Noble Apex eNewsletter Issue 813- The implication of increasing gold price

2019-06-17 03:37
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17 June 2019 Issue 813

Global Market Commentary

Equity

  • US: The number of unemployment in the United States has unexpectedly increased. In addition, the trade war is still uncertain and may affect the economic growth. The market expects there is a interest rate cut soon, driving up the stock market. For the entire week, the Dow rose by 0.41% to 26,089.61 points. The S&P 500 index rose by 0.47% to 2,886.98. The Nasdaq rose by 0.70% to 7,796.66.
  • Europe: Driven by resources and auto stocks, European stock markets generally rose. Over the week, the UK’s FTSE 100 index rose by 0.19%, the German DAX index rose by 0.42%, and the French CAC40 index rose by 0.07%. The STOXX 600 index rose by 0.35% to 378.81 points.
  • Asia: The market expects the heads of China and the United States will meet and can resolve trade dispute during the G20 summit. Moreover, the expansionary fiscal policy of China has stimulated the economy. For the whole week, the Nikkei 225 index rose by 1.11% to 21,116.89 points. The MSCI Asia Pacific Index rose by 0.58% to 155.21 points.

Bonds

  • US: The United States withdrew its measures to impose tariffs on Mexico, and the market expects the Federal Reserve will cut interest rates, causing funds switched from the bond market to the stock market. For the whole week, the US 10-year bond yield rose by 0 basis points to 2.108%.
  • Europe: The Eurozone economy is still weak, trade risks are increasing, and the European Central Bank’s monetary policy remains moderate, resulting in a record low in the yields of German and British government bonds. For the whole week, the German 10-year bond yield rose by 0 basis points to -0.256%.

Commodity

  • Oil: US crude oil stocks unexpectedly rose to the highest level since July 2018, and the US Department of Energy lowered its forecast on global crude oil demand growth. Over the week, New York oil futures fell by 2.74% to close at $52.51 a barrel.

Currency

  • US dollar: President Trump said that even if Chinese President Xi Jinping does not meet with him at the G20 summit, he expects that the US will reach a trade agreement with China on one day, which beneficial to the US dollar. For the entire week, the Dollar Index rose by 1.065% to 97.572.
  • China: Zhou Xiaochuan, former president of the Central Bank of China, said that problems arising in the trade sector may once again trigger a competitive devaluation of currencies in many countries. For the whole week, the yuan fell by 0.204% against the US dollar at 6.924.

 

Economic-related News

  • US: The United States accused Iran of being responsible for the attack on two tankers at the entrance to the Persian Gulf, which Iranian officials denied. The oil tanker attack caused the market to worry that diplomatic efforts could not avoid the war between the United States and Iran.
  • US: White House economic adviser Kudlow warned China that Trump is still waiting for Chinese President Xi Jinping’s reply to the two-person meeting on trade issue. If Xi Jinping rejects the invitation, China may face consequences.
  • U.S: Trump issued a tweet on Tuesday, slamming the Fed’s interest rate is too high, complaining that the euro and other currencies are depreciating against the US dollar.
  • Euro-zone:   Euro-zone: Boris Johnson, who supported Brexit,  has secured the highest number of votes in the first MPs’ ballot to select the Conservative Party leader and next prime minister. This overwhelming advantage means that if he can avoid major mistakes, he will almost certainly be the two candidates to enter the finals.
  • Euro-zone: Euro-zone: According to data from the German Federal Statistical Office, the final value of the growth rate of  German Consumer Price Index (CPI) in May has slowed down rapidly, from a 2% rise in April to only a 1.4% increase, hit the lowest level since February last year.
  • Euro-zone: Euro-zone: European Central Bank official Kazimir said the euro zone is not facing a recession or deflation. The Bank of England reiterated that tensions in Brexit issue and global trade issue caused downside risk to the UK’s economy.
  • Japan: Japanese Prime Minister Shinzo Abe said that the 2% inflation target has not been reached, but the “real” goal has been achieved.
  • Japan: According to the Conference Board data, after the seasonal adjustment, Japan’s Leading Economic Indicator for April (LEI) continued to drop 0.8% month-on-month (previous value down 0.6%) to 95.8.
  • India: According to data from the Indian Ministry of Industry and Commerce, India’s trade deficit in May expanded by more than 5% year-on-year to US$15.36 billion, a six-month high, but still below the market expectation deficit of US$15.84 billion.

 

China Market Commentary
Economic-related news
• China’s social financing scale and new RMB loans in May were lower than expected. Bloomberg economists said that the credit data crisis, the medium and long-term lending activities of enterprises have slowed down, and the window of RRR cuts is still exist in June.
• Fitch reported that if China blacklists US companies or bans the export of rare earth metals to the US, it could have devastating effects on the US technology industry and some Chinese industries.

The implication of increasing gold price

Recently, global risk aversion has risen sharply, and the market’s expectation of the central bank’s easing has also risen. The price of safe-haven assets rose sharply, and the gold price challenge $1,350 per ounce. As mentioned in this column last week, “Is interest rate cut enough to save the market?”, there is a risk of financial warfare in the future. And structural problems are not able to resolve through easing monetary policy.

Easing policy is not panacea

The central bank’s quantitative easing is the honeymoon period for risky assets, but the safe-haven assets are weak this time. After the financial tsunami, the global quantitative easing program began to be implemented until the Fed began to shrink in 2018. Under the substantial expansion of central bank assets, since 2012, gold prices have underperformed other assets, and US stocks have become one of the most profitable assets. The reason is that the global economy entered the blonde period, and the world did not face systemic risks after the European crisis until the Sino-US trade war escalated.

The reflection of the price of different assets on the easing monetary policy has changed. First, the asset price is more volatile than the past, and the easing policy effect is diminishing. Second, in the past two market adjustments, the US stock market has fallen more than most information markets. This means that the direction of market concern is turning to the United States.

The US economy has a risk of slowing down

The slowdown in growth in mature economies began with the European economy. At the beginning of 2018, the European PMI peaked. So far, European and export-oriented enterprises have continued to decline. The new orders index in the German IFO survey has not yet improved. The growth rate of Asian and Japanese exports is still negative.

The economic weakness was passed to the US manufacturing industry, and US industrial output fell by 1.25% compared to the end of 2018. Corporate earning is also peaked in the fourth quarter of last year. More seriously, the slowdown in corporate sector earnings has begun to affect employment. The number of nor-from payroll in the United States fell below expectations in May. If retail sales data does not perform well, the honeymoon period of US economic growth is once again tested.

In this case, even if the central bank re-considers the easing monetary policy, the comparative advantage of the US economy is no longer exist, the market is worried about the systemic risks. Once this expectation becomes true, the money will record outflow in stock market.

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