Contrary to popular belief, midsummer is never a quiet time. Major breakouts have been recorded in precious metals and major currencies. Valeria Bednarik, Joseph Trevisani, and Yohay Elam thrash out the recent market move, analyze their drivers, and discuss the next action.
Yohay Elam: Weeks with a packed calendar may generate in no volatility in markets, while this week's sparse calendar resulted in substantial moves, driven by different reasons. Gold, closely watched and traded by many readers has leaped to the highest since 2011. What is the main trigger behind the move?
Valeria Bednarik: Same as for Silver, at its highest since 2014. Stimulus, rescue funds!
Joseph Trevisani: Gold is the Armageddon indicator. Fear of the pandemic is the reason. Also yes. An uncertain future and floods of easy money are the trigger.
Yohay Elam: Gold has been on the rise already in 2019 but received more attention during the pandemic. Rock bottom interest rates make yieldless gold more attractive.
Valeria Bednarik: In 2019 gold prices rose roughly 250 bucks. So far this year is over 300 bucks up.. and counting.
Joseph Trevisani: Agreed. It is a classic indicator for market and emotional stress and the equity recovery is based on a reopened economy
Yohay Elam: Is there any trigger for this week's big breakout? Silver has also been carried away higher, as you've mentioned
Valeria Bednarik: Well, EU leaders agreed on a rescue fund, while the US Senate is working on another $1 trillion aid package. In both cases, it means more money, but also more fear, as these decisions are clearly indicating that nobody is expecting economies to recover in the foreseeable future. Instead, we are moving into a global recession. Base metals are the preferred refuge.
Yohay Elam: Gold is on course for a seventh consecutive positive week, the S&P 500 for a fourth consecutive week on the upside.
Joseph Trevisani: Agreed. The rise in US initial jobless claims while small was disconcerting. It does not bode well if claims remain where they are or go higher. The circle is going the wrong way.
Yohay Elam: For me, it's more about lots of money sloshing around, lifting stocks and metals together.
Valeria Bednarik: Yes, still puzzled with equities running...seems purely speculative, which for me, means a higher risk of a U-turn.
Yohay Elam: Stocks seems somewhat disconnected from economic reality, and the increase in metals also looks speculative.
Valeria Bednarik: Yes.
Yohay Elam: Or perhaps metals are correlated with the economic reality, just the one in Asia rather than the US and Europe?
Valeria Bednarik: It's different. Metals are getting additional support from fear and uncertainty.
Joseph Trevisani: I have always been somewhat skeptical about the liquidity angle. Yes, it is true that the Fed and the government are providing cash to the economy but how much of that is actually cash in possession of trading firms looking for investment or newly borrowed funds to the same purpose. I think it is more the old rule...never buck the Fed.
Valeria Bednarik: But is not only the US and the Fed.
Joseph Trevisani: And the notion that the economy will recover, though the timing is now questionable. When the same was said of the equities of the equities during the rounds of of QE under Bernanke...they did not fall when the liquidity was removed. True but the liquidity argument is the same for global finance. It is not comforting that gold is nearing its all-time high.
Valeria Bednarik: Well, we can discuss whether the reasons are, but it's undeniable that bright metals are on the run, and will continue to be in the current macroeconomic scenario.
Joseph Trevisani: I agree with that.
Yohay Elam: Gold is already eyeing the all-time high of $1,921.50. Silver is also at multi-year highs.
Jeroen Blokland, senior portfolio manager at Robeco Asset Management told MarketWatch:
The catalyst of the recent rally, however, seems to be the fact that the world is aiming for a ‘green’ recovery, with a significant part of the stimulus assigned to environmentally friendly measures,” says Blokland. “As silver has a wide range of industrial uses, including electronics and solar panels, demand for this metal should rise from this angle as well.
Joseph Trevisani: I would guess that if the US recovery falters, and we are seeing some signs of that already, gold will set new records.
Yohay Elam: Weaker US economy --> higher chances of more fiscal and monetary stimulus --> more speculative funds going into metals
Joseph Trevisani: And more fear.
Valeria Bednarik: You know? This exceptional situation is making us all consider a "better world" coming somehow, but that's something I'm sceptical on. Green energy is still way too expensive when compared to the usual resources. At the end, capitalism will win, and the green future will be once again delayed
Yohay Elam: A green revolution may be far, but speculation is always rife...
Valeria Bednarik: Yes!
Joseph Trevisani: Green energy is non-competitive for electricity production and requires conventional back-up because it cannot provide a steady, reliable flow of power. It is also unsightly and environmentally costly.
Valeria Bednarik: But we have to agree with Yohay, speculation is always rifle.
Joseph Trevisani: True.
Yohay Elam: Energy from renewable sources is becoming more competitive. The current environment of low oil prices makes investment in green technologies less attractive, but also makes expensive and dirty shale oil extraction less attractive. At some point, the pendulum will swing and both will become more attractive again.
Joseph Trevisani: Perhaps but the reductions in the greenhouse emissions in the US has largely been driven by the switch to cleaner natural gas.
Yohay Elam: Natural gas replaces oil as a stable source of energy. Nuclear energy can fill that function as well. Eventually, the main source will be renewables, with gas and nuclear backing up.
Joseph Trevisani: In fact, I think the US has reduced its emission more than any other industrialized nation. Agreed and the market is headed in that direction, though gasoline may remain for transportation as its energy content is higher.
