Historically, gold has been the ultimate safe-haven asset rallying in periods of market unrest. Three years after the Great Recession gold had climbed 40%. The intervening recovery and central bank policy tightening had contained bullion below $1400 for almost six years. The most recent tensions have triggering investor flight to safe-haven assets, where Bond yields have tumbled, and gold has rallied 10% year-to-date, breaking through the key $1400 level for the first time since 2013. Prospect of European Central Bank (ECB) and Fed monetary easing later this year, is likely to exacerbate the flight to safety. The main risk to safe-haven assets is that central banks fail to deliver to monetary easing, until then the prevailing expectation is likely to fuel the rally further.
The US/China trade dispute and various geopolitical risks have caused a continuous decline in the global growth outlook and what might be termed a ‘capex hibernation’. Most major central banks, led by the US Federal Reserve, have acknowledged the external factors to their domestic growth and pivoted policy towards supportive policy adjustments, but certainly not all.
The Bank of Japan – whose asset purchase program dwarfs the US and EU variants – has acknowledged external factors but is holding off with further measures. The balance of factors is simply more complex when the asset purchase program contains equity indices and government bond yields inside of 15 years are thoroughly negative.
In yesterday’s Bank of England policy statement, it was clear that external factors – read US multifaceted trade disputes – are reducing the likelihood of a rate-hike under a soft Brexit scenario. That said, there was no commitment to follow the crowd and signal policy easing either. The inherent political instability in the contest for number 10 could result in a number of different reactive policy measures. This makes a program of prescriptive monetary policy almost entirely pointless.
Bottom line: The policy pivot among central banks is calibrated to insure against a precipitous economic decline but not everyone is or can participate in these measures. In a time where countries are becoming more compartmentalised, a coordinated central bank policy response becomes more important. The inability of some to act now highlights additional fragility under the surface.
The Sterling trade weighted index declined yesterday following the Bank of England’s increasingly dovish stance for the UK economic outlook. The pair is battling the 1.27 interbank level this morning as markets digest the increased certainty of a Boris Johnson premiership.
Risk-on sentiment pushed the Dollar Index lower yesterday providing upside momentum for the pair. The Dollar Index has suffered losses of 1.3% in the last 3 days and EURUSD is now targeting a run towards the 200-day moving average and levels not seen since March.
Yesterday, the pair moved sharply lower following the Bank of England’s monetary policy statement before reversing course. This morning’s positive Eurozone PMI readings have caused another move lower which may be sustained due to a lack of UK data.