Objects In Motion

An object in motion tends to stay in motion, which is why the dollar continued to sink on Monday, hitting the lowest since 2018.

Gold, meanwhile, trekked higher still, much to the delight of the debasement crowd and a bespectacled cartoon duck. While the latter enjoys swimming in physical coins, retail investors generally prefer the paper variety, and on that score, it’s worth noting that short interest on GLD is sitting near a decade nadir.

The dollar’s slide and gold’s dramatic run are a veritable godsend for story-starved journalists. As Rabobank’s Michael Every put it on Monday, “If there’s one clear ‘trend’ at the moment that gets market tongues wagging and teenage scribblers scribbling, it’s that the USD is in trouble”.

As the chart makes clear, there is no mystery as to what’s behind the move(s). Or at least not from a fundamental(s) perspective.

I’ve been over and over the gold story. Plunging real yields eliminate the opportunity cost of a gold position, and because it’s also a generic hedge against tumult of all sorts (geopolitical and otherwise), the current conditions are ideal. The debasement narrative tied to trillions in global stimulus is icing on the cake.

The dollar is just the flip side of the above, with the greenback getting an extra shove lower from the prospect of the US underperforming in the recovery trade. The euro, meanwhile, is buoyant on optimism around fiscal burden sharing. The Fed is expected to give both gold bulls and dollar bears more ammunition.

Read more: Golden Opportunities

“On the Fed this is more about a view that nothing the FOMC does, or [Jerome] Powell says, will work in anything but the direction of USD weakness”, Deutsche Bank’s Alan Ruskin said Monday, while listing the five “fundamental stories” driving the greenback inexorably lower.

Ruskin went on to cite ambiguity around the future of extra federal unemployment benefits, which Republicans are proposing to slash to just $200/week, pending the implementation of a new state system aimed at replacing 70% of unemployed workers’ incomes.

He also said the market is nervous about the idea that a Sino-US “decoupling” is becoming more likely and may “impact the USD’s reserve status”. Ray Dalio’s comments about a “capital war” got a mention, although Ray’s name didn’t come up specifically in Ruskin’s comments.

“There have been questions about how the US finances its current account if China wants to avoid recycling savings to the US”, Ruskin went on to say, adding that “similarly, concerns about the USD’s reserve status and its primary use as a medium of exchange for international transactions will be under greater threat in a ‘capital war’”.

The current administration isn’t doing itself any favors in that regard by constantly weaponizing the dollar and the US financial system, going so far as to consider deliberately undermining the Hong Kong peg, before abandoning the idea because, frankly, it’s crazy.

Obviously, the narrative around the loss of reserve status (no matter how overblown) plays right into gold bulls’ hands.

Thank heavens for these stories — if we didn’t have them to riff on, it’s not clear what there would be to talk about during these dull summer days. Well, other than the virus. Mercifully, the rate of infection in several key US states abated, even as new outbreaks in Hong Kong, Japan, China, and Spain play spoiler to progress stateside. It doesn’t help that the national security advisor is infected. Moderna got some more money from the government for its vaccine, which started late-stage trials today. That drove the stock sharply higher. And so on, and so forth.

There were dip-buyers afoot in big-cap tech after last week’s stumble. The Nasdaq 100 outperformed the S&P handily, but be cautious — this week could be make or break for the mega-cap rally that’s shouldered the broader market burden in 2020.

“The three key earnings reports last week were Microsoft, Tesla, and Intel [and] all three companies were sold fairly aggressively following their releases”, JonesTrading’s Mike O’Rourke wrote over the weekend, noting that “the reaction indicated the market rally was so strong over the past four months that the hoped for upside potential of a ‘good’ report may not be there, and  the downside of a negative report is significant”.

Keep that in mind as Facebook, Apple, Amazon, and Alphabet step up to the plate.

Broadly speaking, the macro narrative is deteriorating incrementally even as equities continue to grind higher.

“The many dimensions of capitulation most prominently include investors abandoning the ‘V- shaped’ recovery assumption”, BMO’s Ian Lyngen and Jon Hill said, in a Monday note. “It’s also fair to say that firms hoping to ride out the initial wave of lockdowns while retaining as many employees as possible are going to face very difficult decisions in the near-term”, they added, before fretting that “hopes that Stimulus 2.0 would be delivered in a swift manner and surprise on the upside appear to have been misplaced; to put it diplomatically”.

Yes, that is a “diplomatic” way to put it. If only lawmakers were diplomatic in their own affairs and deliberations, the US would have passed the next virus relief bill months ago.