The Three Trends
These are the three key trends in the financial markets pre-coronavirus pandemics:
1. Strong US Dollar
Why? First, the 2017 US fiscal stimulus boosted the US economy. Second, the US-China trade war weaken the Chinese economy (and thus the global economy). Strong US + Weak Global Eco = Strong USD.
2. Rising US Stock Market
Why? Initially, the 2017 US fiscal stimulus. However, the US-China trade war, in addition to the Fed interest rate hikes towards the end of 2018, caused the 20% correction in late 2018. Since the correction, the US stock market has been supported by the reversal in Fed’s policy – interest rate cuts and the ‘technical” QE, as well as the trade war de-escalation. But most importantly, the stock market has been used as the political tool, or a self-imposed barometer of the effectiveness of the Trump administration, all leading to the 2020 election.
3. Rising Gold prices
Why? Expectations were that the US economy will eventually get affected by the trade war, and thus, the Fed would be forced to cut the interest rates to the 0% level as well as to restart the QE – thus low nominal interest rates, negative real interest rates, and eventually weaker US Dollar. All of these benefit gold.
How the pandemics affects these trends?
Obviously, the coronavirus caused the US recession. Thus, the Fed was forced to cut interest rates to 0% and restarted an infinite QE.
The Stock market bubble. The stock market is now primaraly a political tool leading into the November elections. Thus, despite the crashing economy, the stock market is not too far from the all time highs. This will change when the pre-election narrative refocuses to a more populist agenda, which in fact has already started with the escalating US-China tensions. Thus, the stock market will start reflecting the deeply negative fundamentals (crashing economy and de-globalization).
The strong US Dollar trend to continue. The pandemics will cause the severe financial crisis in the Emerging Markets heavily exposed to the US Dollar denominated debt. Over the short term, this will continue to support the strong US dollar. However, over the longer term, the trend of de-dollarization will test the ability of the US Dollar to remain the primary global reserve currency.
Gold likely peaked over the short term. Strong US Dollar is likely to keep gold in check over the short term. Gold is facing the key resistance at the 1800 level, which will be broken if inflationary expectations rise (given the large fiscal deficits), or the US Dollar weakens due to de-dollarization. The wild card for gold is whether it will rise as the stocks market resumes the downtrend, despite the stronger US Dollar.