Markets Aug 05

Gold hits another record as investors turn defensive

Gold hits record high on inflation fears; China PMI stays in expansionary territory; Hong Kong PMI shows hit from reopenings

Gold hits another record as investors turn defensive
A United Airlines' Boeing 777/200 is seen at Denver Airport on July 30, 2020, in Colorado. United Airlines is now planning deeper furloughs of pilots following the weakening of air travel demand due to the coronavirus, a company official said. The big US carrier plans for 3,900 pilots to be furloughed, up from 2,250 expected in early July. Photo: Daniel Slim / AFP.

(ATF) Asian markets are defensive as Republicans and Democrats continue to have differences over a new US virus relief package with caution on the US-China tensions propelling gold to a record high.

Although US Democrats reported they were making progress in negotiating a coronavirus relief package with the Republicans, the two sides are close to a consensus in only a few areas. The Senate is scheduled to go to recess on Friday, August 7, but it is likely the recess will be delayed to complete work on the bill.

Trade tensions may also return ahead of US-China talks scheduled on 15 August to review China’s compliance with the Phase 1 trade deal and this is boosting demand for safe havens – gold and US Treasuries.

Although gold is near all-time highs in absolute terms – currently hovering at $2,014 per ounce – it is around 25% below record levels, in inflation-adjusted terms.

“Technical indicators show that gold is overbought, driven by retail investors through ETFs with little sign of excess speculative positioning by institutions,” said Luca Paolini, chief strategist at Pictet Asset Management. “But we remain overweight gold – the most attractive defensive asset given liquidity-induced inflation risks, weaker USD expectations, increased geopolitical risks and uncertainty of the pandemic in 2H."

The Caixin China General Services Business Activity Index (headline services PMI) came in at 54.1 in July, lower than 58.4 in June but still remaining in expansionary territory.

“The Caixin China General Services Business Activity Index came in at 54.1 in July, down from a 10-year high of 58.4 the previous month,” Wang Zhe, senior economist at Caixin Insight Group, said. “It remained in expansionary territory, pointing to a continued rapid recovery of the services sector as the domestic Covid-19 epidemic has largely been brought under control.”

Reopening risks

Still, with the global coronavirus infection count now hitting 18.5 million and the death count nearing 700,000, the hit to economies which have reopened from subsequent waves remain a concern.

The Markit Hong Kong PMI declined to 44.5 in July from 49.6 in June on a new wave of coronavirus outbreaks and related tightening of virus control measures.

“The recent surge of coronavirus cases prompted policymakers to tighten virus control measures again from mid-July, which weighed on activity growth,” Goldman Sachs analysts said in a note.

“New infections have remained high in recent days and economic activity in August could weaken further from July,” they added. Goldman recently downgraded forecast for Hong Kong’s Q3 GDP growth, to -5.2% year-on-year from -2.6% year-on-year, to reflect the renewed downward pressures on activity growth from the new wave of outbreak and tightening of virus-containing measures.  

Japan’s Nikkei index has eased 0.66%, Australia’s S&P ASX 200 benchmark has retreated 0.89% and China’s CSI 300 has slipped 0.59. But Hong Kong’s Hang Seng benchmark has outperformed, climbing 0.2% amid expectations of more tech listings from China.

Overnight, the Dow Jones Industrial Average added 0.62%, the S&P 500 advanced 0.36% and the Nasdaq Composite climbed 0.35%.

Asian credit markets are marginally firm with the Asia IG index moving in marginally to 69/70. Primary markets are busy with Korea ExpresswayCentral China, and Zhongtai Financial announcing bond plans.