Everyone agrees that a recovery is at hand after the deepest but shortest recession on record thanks to massive fiscal and monetary relief measures that put a floor under the economic collapse and limit the negative consequences of global shutdowns. Now that we’re seeing an upswing, competing views of the rebound have emerged. On the flip side is the view that the bounce will be more anemic because of social distancing and fears over a second wave. And in between, there’s the belief that the early bounce will fade to lackluster growth. As the summer begins, the markets will remain volatile on the tug-of-war between these views. Data will be important as we gauge the rate of the recovery.
Last week’s small decline in US jobless claims caused some disappointment and suggested the good news from the May jobs report was an overshoot. Trade data globally remains extremely weak. The virus spike in Beijing and the emergence of hot spots in other parts of Asia, as well as in some US states, have added to the view that a less robust, or a flattening in the recovery, is more likely.
Today, the early wobble in markets at the open came with data showing a further acceleration in coronavirus infections and a German coronavirus r-rate increase, though the Robert Koch Institute downplayed this, arguing that small localized outbreaks in the context of low overall case numbers have exaggerated the headline statistic, which helped risk sentiment improve in global markets.
The risk-sensitive currencies and assets in general, rebounded from early losses, as stocks in the Asia-Pacific region lifted out of early losses, for the most part, while USA500 futures managed gains of 0.5%, wiping out the decline seen during the regular Wall Street session on Friday.
The precious metal, Gold, spiked on the open by finding bullish momentum from Friday’s strong session, that resulted in an upside breakout of the key $1745.00 today. The asset topped at $1,758.57 (1-month high), raising concerns over whether this breakout could be reliable for a move to $1,800, or whether it could be seen waning again similar to May 18th.
Gold has been seen supported as risk appetite soares as the rising virus cases in the US raises concerns over a swift economic recovery. Interestingly, over the weekend , Reuters reported that 9 private banks recommended their clients to hold “up to 10% of their portfolios into the yellow metal as the massive central bank stimulus reduces bond yields – making non-yielding gold more attractive – and raises the risk of inflation that would devalue other assets and currencies.” Before the pandemic crisis, private banks were advising for no investments in gold or at least just a tiny amount of gold.
In simple words, as stimulus is sustained, keeping yields low and interest rates low, and as QE measures keep devaluing fiat currencies, then gold gains traction, as a non-yielding asset.
It is worth mentioning that according to Reuters, 9 private banks supervise around $6 trillion in assets of the world’s ultra rich people and hence they have advised their clients to increase their gold holdings. Advice that hasn’t been seen since the Great Financial Crisis and the Lehmans demise.
That said, let’s not forget that Gold has been sustaining a rally of more than 12% for the year and around 25% higher from a year ago. While the fundamental supply and demand picture for Gold remains to the upside, as a V-shape recovery for the economy of the world’s biggest gold consumers, China and India, could see demand spiking.
Technically speaking, the daily momentum indicators sustain caution against the breakout play but remain positive. Resumption of the May rally could push gold to its $1,765 Resistance. Ideally, Support could be seen at the 1-month Resistance at $1,745.00.
Andria Pichidi
Market Analyst
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