Insult To Injury.

An “insult to injury” dynamic is beginning to manifest in the news flow around coronavirus outbreaks in the US.

Just hours after Florida reported a record rise in cases and a sharp spike in hospitalizations, California said it too logged a record jump in infections, with 7,149 new cases. The near 4% rise far exceeded the seven-day average.

In Houston, demand for ICU beds is increasing at an alarming rate. Local councilwoman Sallie Alcorn delivered some disconcerting news in a tweet.

.@houmayor at city council this morning announces that 97% of ICU capacity in Houston has been filled – 27% of that is COVID-19 patients.

— Sallie Alcorn (@salliealcorn) June 24, 2020

One imagines these trends are going to continue. On Wednesday afternoon, Texas said it’s experiencing a “massive” outbreak.

New cases accelerated by 5,551. It was the second day during which infections topped 5,000.

Judging by Wednesday’s price action, risk assets are losing patience with this situation.

Crude was bludgeoned, for example, as worries about new lockdowns cast doubt on the demand recovery story. Energy shares suffered another body blow and remain a notable laggard in 2020. The figure (below) is simple, but poignant.

Broadly, US equities had their second serious selloff in as many weeks, as a combination of trade worries (the Trump administration is pondering tariffs on an additional $3.1 billion in goods from the EU and UK) and alarming virus news served to deep-six sentiment.

It’s hardly surprising that the market should be inclined to take a breather. What’s notable is that secular growth (and specifically tech) continue to outperform during risk-off sessions, which is just another way of saying that the pro-cyclical rotation is likely dead.

Small-caps have underperformed big-cap tech for a half-dozen consecutive sessions. Meanwhile, the ratio of the equal-weighted Nasdaq 100 to the cap-weighted is falling, which suggests breadth is poor. Hardly surprising, but worth noting.

This is all tied to rates and, specifically, the curve, which in turn hinges on the economic outlook and the reopening narrative.

“If the rates trade is a risk-on bear-steepener on economic reopening growth optimism, we see Momentum clobbered as Value, Leveraged Balance Sheet/Default Risk and High Beta factor outperform the duration-sensitives of Secular Growth and Min Vol”, Nomura’s Charlie McElligott wrote Wednesday. “Conversely, if it’s a sideways or lower risk trade with a bull-flattener, Momentum works, which means the ‘Mo long’ leg of Secular Growth is outperforming the cyclical/economically-sensitive ‘Mo short’ leg of primarily Value and High Beta”.

Needless to say, Wednesday was a textbook example of the latter, as risk-off coincided with a bull-flattener. The long-end was richer by some 5bps, and the front-end largely unchanged. The big story in bond land was robust demand for another century bond from Austria, which got €17.7 billion in orders for a 2120 issue with a coupon of 0.85%.

The dollar gained on Wednesday, while gold lost a bit of its luster, retreating from levels near $1,800.

That’s important, and it underscores the one worry I would have if I were a raging gold bull at the current juncture.

While it’s obviously true that the combination of negative real rates and the promise of endless money printing and overt debt monetization makes for a compelling bull case, March was a reminder that when push comes to shove (and I mean really comes to shove) folks will sell gold too, as all babies are thrown out with the bathwater in a panic to raise the only thing that anyone wants when it’s all falling apart — US dollars.

That’s something to consider, although I readily concede that my good buddy Kevin Muir (formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist”) is obviously correct when he wrote about this very subject on Wednesday, in a note to subscribers. I’ll leave you with a few excerpts, heavily abridged.

The bottom panel is the US 5-year government Treasury note yield minus CPI inflation. The red areas represent periods when rates were below inflation. 

If you believe that gold is an asset that is no one’s liability, then when the world’s reserve currency has a negative real return, gold will naturally benefit.

I think the Federal Reserve will keep real rates extraordinarily low for some time to come. The damage to the economy from the corona shutdown is extensive and far-reaching. The Fed will continue to push on the stimulus, which will drive real rates lower, and in the process continue to be positive for the price of gold. It’s that simple. The Fed has no other choice.