The price of gold rallied by about 5.25% off the five-year low set in late-July near $1172 an ounce to the high set earlier today. More than half this rally took place this week, seemingly in response to the heightened uncertainty as China changed its currency regime.
It is understandable. China’s move on Tuesday caught the market off-guard. After seemingly re-pegging the yuan to the dollar, it pushed it reset the yuan to the lower end of its 2% band and announced a new mechanism that seems still to be largely a “black box”, in the sense of lacking much transparency.
Not so long ago, gold rose to new highs. Recently, it has suffered the most challenging losses since 1999. The Fed’s rate hikes do not bode well for the gold in the near term, but what about in the medium-term?
On Wednesday, August 12, Alibaba, one of China’s premier internet companies will report its quarterly earnings. They will command more attention than one might suspect by global fund managers.
Japanese and Chinese banks are selling hundreds of billions of dollars of U.S. debt as investors sour on the future of U.S. Treasuries.
In June, Japanese investors sold the most amount of U.S. Treasuries in a one-month period since 2013, when the taper tantrum caused yields to rise and investors to leave the Federal debt market on the fear of rising yields and falling prices for U.S. government debt. At the same time, Japanese investors sold German and French government debt, leading to concerns that Asians are losing interest in investing in the west.
The US dollar posted gains against all the major currencies last week save the Australian and New Zealand dollars. The Reserve Bank of Australia appears to have moved to a more neutral stance on rates, relying on the currency to provide the necessary adjustment.
A strong July auto sales, a jump in the service sector ISM, and a jobs report that was consistent with recent trends helped the dollar’s gains. Over the course of the week, the September Fed funds futures contract priced in a greater risk of a September hike.
Several recent developments in the fixed income space are distinct from the prospect of higher rates in the US and UK, or the ongoing purchases by the BOJ, ECB, and Riksbank.
Corporates have raised 157 bln euros by issuing investment grade bonds. Some observers have suggested this will be the fuel that spurs a euro recovery. Repayment of the borrowing will have to happen, and it will require the purchase of euros.
The unexpectedly record low increase in Q2 US Employment Cost Index unwound the some of the dollar’s weekly gains and neutralized the near-term technical outlook. Next week’s nonfarm payrolls are still critical, and the weakness may put even greater burden on the jobs data to demonstrate that slack is indeed being absorbed.
The sharp decline in Chinese stocks and the policy response is important for global investors but not on the grounds commonly cited. It is unlikely to have a major impact on the Chinese economy. It is unlikely to be a key factor in the IMF’s decision regarding the composition of the SDR basket.
China does not have an equity culture. Equities account for about 12% of Chinese household financial assets. It is lower than the major economies and compares with 58% in the US.
Chinese stocks posted their largest drop in eight years as the Shanghai Composite lost 8.5% in one day of trading.
As stocks fell in Shanghai, other Chinese stock indices also posted major losses, with the Shenzhen Composite losing over 7% and the Hang Seng losing 3.3% in Monday trading, reversing much of the recovery Chinese markets saw in early July.
