The Fed, on the other hand, remains calm, as not one Fed speaker has given even a hint that the coronavirus was causing them to change their overall view of the US economy, even slightly, let alone trigger any reassessment.

The longer that divergence of views remains in place, the lower long-end Treasury yields will fall, and the more Treasury curve spreads will narrow.  In this scenario, I see gold as a win-win trade.

But ultimately, the tighter financial conditions triggered by the recent equity market declines will most certainly trigger the Feds circuit breaker.