MikePompeoandChineseretaliation

The pitch in the rhetoric match between US and China has been increased. After a day when the US President described coronavirus as a Chinese plague, the US Secretary of State Mike Pompeo likened the Asian country to a “Frankenstein” and added that President Nixon’s apprehension regarding dealing with the communist country has proved right. The remarks surely will invoke a rebuttal from the other side which could pave the way for further escalation. On the response to the US order of closing the Chinese consulate in Houston, China has asked the US to close its consulate in Chengdu.

On the data side, the US initial jobless claims rose for the week ending July 18 for the first time since late March. The weekly jobless claims number showed that there are nearly 32 million people collecting unemployment cheques currently. Many of the relief programs which were instituted in March, amid the corona shock, are coming to an end by 31^st July, including the extra $600 weekly benefit for those who have lost their jobs. The more than handsome handout has been one of the reasons which has enabled the US to avert an acute despondency setting in. The problem now is that such generous payouts can’t be extended ad infinitum, and at some point the government has to bite the bullet. If the reopening and recovery is delayed then the US government will find itself in a hard place. However, there is close to $ 1 trillion in relief packages which are now in the final stages of being passed in US Senate.

The Euro and Sterling have continued their good run. The Euro traded around 1.16 levels which is its highest since late 2018. The US Dollar Index is trading down around 94.70 trading very close to the lows of 94.65 last seen in March 2020. US 10 year yields are trading at 0.58%. The Dow Jones fell 1.3% in yesterday’s close. The Hang Seng is down by 2.13% in the trading today.

But the interesting asset to watch out for is gold which is trading at 1880 $/oz and is within striking distance of the all-time highs of 1920$/ Oz which was seen in 2011. We have written multiple times that in times when all the countries which have the power to print money are printing with full gusto, gold presents a special case where the supply is constrained. The classic demand supply dictum also kicks in to defend it in such times - the ratio of fiat money to physical gold is increasing and hence the prices continuously adjust. This simple metric has a very normal follow up argument, that until the time the fiat money stops expanding, gold is expected to keep rising.

On the domestic front, the Rupee trades a bit weaker at 74.90. The 10 year benchmark bond trades at 5.80, the bond market will see how the auctions for 30k Cr INR government bonds fare today and whether government again sells more than the notified amount. Indian stock markets are trading in red in line with the global stocks.