Half Time 2020 Review
The following looks at core views across markets as we enter the second half of the year.
Gold
What started off as a shaky start to June has instead turned into a major bullish break. The clearest and most important monthly and quarterly close across markets was on Gold (GC1) which finished above the May high resulting in a strong bullish monthly.
The path is now set for a rally to the all-time high of $1,920.
It is no coincidence that the Q2 Gold performance was the best since Q1 2016 which was when the Bank of Japan changed interest rates to negative. Ultra-lose monetary policy had a huge impact then as it is again now, though on a much larger international scale this time. We have already seen a break to fresh highs on Gold when measured against a basket of USD/EUR/JPY/CNY and let us not forget that Gold is the worlds best performing currency YTD, while the best for the 2nd quarter was Silver. This is, without doubt, the year for ‘hard’ currencies again. Given the ongoing crisis of Covid-19 it is highly unlikely that the lose central bank and government policies will be pulled back any time soon. Consequently, a target of $2,000+ is quite reasonable before year end.
Equities
The same lose policies have resulted in the best quarterly performance in the stock markets since 2009 – that was also a period after major stimulus from central banks was put in place while there was a simultaneous collapse in economic activity at the time. Some indices like the Dow Industrials or S&P 500 just posted the best quarter in more than 20 years. When printing presses are in gear and intervention in asset markets are firm, there is naturally going to be a contrast between stock trends and the ‘real’ economy. Even still it is prudent to be more short term and nimble from here as one cannot reasonably expect similar returns to repeat again this quarter and the next (if they were to repeat then the S&P 500 would finish the year 37% up – nothing is impossible but even the most ambitious bull might find that to be a bit of a stretch). The next earnings reports along with more economic data may provide a potential short-term crossroad this month. July should be strong however reservations are held with respect to August which is sometimes a volatile month in markets. Any pickup in volatility, should we see it, will very likely result in more dovish rhetoric or action by the Federal Reserve which would in turn stabilise markets and, as a minimum, further support Gold.
Foreign Exchange
Having reversed the gains seen in March the USD is now at a cliff edge. Short-term two-way price action is likely though that is all within the context of a longer-term bear market.
Price action in Asia, and particularly on USDCNH, warns of a major trend down on the USD over the remainder of the year and probably going in to 2021. It is becoming clear that international attitudes towards China are worsening – whether in the arena of trade, supply chains, or geo-politics. However, the Renminbi is no weaker than last year when trade war concerns were at the fore. The more dominant driver in markets seems instead to be actual policies which are coming together to argue for a weaker USD which is itself a form of monetary easing for the US. If the USD looks weak against CNY in an environment like this, then it really does look weak against a lot of other currencies.
With respect to supply chains, India remains a serious potential beneficiary from any re-directed investments away from China. This is encouraged further by the government’s renewed efforts towards the ‘Make in India‘ campaign, as well as the relatively cheap and plentiful labour resources that India offers. The Nifty Index has started to outperform the S&P 500 and should continue higher, particularly if we manage to break above 11k. USDINR has remained elevated for most of Q2 which was needed for the Indian economy to recover but even there we now see signs of USD weakness when 75 firmly gives way. For more on India, listen to this podcast.
There are also numerous signs that the Euro will perform well. Key monthly reversals on EURJPY, EURCHF and a breakout on EURGBP all suggest moves higher. EURUSD will be particularly strong above the 1.15 handle as will EURCNY above 8.10-8.11. The timing of these signs are note worthy given the long term EU budget proposals which will be discussed by The Council on 17-18 July.
Real Estate / Housing
Historically, major stimulus between housing led downturns have not only supported the real estate markets in the US but also weakened the USD. This was true in the mid 1980’s as well as the early 2000’s (see video here). Housing data has started to improve as some lockdowns have been lifted while the US’s largest online mortgage lender, Quicken Loans, has reported record applications. It remains one of the core views here that housing will outperform the wider stock market, as had started to happen in Q2, while inner city commercial properties may struggle in comparison. Mortgage rates remain at historically low levels and there is not yet gross over-indebtedness by the masses to warrant a banking crisis or a major depression despite the shock of Covid-19 and the subsequent government instructed lockdowns. We are in the middle of a 16-18-year property cycle which is not due to peak until the mid 2020’s. Additional data releases on this front should further solidify this long-term view that housing will boom over the next 4-6 years. The key break levels to watch on the S&P 500 Homebuilding Index versus the S&P 500 ratio is 0.41-0.42 – the last time we traded above there was in 2007. Watch for a breakout higher later this year.
SKA