Melt-Up in Hard Assets

Federal Reserve allowing for actual inflation to overshoot the 2% target to compensate for past undershoots is likely to cause a dash out of paper currencies into hard assets.

The melt-up in hard assets is beginning in earnest. As we pointed out, the headline last week that the Federal Reserve was going to allow actual inflation to overshoot the 2% target to compensate for past undershoots is likely to cause a dash out of paper currencies into hard assets. It’s been the trend all along in the age of incessant money printing and that was yet another trigger.

With the weekend over, with no new news, tech stocks took off from the get-go and did not look back. The bears got all excited towards the end of last week, and the weak bulls bailed. We have seen this episode before, and it’s just another rehash of what’s been happening all season. If you have been reading our stuff diligently, you know what we are going to say. Tech stocks, hard assets… What else do you need to keep you warm at night?

There really isn’t much to add except hold on to your hats!

WHAT HAPPENED YESTERDAY

As of New York Close 27 Jul 2020,

MARKET MOVEMENTS

Dollar tumbled to an almost two-year low against the EUR on Monday on concerns about the growing number of virus cases in the United States and ahead of the Fed’smeeting this week when it is expected to confirm its commitment to rock-bottom interest rates. The Fed is expected to reiterate that it will keep rates near zero for years to come when it concludes its two-day policy meeting on Wednesday. Investors will be watching to see if the Fed indicates that it will increase its purchases of longer-dated debt and whether yield caps are likely going forward.
Amazon (AMZN 3055.21, +46.30, +1.5%), Apple (AAPL 379.24, +8.78, +2.4%), Alphabet (GOOG 1530.20, +18.33, +1.2%), and Facebook (FB 233.50, +2.79, +1.2%) outperformed in front of high-profile events this week. Specifically, the CEOs of these companies will testify before lawmakers on Wednesday regarding regulatory concerns, and the companies will report earnings on Thursday.
In other corporate news, Moderna (MRNA 79.91, +6.70, +9.2%) received an additional $472 million from the government to advance its COVID-19 vaccine candidate.

HEADLINES:

SECOND WAVE OF VIRUS IN ASIA PROMPTS FRESH LOCKDOWNS

Countries around Asia are confronting a second wave of coronavirus infections and are clamping down again to try to contain the disease, with Australia recording a record daily rise in cases and Vietnam locking down the city of Danang.

Mainland China is battling the most aggressive return of COVID-19 in months, confirming 57 new locally transmitted cases on Sunday, the highest level since early March, driven by fresh infections in the far western region of Xinjiang.

While much of Asia is reimposing lockdowns and other curbs on movement, India continues to ease restrictions despite a relentless rise in infections. India has a total of 1.4 million cases, behind only the United States and Brazil.

Thematic Context: “Despite being the most successful in handling the first wave of Covid-19, Australia is not spared the second wave that is brewing in Victoria. Part of AUD’s recovery from the lows is in anticipation of “return to normalcy” faster than other countries due to impeccable handling of the situation. However those expectations may be dampened if case counts rise and more importantly, mortality rates, so we must remain cognizant of these factors. We continue to believe AUD is a buy on dips amongst other currencies as it has the best relation to hard commodities (metals are doing really well).” — 27th Jul 2020

MODERNA’S COVID-19 VACCINE CANDIDATE MOVES INTO LATE-STAGE TRIAL

Moderna Inc (MRNA.O) said on Monday it had started a late-stage trial to test the effectiveness of its COVID-19 vaccine candidate, the first such study under the Trump administration’s program to speed development of measures against the coronavirus.

The federal government is supporting Moderna’s vaccine project with its Operation Warp Speed program. Moderna has received nearly $1 billion from the U.S. government, which has chosen it as one of the first to enter large-scale human trials.

Results of a small early-stage study published earlier this month showed volunteers who got two doses of Moderna’s vaccine had high levels of virus-killing antibodies that exceeded the average levels seen in people who had recovered from COVID-19. Moderna said it remains on track to deliver about 500 million doses a year, and possibly up to 1 billion doses a year, beginning 2021.

REPUBLICANS UNVEIL VIRUS PLAN, SLASH EMERGENCY UNEMPLOYMENT BENEFIT

Senate Republicans on Monday proposed a $1 trillion coronavirus aid package hammered out with the White House, paving the way for talks with Democrats on how to help Americans as expanded unemployment benefits for millions of workers expire this week.

The plan sparked immediate opposition from both Democrats and Republicans. Democrats decried it as too limited compared to their $3 trillion proposal that passed the House of Representatives in May, while some Republicans called it too expensive.

McConnell said the package would include direct $1,200 payments to Americans, as well as incentives for the manufacture of personal protective equipment in the United States, rather than China. It also includes $190 billion for loans to help small businesses, and $100 billion for loans to businesses that operate seasonally or in low-income areas. Republicans want to reduce the expanded unemployment benefit from the current $600 per week, which is in addition to state unemployment payments and expires on Friday, to $200 in addition to state unemployment.

Negotiations started immediately after the Republican package was introduced. House Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer met for nearly two hours with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows. Meadows said afterwards that it was a “good meeting” and that he and Mnuchin would return to Capitol Hill on Tuesday.

Thematic Context: “The Fed and government is doing whatever it takes to get money into the hands of businesses, even making adjustments to ensure that happens. One cannot expect a more accommodative policy or question the absolute resolve to bail out the economy in the bid to save jobs, quell social unrest and anxiety. The clear intentions project a reliable trajectory that the markets will be supported and the incessant money printing is not stopping in the near future, both are positive for the Nasdaq, Hard Assets (Gold & Silver) and the Risk Currencies (AUD & NZD).” — 7th July 2020

“We can move very quickly with the Democrats on these issues. We’ve moved quickly before, and I see no reason why we can’t move quickly again,” Mnuchin said. “And if there are issues that take longer, we’ll deal with those as well.” — 27th July 2020

DAY AHEAD

Fed Meeting

The Fed will wrap up its latest meeting on Wednesday. No change in policy is expected, so the focus will be on Powell’s press conference at 18:30 GMT. With signs that the US recovery has flattened lately, Powell could adopt a more cautious tone, opening the door for more action in September. If so, that might be enough to accelerate the dollar’s freefall, though Thursday’s GDP numbers could provide some support.

2. AUD continues to grind higher. Dips will be supported and the march higher will be inevitable.

3. Gold broke through the previous all-time high easily and powered ahead. Silver too is making new cycle highs. The financial press is splattered with headlines of the bull run and the FOMO is beginning in earnest. This is no time to lose heart. Hold on to your hats!