Both Gold and Risk Rally – Why?

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Market Drivers February 19, 2020
Gold and USDJPY climb
UK inflation slight beat
Nikkei 0.89% Dax 0.51%
UST 10Y 1.55%
Oil $52/bbl
Gold $1610/oz
BTCUSD $10130

Europe and Asia:
GBP UK Core CPI 1.6% vs. 1.4%

North America:
USD PPI 8:30
CAD CPI 8:30
USD Fed Minutes 14:00

In an unusual correlation, both gold and risk assets move higher in Asian and early European trade today with US futures up about 35 basis points USDJPY firmly through the 110.00 figure and Gold approaching its 7-year highs set earlier this year during the Iran crisis.

The markets appear to be both ignoring the long term negative economic impacts of China shut down while at the same time hedging the risk by bidding Gold higher. On the equity side traders remain delirious with hopium bidding up equities despite yesterday’s warning from Apple on the assumption that central bank liquidity will continue to prop up risk assets which are now being driven by pure momentum frenzy.

The rally in risk has been so relentless that it has finally pushed USDJPY through the 110.00 level with the pair firmly clearing that level as it trades at 7 month highs of 110.34.

At the same time, Gold verticalized in today’s trade after taking out the 1600 handle yesterday with the yellow metal now within a whisker of 7-year highs. There are many theories as to why gold has suddenly seen such a bullish impulse with coronavirus risk certainly one of them, but the yellow metal is also benefiting from more fundamental factors such as the fact that for the first time in more than a decade central banks have been net buyers. But perhaps the single greatest reason for Golds’ strength is that real interest rates are negative and continue to progressively remain so.

The odd man out in today’s dance in the markets is bonds that are not signaling even an ounce of optimism coming from equities. US 10 year rates remain at 1.55% with 30 year now below 2%. The bond market is pricing in global contraction or at the very least slow down while the equity market is showing a much more sanguine outlook towards the future. The rise in Gold, therefore, is both a hedge against the very optimism in stocks as well as response to the ever contracting real yield on fixed income assets.

It’s clear that today’s unusual price action is signaling a massive underlying tension in the markets and the most likely candidate to blink first will be equities especially if central bank largesses finally translates into budding inflation. Today’s US PPI data could be the key release that resolves some of these conflicts as the day proceeds.

Boris Schlossberg
Managing Director

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