Risk Wobbles on China Woes; Gold Breaks Out

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US-China tensions escalate
Euro holds above 1.1500
Nikkei -0.58% Dax -0.67%
UST 10Y 0.59
Oil $41
Gold $1850/oz
BTCUSD $9343

Asia and the EU
No data

North America Open
CAD CPI 8:30

Equities sold off in late Asia and early European trade today on news that the US has forced China to close its Houston consulate due to intellectual property violations.

The move is just the latest salvo in the increasingly strained US-China relationship as Trump administration begins to take a much tougher line on Chinese economic spying.

Despite the dramatic political move that involved the Houston fire department as Chinese consulate workers burned papers in the street, the market reaction has been relatively muted. Stocks only sold off by 50 basis points finding a modicum of support in mid-morning London dealing as investors continued to view the latest posturing as more bark than bite.

There is some fear that China may retaliate by closing the US Wuhan consulate in return, but so far the Chinese have not made any moves as they are reluctant to escalate the tensions which could quickly spiral into an all-out trade war.

Still, the news on the geopolitical front is sure to weigh on risk flows as concerns will mount that that political jockeying could impair the global recovery from the pandemic especially is the rhetoric turns more strident as the summer proceeds.

The change in risk sentiment is most pronounced in Gold which benefiting from both lower US yields and rising safe-haven flows. Overnight the yellow metal rose above $1860 an ounce hitting multi-year highs as investors increasingly turn to the asset for safety. The next big target of longs will be the $1920 all-time high and then the psychologically important $2000 level. Gold attracts flows when real interest rates compress and when political tensions rise, so the current market regime is a perfect recipe for a move higher over the intermediate term horizon.

Boris Schlossberg
Managing Director

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