Going for gold

​​​​​​Today's news headlines:

• ‘Johnson’s tax plans would cost 20bn and risk prolonging austerity, says IFS’. The Institute for Fiscal Studies has revealed that front runner, Boris Johnson’s, plan to raise the high tax threshold and lift the national contribution threshold would cost about 20bn per year, primarily benefit the wealthy and prolong austerity. (Financial Times)
• ‘Polish judicial reform illegal, rules ECJ’. Polish politicians have passed a controversial law which causes 30 Supreme Court judges to retire and hands judicial control to the legislative. The European Court of Justice has ruled this erosion of the judicial independence illegal, highlighting the increasingly contentious relationship between the EU and Polish political class. (Financial Times)

Trump’s Iran bluster could backfire

In the last 24 hours, tensions between the US and Iran have ramped up as President Trump seeks to put maximum pressure on the Iranian regime. The unveiling of sanctions on Iran's supreme leader and other top officials, designed to restrict access to financial resources, was met with a hard-line response. Iran's Foreign Ministry was quoted saying: 'The futile sanctions against the Iranian leader and the country's chief diplomat mean the permanent closure of the diplomatic path with the government of the United States.' Tensions in the Gulf have spiked since May raising the spectre of war; however, new sanctions shouldn't have a significant impact on an Iranian economy already in recession and largely shut out of the global financial system.

The outcome of this 'particular experiment' could determine the direction of oil prices as Trump heads towards Presidential elections next year, writes David Fickling for Bloomberg Opinion. The relative ease for Iran to disrupt the oil supply chain in the Strait of Hormuz could restrict carriers of around a third of the world's seaborne oil. Interestingly, Iran's own oil-export market has been killed off by the removal of US waivers for countries trading with Iran—the incentive to keep the Strait of Hormuz open no longer benefits Iran's economy.

Bottom line: What direction does this issue go now that the diplomatic channels are dead? Iran will most certainly take the nuclear route by increasing their stockpiles of Uranium. While hardly comforting, provocation and counter-provocation to the point of stalemate won't change the market dynamic at this time—not when the focus is on the US and China in the run-up to the G-20 this weekend.

All that glimmers is not gold

Whether you look at slowing global growth estimates or the abundance of geopolitical risk hotbeds, it seems clear the investment environment is becoming less habitable. It is not surprising then to see classic barometers of risk or market stress rise in response to these signals. Since the beginning of June, gold, the quintessential safe-haven asset, has risen by 10% and reached six-year highs. 

Some might be surprised by this, however, undoubtedly the US Dollar has pulled back from highs, and the global equity rally continues unabated. True enough, when Fed members voiced their willingness to cut rates in upcoming meetings—acknowledging the market expectation for 80bp cut by Jan 2020—the equity market rallied. This was not a switch to risk-on; instead, the Dollar seceded ground to the Japanese Yen, another safe-haven currency. This morning, US Treasury and Japanese Government bond yields continue to plumb new lows suggesting strong demand for safe assets.

In a Bloomberg article released this morning, a startling dynamic in equity prices has recast recent gains. While the S&P 500—an index of large capitalisation stocks—is near record highs, small capitalisation and transportation stocks—which better explain underlying economic activity—are near 2009 lows.

Bottom line: This inconsistent dynamic has ramifications for the equity market if a sudden repricing of risk occurs, but it also has the potential to change the monetary policy setting for the G-10. Unfortunately, it’s the monetary policy of the past decade which has enabled this dichotomy to exist, so an additional loosening of interest rates is more likely to fan the flames rather than solve the problem.

GBP/USD

The Dollar sell-off of the past week has slowed, which suggests support for the Greenback. Having seemingly found a bottom, the Pound has traded sideways for the past several days. This afternoon, US data and two Fed speakers are key events to watch.

GBP/EUR

Where the Dollar has found support, the Euro rally has halted at the trade-weighted 200-day moving average. With Sterling in wait-and-see mode, the common currency continues to determine direction for the pair. 

EUR/USD

Following a break of the 200-day moving average yesterday afternoon, the pair seemed to continue its upward trajectory. Then Dallas Fed Governor, Robert Kaplan, expressed concern about dropping rates too soon and capped further Dollar losses for the time being.