19-Feb-2020

1) Asia Open : It’s Not Where It’s Been, Its Where It’s Going
2) Dollar Pares Losses As Coronavirus Concern Lingers
3) Gold/U.S. Dollar: Gold Prices Smashed Estimated Target

1) Asia Open : It’s Not Where It’s Been, Its Where It’s Going

After returning from holiday, US markets were weaker Tuesday. The S&P500 was down 0.2%, heading into the close, and US 10Y yields fell 3bps to 1.55%. 2s5s has inverted since last Thursday and slipped further into negative territory overnight, while the 2s10s curve is at its flattest seen all year. The risk-off sentiment was widespread, but not deep, European and Asian equities fell, oil slipped, and gold lifted 0.9%. All attributed to the fact that sentiment was dented by Apple, indicating it will likely not meet revenue projections for Q1 because of supply-chain disruptions due to the coronavirus.

However, the Apple disclosure wasn’t perceived as a massive surprise, given large parts of China are in lockdown. Still, price action will be critical, given the market has shaken off virus concerns so far, especially in the tech sector. And to that note, the warning failed to move the “growth trade” in aggregate lower on Tuesday.

None the less the news provided the equity market with its first real sentiment test, and it took Apple to do what the coronavirus couldn’t – make stock markets feel very queasy.

But any market wobble this year, whether from data-driven concerns or geopolitical events, has all been a “buy the dip” opportunities for investors primarily because worst-case scenarios were a long way from being realized. However, the Apple news is getting looked at differently because they are the first high profile company to come out and warn about the impact of the coronavirus. And for some, it could signal that fundamentals are starting to reassert themselves. The absence of which has left many an investor, especially those short stocks, scratching their head.

There has been much debate about the foundation of the equity market rally with virtually everyone blaming central bank policy for the continued risk-on moves as the hunt for yield and the overall demand for riskier assets outweighed the fundamentals.

But it is all about liquidity and momentum these days. While equity desks are not precisely hovering up the dip, the NASDAQ, which everyone should be paying attention to give its tech focus, has recouped earlier losses while the S &P 500 is only marginally down into the close.

But these markets are increasingly tricky, and while I won’t go as far as saying the days of the easy trades of hammering, the reversion button is gone. But the Apple guidance has done something that trade war, an actual war, and the coronavirus has failed to do, make traders think twice before smashing the big risk-reward reversion bets.

2) Dollar Pares Losses As Coronavirus Concern Lingers

The greenback pared intra-day losses made in Asia and Europe and ended higher against majority of its peers on Tuesday on continued fear that the coronaviurs outbreak may impact global growth. The single currency fell on weak German data while sterling retreated in New York session on EU-UK trade concern.

Versus the Japanese yen, although dollar dropped from 109.90 in Australia to session lows at 109.66 in Asia on continued concern over coronavirus as well as selloff in the Nikkei 225 (down by 329 points or 1.40%), price erased its losses and later rallied to an intra-day high of 109.94 in New York morning on strong rebound in U.S. Treasury yields before retreating to 109.78 on weakness in U.S. equities.

The single currency initially dropped to 1.0824 in Asian morning and intra-day fall accelerated in Europe and later hit a fresh 32-month bottom at 1.0786 in New York morning on weak German data before rebounding to 1.0825 on short-covering. However, the pair met renewed selling there and retreated again to 1.0792 near New York closing.

Reuters reported the mood among German investors deteriorated far more than expected in February on worries that China’s coronavirus outbreak would dampen world trade and deepen a manufacturing recession in Germany, a survey showed on Tuesday. The ZEW research institute said its monthly survey showed economic sentiment among investors fell to 8.7 from 26.7 in January. Economists had expected a drop to 21.5. The survey adds to expectations that Europe’s biggest economy will continue to lose momentum in the first half of 2020 as its manufacturers linger in a recession prompted by a reduction in exports.

The British pound went through a volatile session. Although cable met renewed selling at 1.3009 in Australia and then fell to session lows at 1.2971 in European morning on conflicting news over EU-UK trade negotiations, price erased its losses and rallied to an intra-day high at 1.3049 after new Finance Minister, Rishi Sunak, announced that the March budget will be delivered as scheduled on the 11th before retreating sharply to 1.2996 in New York afternoon on cross-selling in sterling.

Reuters reported Britain’s negotiator with the European Union said on Monday that London was prepared to accept an “Australia-style” free trade agreement with the bloc if its member states continue to have doubts about the terms of a no-quotas, no-tariffs deal.    The EU does not have a free trade agreement with Australia, and so such an arrangement would effectively be a trade relationship governed by World Trade Organization rules.David Frost told a university lecture in Brussels that Britain, which left the EU at the end of January, wanted a trade agreement similar to that which Canada has with the bloc when a transition period ends on Dec. 31, 2020.

