Noconsensusonreliefdealandcontinuedgoldrise

Doing a round-up of the main global market news involves taking a look at equities, bonds and currencies around the world. Just a few currencies and rates are the harbinger for the other to follow, the reason being that the economic sizes of those economies impact the health of the entire world. In an overtly simplistic classification, the US and China can be considered as the two engines with US donning the hat of prime consumer and China being the prime production house. That’s why any data point which refers to the health of the US consumer or which refers to state of Chinese manufacturing impacts everyone globally.

In the US, one issue which can impact possible consumer sentiment is the continuation of unemployment benefits. As per many analysts the USD 600 per week pandemic jobless benefit has helped sustain the consumer demand. Democrats want to continue the benefit through January which will cost around USD 400 bn whereas Republicans are proposing to cut it to USD 200 per week, further linking it to the workers last drawn wages. The two sides haven’t  been able to come to an agreement until now. The Treasury Secretary Steve Mnuchin said that negotiators from both sides have set a goal of reaching an agreement by the end of this week to permit a vote next week. The contours of the final package will have consequences across different asset classes.  The Dollar Index and US Yields will probably see a rise if the Democrat version of generosity continues. Equity markets will also see it in a positive light.                                              

On the Chinese side, Caixin services PMI fell to 54.1 in July from 58.4 in June. As for the market levels, the US Dollar index is trading down at 93.10 and US 10 year yield is trading at 0.52. The Dow Jones closed high by 0.6% in yesterday’s trade. Offshore, the Chinese Yuan trades at 6.96.

But the level of the day unsurprisingly has to be gold. The yellow metal has now broken the 2000$/oz level and is trading at 2022$/ oz as we write this. We have written multiple times about the various ways in which any gold price can be viewed. The one point which forms the cornerstone of our discussion is measuring the gold price against any fiat currency. The essential point is that if the supply of fiat currency increases indiscriminately, then gold, the supply of which is limited, has to rise. One thing which constrains this one way movement can be if there is an expectation that the easy liquidity will be reversed sometime in the future. The experience on this count has been sober to say the least. The balance sheet expansion by the Fed post the GFC was never fully reversed - at best it was curtailed.

Domestically the INR has opened strongly following the global cues whereas bonds have not seen too much movement. The 10 year treasury bond is trading at 5.83. The policy is due tomorrow. Interestingly this will be the last policy of this MPC committee as its tenure of 4 years will be over unless the government decides to continue with the same group.