Market Commentary – August 5, 2020

Kevin Jock

5th August 2020

    Gold settles above $2,000 on the back of plummeting Treasury yields. Concern surrounds the lack of progress in stimulus talks between the two US congressional parties. The longer the delay to reach a deal, the greater the cost over time for the US economy. The more the Federal Reserve will be required to continue its various quantitative easing measures. And with it, the continual debasement of the dollar. Investors worried of subsequent inflation have been forced to seek safety in precious metals.

Gold 1 min

Figure 1 (Source: Refinitiv): XAU 1-min – Investors seek gains in Gold as Treasury yields little.

    Following a four-day holiday and amid thin liquidity, overnight swap rates hit 1,050% on Turkey’s lira. Turkish authorities have spent billions of reserves in attempts to hold the lira at certain ranges. Of which largely has failed. At the risk of further depreciation and higher inflation, analyst expect central authorities to hike policy rates soon to discourage speculative bearish bets.

    Elsewhere, trade talks between US and China set to resume this on month on the 15th via video conference amid rising geopolitical tensions. The previously agreed upon deal signed in January saw China purchasing an additional $200bn in agriculture and manufactured goods and services. So far China has fallen short with energy product imports meeting only 5% of year-end goals. Unforeseen developments from the coronavirus pandemic early in the year has hindered global demand. China hopes to achieve a new trade pact reflective of the current global climate.

Headliner to Review

  • Employment change in New Zealand decreased from 1.0% to -0.4% whilst the unemployment rate decreased from 4.2% to 4.0%. Contrast in stats suggest New Zealanders leaving the work force, as they become more discouraged from finding employment in an already lethargic economy. Much of the employed have benefited from the Governments jobseeker benefits as firms are less pressured to make redundancies. On top of this, fewer and flexible hours have become an accepted norm allowing firms to retain existing employees.
  • The Canada Manufacturing PMI increased from 47.8 to 52.9. The China Caixin PMI dropped to 54.1 from 58.4, which was the highest reading since April 2010. The 50-mark separates growth from contraction.

Headliner to Watch

  • Recovery in US labor market seen staggering off. With over 20M unemployed from May and June figures, August ADP non-farm employment change expect only an additional 1.2M Americans finding jobs. Much of the recovery has been limited by reluctance from managers as they await to see the consequences of the second wave. Business sentiment also expected to take a dive as top-up stimulus benefits delay.
  • Whilst US manufacturing remains buoyant, ISM non-manufacturing PMI is expected to moderate from 57.1 to 55.0. Social distancing norms and lack of foot traffic seen hindering expansion.
  • Analyst see crude oil inventories fall for a second week (-3.4M) though at a slower pace than last week (-10.6M). Coming August, as production cuts from OPEC expire, output is expected to increase by 1.5M bpd. Fears surround whether there will be enough demand to meet new supply given fresh waves of virus out-break worldwide.
  • Subdue inflation expectations forecast out of New Zealand. Set to remain around previous months figure of 1.24%. Whilst fuel cost would have risen, much of it will be offset by declines in the cost of services.

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Antony Tan
Ben Li
Kevin Jock