June 10, 2020
June 10, 2020
- A riskier mood is emerging in the stock indices as the first wave of the coronavirus pandemic wanes, with continuing outperformance from the energy and financial sectors.
- The U.S. dollar appears to be softening, while gold becomes the favorite hedge and dominant performer across asset classes.
- Monetary policy actions by the ECB and Federal Reserve project at least a two-year recovery period.
One Big Takeaway
Diversified portfolios are an important tool for staving off losses during the kind of economic chaos we have experienced over the last several months. Gold, the best performing asset class over the course of the pandemic, is anchoring many portfolios — and the drivers of this performance can be found in economic trends of the past two decades.
The price of gold increased during the inflation-heavy 1970s and 1980s as investors searched for a safe haven. When globalization defused inflation concerns and equity markets became growth catalysts, gold was largely forgotten until the burst of the dot-com bubble in the early aughts and then the global financial crisis in 2008-2009. As part of a portfolio mix, it serves an important anchoring, if cautious, role, as a straightforward currency, an ETF, or a structured product.
As a fixed asset, gold pays no dividends or interest. But in the current moment, where the equity markets are still shaky and bond yields are low as monetary policy holds down interest rates for the foreseeable future, it can act as a diversifier and a hedge while fiscal stimulus and capital market solutions to the crisis play themselves out.
Chart of the Week
As a percentage of reserves, gold is the strongest performer across asset classes in the last six months; historically, its growth increases during periods of disruption in the equity markets. Why the resiliency? Gold is the closest thing an uncertain market has to a safe haven: it behaves similarly in both inflation and deflation scenarios, the opportunity cost is low, and it is not linked to the financial stability of any single country.
What happens if Chinese companies are delisted?
Chinese companies represent $1 trillion of the $37 trillion on the U.S. stock exchange, whose audit requirements they have long ignored. But amid China’s ongoing tensions with the Trump Administration and the recent Luckin Coffee accounting scandal, the delisting of more than 150 Chinese companies for noncompliance may become a real consequence: the U.S. Senate passed a bill threatening exactly that. The bill will not become law unless it is also passed by the Democrat-led House of Representatives — an unlikely scenario amid domestic partisan tensions — and even then, the impact to the global economy is expected to be manageable as long as the companies are relisted elsewhere.
Getting the EU and the U.S. back in the black
Monetary policy responses to the pandemic suggest 2022 as the tipping point for stimulus efforts. The European Central Bank (ECB) committed an additional €600 billion — for a total of €1.35 trillion — to its pandemic emergency purchase program, which expects to purchase €35bn per month until the end of 2020 before starting to taper. Their balance sheet will hold 60% of GDP (€.5 trillion) by the end of 2022. On the other side of the Atlantic, the U.S. Federal Reserve announced Wednesday that it will keep interest rates low amid estimates of a 9.3% unemployment rate and a 6.5% drop in output by the end of 2020, with a rebound unlikely before 2022.
Data to Watch
- The inflation forecast for the EU is now a full percentage point lower than the 2% target, making ongoing results from the ECB stimulus an important metric to monitor.
- The U.S. is awaiting May data on the consumer price index (CPI), though experts believe it unlikely to show a further drop.
- India’s reported 3% GDP increase might be overstated, since the updated number rests on data collection complicated by the pandemic.
- The unexpected 2.5 million increase in employment in the U.S. may be driven by “hidden rehiring” of staff in the leisure and hospitality industries, which showed the biggest increase with the kickoff of the curtailed summer holiday season.