Valeria Bednarik: Agree, although I believe that I won't live enough to see that "eventually." And I plan to live some decades more. Which means that, for today markets, it is irrelevant.
Joseph Trevisani: We will all live to see the future.
Valeria Bednarik: A green future?
Yohay Elam: As a friend told me "the future will come." Answering a question about what's next...The EU's decision may or may have been one of silver's catalysts this week, but I think we can attribute it to the rise in the euro. We have been complaining about the lack of EUR/USD volatility for years. This week, we cannot complain
Valeria Bednarik: Indeed. Crossing fingers it keeps on moving.
Yohay Elam: We volatility.
Joseph Trevisani: Yes. Patience has been rewarded.
Valeria Bednarik: Yeah.
Joseph Trevisani: The EU stimulus combined with the rise in Covid cases in the US is a dual whammy for the dollar.
Yohay Elam: Do you think that the euro has more room to rise thanks to the EU Fund? We have seen 10-year Italian bond yields dropping below 1% on Thursday, extending the reaction. Or perhaps it is all priced into the euro?
Valeria Bednarik: I do believe it has more room to go, helped by dollar's weakness. As Joseph just said, the greenback is being hit from different fronts, not to mention elections in the way.
Yohay Elam: So far, the S&P 500 is up on the week, and that goes hand in hand with dollar weakness.
Joseph Trevisani: It is interesting the EU fund was less than anticipated but still provided a lift to the euro.
Valeria Bednarik: It's a miracle they agreed on it. Guess that's the positive factor that overshadows the negative one you mentioned.
Joseph Trevisani: Normally US markets do not pay much attention to the election until the fall, but not much of the past four years has been according to type.
Yohay Elam: For me, investors are shrugging off US data, coronavirus stats, and relations with China. We do have encouraging news on the vaccine front from several companies. And hopes for further stimulus...new stimulus from the government, and ongoing support from the Fed.
Joseph Trevisani: The stimulus is happening after the Democrats and Republicans call each other a few more names. It's traditional. Will happen
Yohay Elam: I expected more name-calling, this time things seem relatively quiet.
Valeria Bednarik: LOL. you are right, but what a shame politics have become! and I don't mean just the US.
Joseph Trevisani: Well. Politics are a good deal less vituperative now than they were in the 19th century.
Yohay Elam: Politics are becoming ugly everywhere, at least they have impact on markets, good news for a politics junkie like myself...
Valeria Bednarik: But bad news for the common mortals.
Yohay Elam: Yes. The 19th century, those were the times!
Valeria Bednarik: I don't know, I'm too young to remember.
Joseph Trevisani: Well, I am not so disturbed by the name-calling, rhetoric is normal.
Yohay Elam: The technological revolution in the late 19th century was much more significant than what is happening now.
Joseph Trevisani: Yohay travels in time, I think.
Yohay Elam: Living to see the future, commenting on the past...
Joseph Trevisani: Yes that is true, the 19th century was the border between the past and our future. But back to the markets could the dollar be getting concerned about the US election result?
Yohay Elam: I think that there are greater factors in play: fiscal stimulus in the short term, economic figures, virus developments and around the elections, I think that politics will be dominant, but vaccine headlines may attempt to steal the show.
Valeria Bednarik: Well, is not that is one cause, one consequence. As we have been discussing here, there are multiple factors at play, and most of them are dollar negative.
Yohay Elam: During the next few weeks, I think the elections will not even make it to the podium, perhaps ranking No. 4 in impact behind the virus, data, and fiscal stimulus.
Unfortunately for a politics junkie...
Joseph Trevisani: Agreed. The tides are running against the dollar. Even if equities are on their own game, the credit markets would seem to agree with currencies, the 10-year Treasury is at 0.586% this morning. I tend to agree. The virus and the economy are driving. But don't worry, the campaign will be very ugly, I meant lively.
Yohay Elam: When Draghi said "a lively exchange of opinions" referring to an ECB meeting, he meant a shouting match... I am sure the campaign will be ugly.
Joseph Trevisani: Heroically so, and the media will act like a megaphone.
Valeria Bednarik: Guess nobody doubts on that. We are going to have some fun.
Yohay Elam: I was flirting with the idea of traveling in October but quickly slapped myself for even thinking about it
Valeria Bednarik: LOL.
Joseph Trevisani: Where? Here? The ghost town of Manhattan?
Yohay Elam: I thought of walking the high mountains of Nepal, but this time I'll opt for high volatility in markets...Thinking about... The Federal Reserve meets next week
Valeria Bednarik: I'm not putting too many chips on the Fed this time. Guess they will continue with a wait-and-see stance. Monetary policy on-hold, uncertain future due to pandemic, economy moving in the right way. That will probably be the message.
Joseph Trevisani: The Fed has been very preemptive but the question is what else can they do?
Valeria Bednarik: Exactly.
Yohay Elam: YCC.
Valeria Bednarik: Central banks can do up to a point.
Yohay Elam: Yield Curve Control, but probably not now. So, no impact on the dollar?
Valeria Bednarik: I would say so.
Joseph Trevisani: Probably not. I think the FOMC would really shock markets if they started a new program. What do they know would be the question?
Yohay Elam: Agreed, I think they will refrain from rocking the boat, trying to stay out of the spotlight. They already did so much. They will probably leave market action to other factors.
Joseph Trevisani: And I am not sure there is much more they could do side from increasing amounts.
Yohay Elam: I think they will eventually go for Yield Curve Control, for what it's worth.
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