Market Commentary - Aug 10th 2020
Uncertainty continued to proliferate in July, in the form of increasing Covid-19 cases and concerns, geopolitical wrangling, or unprecedented activity in financial markets and asset classes.
Despite this uncertainty, the MSCI World index strengthened 5.1% during the month to sit only 4.8% below the February high. Economic and corporate earnings data has been better than expected, for the most part, with US companies reporting solid results and the Chinese PMI moving above 51 to indicate expansion.
Gold has been discussed at length in the financial press; merely a mention inspires controversy and a medley of viewpoints. Gold’s scarcity, malleability, and desirability are just three unique traits that ensure its position as a store of value and hedge against inflation or economic uncertainty. The price of gold increased 10% between 16th-28th July to reach an all-time high of $1,970.8 per troy ounce – at least, it was an all-time high before gold surged above the $2,000-mark on 4th August.
As alluded to in the initial statement of this commentary; uncertainty is intensifying, and this goes some way to clarify the recent leg higher in gold. Whilst arguments linking its strength to technical machinations continue to emerge, other avenues are useful to explore. Investors may be seeking further diversification in anticipation of increased volatility from the rising Covid-19 cases, and in a world where fixed interest as an asset class looks increasingly difficult to forecast and value, gold has been a natural home for those desiring a low correlated investment. These “safe” fixed income assets are to a large extent providing negative or zero yields, which makes the relative safety of gold ever more appealing.
The US election, and increasing popularity of Joe Biden in the polls, may be adding to uncertainty, however the absence of portfolio de-risking alongside suggests this may not be a driving force for the move in gold. Vast stimulus deployed by the Federal Reserve reminds us of the similar liquidity deluge in the financial crisis of 2008-9. Here too the price of gold soared on fears of inflation, however we are all aware that inflation did not emerge as expected, which makes those arguing for its potential resurgence now more tentative.
The US dollar, which has been weakening since the world emerged from the preliminary stage of the Covid-19 crisis, often strengthens when there is a broad-based flight to safety. This has not been the case; despite uncertainty the dollar has continued to decline in lockstep with the decline in real yields, which take account of inflation expectations. Economic models show that gold prices rise as real yields fall, being very closely correlated, which also adds to the list of potential explanations for recent rise in gold.
Elsewhere, and in addition to the dynamics mentioned above, the three D’s of deglobalisation, digitalisation and decarbonisation still seem to be very much in play. These themes have been catalysed by the pandemic and exemplified in those industries and companies benefitting the most from these tailwinds. Whilst inevitable at some point as these companies grow and increase their market share, the recent congressional hearing for Amazon, Google, Facebook and Microsoft did little to dissuade investors when the tech behemoths reported earnings shortly after the hearing; all four beat analysts’ expectations and saw their share prices rise.
Alongside these extraordinary returns, US GDP shrank at an annualised rate of 32.9% in the second quarter, the worst reading since World War II.
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