Market Review 07/2020

We would like to start or memo with precious metals, as July proved to be quite a historical month for those – gold reached new all-time highs (and never came back to our preferred buying levels) and silver has made an impressive run too (again, leaving market players without any decent opportunity to add to their positions “cheaply”).

This move was so strong that it managed to reach our target of 26 dollars per troy ounce in a few days rather than over the (normal) course of several weeks. Silver has doubled since March selloff and that kind of volatility might be a doubled edge sword. Risk for silver is to revisit 20-22 mark, which was holding for such a long time. It would be quite a serious retracement and highly leveraged positions will most probably suffer. An important milestone for the metal will be the third quarter of the year. If by that time silver gives back good part of its recent gains then market risks to get back in a narrow trading range, but if it ends around current levels or higher – silver can directly progress to the levels we last saw in 2010-2011.

The Dollar is on a move

Jūlijā arī EUR/USD valūtas pāris bija atdzīvojies. Mēs piedzīvojām nedēļas We also saw quite a bit of life in EUR/USD pair. We got a weekly close above 1.1310 we mentioned last month and then a nice directional move up to almost 1.1900 level. Quite a few longer-term targets were met in just a couple of weeks. USD index broke 95 points and is now trading around 93.50 mark. Dollar definitely has room for a deeper move down – DXY level of 91.80 is very important support and even 90 mark is reachable. However, on the larger perspective we are not calling the end for dollar, at least not yet. In coming weeks, we would want to buy EUR/USD dips (closer to 1.1650) and sell USD index rally closer to 96 points.

Benchmark yields point lower

In the midst of summer doldrums, yet another profitable month has ended for credit markets. Developed market government bond yields are still in decline – on the last day of July the US 2-year notes revisited the 0.1% low established in May of 2020 and the 5-year bonds recorded the new low of 0.2%; meanwhile in Europe the whole bund yield curve is back in negative territory.

Countless surges of optimism burgeoning every other day based either on some new form of government aid program or Covid-19 vaccine hopes and the abundant liquidity courtesy of a frightened Federal Reserve and other Central Banks, has resulted in risk premiums for corporate borrowers to decline further. The famous high yield ETFs that the Fed is buying have rallied 25% from their lows.

Equity market took a back seat

We have almost nothing to say about equity markets this month except that we saw choppy trading environment pointing us higher to around 3350-3450 level in S&P 500, with important support levels resting close to 2900.

Grim economic data

On the economy front, GDP in the Eurozone shrank by 12.1% from the previous quarter – the steepest fall since 1995. Spain posted the worst output, with its economy shrinking by 18.5% Q/Q and wiping out all the post-financial crisis recovery of the last six years. GDP in Italy and France also fell sharply but less than forecasted, respectively by 12.4% and 13.8%. Germany, the largest economy in the bloc, saw a 10.1% contraction in the second quarter. It was its steepest plunge on record as household spending, business investment and exports collapsed. On the other hand, consumer prices in the bloc continued its miniscule rise: 0.4% on an annual basis in July from 0.3% in June and 0.1% in May. Economic sentiment rose to 82.3 points in July from 75.8 in June. However, the European Union’s statistics office said region’s unemployment rose to 7.8% of the workforce in June, up from 7.7% in May as 203 000 people lost jobs thus bringing the total unemployment count to 12.7 million people.

China narrated an expansion in factory activity in July. The bureau also reported a composite PMI of 54.1 and a non-manufacturing PMI of 54.2 both slightly lower than June’s readings. China’s fiscal revenues rose by 3.2% in June from a year earlier and returned to expansion for the first time this year. China kept its benchmark lending rate steady for the third straight month amid signs that the world’s second-largest economy is recovering. The one-year loan prime rate (LPR) was kept unchanged at 3.85%, while the five-year LPR remained at 4.65%

The US economy contracted by an annualized rate of 32.9% in the second quarter, the worst decline since the Great Depression. At the same time, the Labor Department reported that the number of Americans applying for initial unemployment benefits edged up to 1.434 million in the week ending July 25, highlighting concerns over the slowdown in the economic recovery. The reports come as millions of unemployed Americans are set to lose a $600 weekly jobless benefit supplement in August, when part of a historic government aid package of nearly $3 trillion expires. The Federal Open Market Committee left its benchmark rate unchanged in the range of 0% to 0.25%. U.S. consumer spending increased for a second straight month in June, setting up consumption for a rebound in the third quarter though recovery could be limited by the end of expanded unemployment benefits.