EU negotiators have said that for a Canada-style deal, Britain would have to adopt a level playing field with the bloc on state aid, environment, employment and other regulations to guard against unfair competition with the European single market.    Frost said that whatever trade friction Britain faces when the transition period ends, his country would aim to minimise it as much as possible through customs facilitation.

Reuters reported the number of people in work in Britain jumped again in the last three months of 2019, according to data which underscored how the labour market defied a slowing of the broader economy ahead of December’s election. The number of people in work jumped by 180,000 to 32.934 million, at the top end of forecasts in a Reuters poll of economists. Full-time employment accounted for most of the growth while self-employment also rose strongly, the Office for National Statistics data showed.     The unemployment rate of 3.8% remained at its joint lowest level since early 1975.

However, growth in pay has slowed steadily in months. Total earnings growth including bonuses, rose by an annual 2.9%, the weakest increase since the three months to August 2018. Excluding bonuses pay growth also slowed to 3.2%, its weakest increase since the third quarter of 2018. Economists had expected total pay to grow by 3.0% and regular pay to grow by 3.3%.

Reuters reported Britain’s budget will be delivered on March 11, as planned, newly-appointed finance minister Rishi Sunak said on Tuesday, dispelling speculation that the date might be changed. Sunak’s predecessor Sajid Javid unexpectedly resigned in last week’s cabinet reshuffle, raising questions about whether the budget would be delivered on schedule. In a tweet, Sunak said, “Cracking on with preparations for my first Budget on March 11. It will deliver on the promises we made to the British people – levelling up and unleashing the country’s potential.”

In other news, Reuters reported the EU hardened its stance for looming negotiations on a new deal with Britain, from firmer demands for fair competition guarantees that would “stand the test of time” to raising the prospect of demanding the return of stolen cultural goods from London, according to a draft seen by Reuters. Ambassadors of the 27 EU states are due to discuss the updated negotiating mandate at a meeting in Brussels on Wednesday before it gets the final stamp of approval at a ministerial gathering later this month. Changes from a previous version include the strengthening of the so-called level playing field provisions. The 27 would also demand similar clauses for international maritime transport and other areas, the document showed, and  have also stressed more firmly that they would be taking on their own any decisions on equivalence that would allow access for British financial services to the bloc’s single market.

3) Gold/U.S. Dollar: Gold Prices Smashed Estimated Target

Gold prices smashed the estimated target at 1592.00 against the U.S. dollar after a breakthrough at 1575.90 price barrier. Gold prices have taken out three resistance level at 1582.00, 1586.60, and the target price at 1592.00 since my last update and now testing 1600.00 support as I compile this post.

Gold prices broke through 1600.00 in this morning’s trades and tested 1605.00 before retreating to 1600.00 price level. Gold prices have reached the top of the 60 minutes price channel highlighted in my previous post and need to hold above 1600.00 to continue to the upside.

Yesterday marked the 19th day in a row of gold ETF inflows. It appears that investors are continuing to seek gold as a quality asset or hedge against the economic impact of the outbreak. There is a significant appetite for this segment of the market to continue adding gold as a strategic part of the portfolio.

USD strength has probably restrained – but did not significantly impact – gold gains. Instead, bullion is finding the bulk of its support from lower equity markets. While a modest dip in yields also buttressing demand.

If it’s just an equity correlation, then gold will come off hard if the stock market does there usual buy the dip mode.

Apart from COVID-19 economic effects, Eurozone data remain weak. Still, the fear that the CDU crisis in Germany could spread across the EU has been underpinning gold support across Europe as political risk uncertainty comes back to the fore.

Also, COVID-19 will have a multi-faceted impact on growth in ASEAN this year, most immediately in the tourism and retail sectors. Policymakers are likely to respond to the virus with a mix of fiscal and monetary policy. Yesterday, South Korea, Thailand, and the Philippines central bank started signing from the same dovish song page, commenting that they are considering cutting interest rates, which is moderately bullish for gold prices.

And nudging gold along is that the December 2020 Fed Funds imply year-end Fed rates at 1.22% against 1.40% just 7 weeks ago – in other words, the market has gone to pricing 30bp from just 20bp worth of a Fed cut this year as US rate cut fever is starting to build on the back of COVID -19 concerns.

The next target to the upside is estimated at around 1615.00; however, it will need to stay above 1605.00 to achieve that target. The long term uptrend is very much intact, and this could be the beginning of a gold rally. Gold prices could retreat to around 1592.00 if it fails to hold above 1600.00.