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What Gives? Stocks Offered; Gold And Bonds Bid

Published 21/02/2020, 10:55
Updated 25/12/2023, 10:05

Stocks offered, gold and bonds bid. Looks like simple risk-off but the yen isn’t playing ball. Indeed the story is a bit more complicated than that.

US stocks took a sudden turn for the worse on Thursday, with the Dow ripping nearly 400 points lower before rebounding to eventually close down 128 points.

It was a bit of a head scratcher. There was nothing except the usual coronavirus fears - some pointed to a report saying there was a spike in admissions at a hospital in Beijing, but I rather prefer a technical explanation as markets pulled back from Wednesday’s record highs for the US and Europe. Whatever it was the dip buyers emerged. However I’d expect a lot more volatility today as we head into the weekend.

Asian equities are weaker after the limp handover from Wall Street. Hong Kong and Seoul lagged. I think we are getting a greater impression of the economic damage – some developments:

  • South Korea has reported a spike in cases and declared two cities as ‘special care zones’. Covid-19 worries remain high and increasingly it looks like the outbreak will depress growth for longer than markets had hoped.
  • Japan’s economy is in a mess – the manufacturing PMI slipped to 47.6, the weakest since 2016.
  • Chinese car sales fell 92% in the first half of February
  • Vietnam is reporting supply chain problems from the coronavirus outbreak that could hit deliveries of new Samsung (LON:0593xq) devices
  • Honda is to postpone restarting its plant in Wuhan to March 11th

European equities opened weaker as they took the cue from Asia’s soft session. The FTSE 100 struggled to hold 7400 and the DAX shed 90 points to 13,572.

All the stops are out for gold and momentum buying is pushing up prices even further. We’re seeing a very rapid march higher to north of $1630, knocking out a fresh 7-year high. Next major target appears to be $1690.

Bonds are bid with US 10s taking a 1.49% handle.

Copper has taken a tumble again on broader growth fears.

USDJPY trades either side of 112, eyes a break of the big 50% Fib level around 112.60/70. The rally has a definite look of being quite extended and requiring a pause – indeed as of send time the yen has fought back, forcing the pair to ease off the highs to 111.70. Swing low support at 111.10.

EURUSD is struggling below 1.08 and the pressure from the buck is relentless. Deadlocked talks over the EU budget won’t help. Two comments on this - with the U.K. leaving the other northern net contributors will have to stump up more for their project, or the EU will need to trim its cloth. Secondly, they always figure it out in the end.

GBPUSD is continuing to feel the brunt of dollar strength. There’s been chatter about how far apart the U.K. and Europe are in terms of trade talks. A commentator I respect greatly has looked at the respective positions and suggests a deal is maybe 50/50. Certainly there may be bit of Brexit jitters about this move lower in cable but the dollar is bid across the board, so we should look at that. With the retreat towards 1.28 we’ve entered the extreme low range of the broad range since October. 1.2850 provided near term support, with pair bouncing off this level overnight.

What gives?

Whilst we’ve got some weakness in stocks in the last session and today, US and European equities are trading within all-time high ranges. At the same time, bonds and gold are very well bid, whilst the yen is selling off. Gold has broken through to fresh 7-year highs, despite a very powerful dollar.

Whilst there is a haven bid in there, and we note predictions for gold at $2000, I’d always come back to this as a yield play, specifically real US rates, which in the last month have moved sharply into negative territory right up along the curve to the 10-yr maturity. As I’m always keen to stress, gold is all about real rates.

I can only put this all down to monetary policy expectations driving markets over fundamentals - although the selling in equities could yet build up some steam that is more fundamental driven. Investors are showing their desire to hedge risk in relation to downside factors like the coronavirus but are not selling out of equities for good reason. If you want to capitalise on upside shocks these are the place to be. If it all goes down the pan, the central banks will be there. Gold is acting as a useful hedge when real rates are negative.

For the yen, its haven status is coming under pressure due to capital outflows, pension funds increasing holdings of foreign bonds and weak economic data. But you could argue that with equities near their record highs there isn’t the full flight to safety in process.

Against all this, the Federal Reserve’s intellectual heartbeat Richard Clarida has poured a bucket of cold water on markets expecting a rate cut this year.

“Market pricing for rate cuts is a little tricky, because there's market expectations for rates, there also can be term and liquidity premiums," he said on Thursday. Does that mean they won’t cut? Perhaps, but if the economic data starts to soften, the bias to a cut is clear enough. The problem lies in the Fed cutting so near an election, it will start to look very political if the Fed cuts now. In fact last year’s adjustment could be seen as a way of getting ahead of the election news cycle as they were aware that cutting in mid 2020 could be problematic.

Meanwhile we’ve got arch dove Neel Kashkari talking about a rate hike if there’s an upside shock for the US economy. I don’t recall Neel ever acknowledging what a hike looks like so this is interesting. Of course he still thinks a cut is next: “If I were to guess, the Fed will sit here for the next 3-6 months, and next move would be a cut," he said Wednesday.

Lots more Fed talkers today to help ram home the message.

Coming up

EZ, UK, US Flash PMIs, EZ CPI (Final), US Existing Home Sale, ECB’s Lane & Wunsch, Fed’s Kaplan, Brainard, Clarida, Bostic...plenty to keep us occupied.

What are we looking for?

EZ to show ongoing weakness, contraction and a broad lack of confidence. Mfg expected 47.4, services exp 52.3, composite 51.

U.K. to show much more optimism as the Boris Bounce continues. Mfg expected 49.7, services 53.4, composite 52.8. Percent

US to be steady with improvement on trade offset to a degree by coronavirus worries. Mfg expected 51.5, services 53.4.

The final EZ inflation print is seen at 1.4%, 1.1% core, year on year.

Equities

Pearson full year adjusted operating profit missed estimates.

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