In July, many countries struggled with the

resurgences of coronavirus outbreak,

forcing a pause to their economy reopening

schedule as well as tightening lockdown or

social distancing measures.

Being stressed out with the dim hope of

virus containment, governments have felt

the urge to claim accountability for the

origin of this global pandemic.

Meanwhile, U.S. president Trump openly

admitted that settling the trade deal was no

longer material, meaning that he could and

would go against China by all means.

We believe that geo-political tensions

would stay extreme and expect a highly

uncertain investment environment. The

path of economic recovery is unclear.

Despite all the economic headwinds and

disturbing political atmosphere, global

equity markets, especially the U.S.’s,

continued to climb. This has been backed by

the high liquidity and the anticipation of

more easing measures by central banks

which will continue to provide support to

the financial market.

Nonetheless, there is no doubt that the U.S.

is getting tougher and tougher against China.

Actions and reactions of the two countries

may bring sudden shocks to the market.

If the above situation suddenly worsens, the

potential market drawdown can be massive.

GLOBAL STOCKS

COMMODITIES & CURRENCIES

4.69%

2.38%

5.51%

6.82%

-3.09%

0.02%

-4.41%

0.51%

-2.59%

8.42%

1.80%

8.27%

10.90%

7.71%

-3.24%

4.98%

-0.78%

6.85%

8.02%

8.98%

-2.32%

0.69%

6.69%

MSCI World

Dow Jones

S&P

Nasdaq

France

Germany

UK

Australia

Japan

MSCI EM

Russia

Brazil

China

India

Vietnam

Indonesia

Thailand

Malaysia

MSCI Asia ex Japan

Taiwan

Singapore

Hong Kong

South Korea

10.94%

2.55%

9.13%

6.95%8.03%

Gold Crude Oil Platinum Copper Wheat

-4.15%

4.84%

1.96%

5.52%

3.48%

1.22%

0.49%0.64%

4.64%

0.85%1.30%

USD EUR JPY GBP AUD CAD KRW TWD BRL INR CNY

As told a lot of times, the extremely high

liquidity that central banks have been pumping

into the market has given much support and

boosted an overall market rally, both stocks and

bonds have grown simultaneously.

However, the sideline is, world interest rates are

going low. Unlike stocks, bondholders do not

aim at price appreciation but the scheduled

coupons that they would receive.

The Traditional inverse relationship between

stocks and bonds provides a hedging advantage

to bondholders. The more and more aggressive

expansionary monetary policies by the central

banks are breaking this link.

In that case, lower rates lessen the interest

bonds would give to their investors, much

depleting the primary attractiveness of bonds.

The U.S. Federal Reserve alone has turned

things around. Over the latest purchase

programs, the Fed is basically buying up

everything in the bond market, just as to

support the economy.

This has flooded the financial system with

unprecedented level of cash. See that its asset

balance went from $4.2 trillion to $7 trillion in

just three months’ time!

With such liquidity pumps, bonds are no longer

completely free market agents. Besides, as rates

are approaching zero, even into the negative

territory, the hedging purpose of bonds would

cease to exist.

So perhaps, it’s time to rethink the investment

mix. So, easing might not be any good news to

bonds and investors are seeking alternatives

when they want hedging tools.

How About Swapping Out Bonds for Gold?

Now the question is, what can gold do but

bonds cannot? Something that’re bad for both

stocks and bonds: inflation, and economic

downturn. Recently investors’ fear for inflation

have crept up, seeing Treasury yield curve has

barely steepened whereas the path to economic

recovery is so far from in sight.

Being accustomed to the current cost of living

that hasn’t moved up much for long, it’s just

reasonable that any uptick would send us

scrambling for gold.

Gold’s advantage is that it can still benefit under

both of the above-mentioned situations. At least

in history, gold outperformed stocks when

inflation went above its long-term mean.

One thing that might worry you, is there really

room to the upside given the already

record-breaking gold rally? Yet when we

consider commodities, technical adjustments

don’t apply that much since they can have

physical demand and value.

Goldman recently estimated that, on the easy

money and low rates, gold futures price could

even reach $3,000 if inflation hits 3.5% for a

sustained period or if it hits 4.5%.

On its latest development, the massive rally in

gold has already sent its price to record highs

$2,000 an ounce. The course reversed a little

lately but bond yields cut shall continue to

support the metal.

Unemployment rate %; Non-farm payrolls

Labor figures were positive. Non-farm payrolls added 1.76 million jobs in July,

leisure & hospitality accounted for a third of the month’s increase.

Unemployment rate fell for the third month to 10.2%, beating expectations.

IHS Markit U.S. Manufacturing PMI index

The index was revised lower to 50.9 in July. But compared to June’s final 49.8,

this figure still signaled a marginal improvement of the manufacturing sector.

This shows the first expansion since February.

Consumer inflation, year-on-year growth %

Overall inflation rose by 1%, far more than the previous three months. This shows

an apparent improvement from the previous subdued period. Meanwhile, core

inflation rose 1.6%.

Stock markets have recently erased their losses triggered by the initial onset of

the global pandemic, mostly driven by momentum and that investors continued

to bank on further fiscal and monetary stimuli.

Meanwhile, number of new daily infections in the U.S. rose to record highs

despite several signs of improvement in some hard-hit states.

Running a Full Circle for the Year

Over the last few days, S&P 500 index climbed back to its February’s high. The

index has captured a rally over 50% since its bottom in March, reversing the

“Death Cross” in three and a half months’ time. It is apparent that the market is

taking a bigger deal on the comfort than the otherwise as the Federal Reserve

urges the need to protect the nascent recovery.

IHS Markit Manufacturing and Services PMI index for Euro area

Manufacturing sector was revised up to 51.8, beating estimate and showed

the first expansionary mark since February 2019. Service sector was revised

lower to 54.7, still pointing to the steepest expansion since September 2018.

European Commission Consumer Confidence Index

The indicator fell to -15 in July, from -14.7 in June but still an improvement to

the slump in April. We assume that the improvement slowed but at least

stayed at similar pace.

Consumer inflation rates, year-on-year growth %, core, whole

Annual inflation rate is expected to pick up to 0.4% in July. Core inflation is

likely to accelerate to 1.2%, a comeback compared to the previous 0.8% and

near the pre-pandemic level.

Thanks to responsible individual behavior and smart public policy, Europe has

delayed a resurgence of Covid-19. Among the newly infected, the profile is

younger, patients show less or no symptoms, hospitals are relieved from stress.

Looking at the patient demographics, the virus containment of this second wave

looks “easier” to the experienced governments and general public. But to the

economy and market, the stress is still there, adding that there’re still risks of

major outbreak if the infections spread to the elder generation.

Most recently, as the U.K. added some fresh travel rules to its European

neighbors, the region’s stock market weakened. To count the cost of lockdowns

to the region’s economy, Oxford Economics estimated the below GDP changes.

Meanwhile, Euro has run on extraordinary rally against the greenback, the

exchange pair already marked eight weeks of gains in a row, set for the longest

run of weekly gains since 2004.

Industrial production growth, year-on-year

Industrial output rose 4.8% in July which remained unchanged from June and

lower compared to market consensus of 5.1%. This is the steepest rise in six

months. Growth in manufacturing and utilities continued.

Producer Prices, year-on-year change %

PPI fell 2.4% in July, following a 3% decline in June and compared to market

estimates of -2.5%. It marked the sixth straight month of fall in factory prices,

but the smallest in four months as the economy tried to recover.

The Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia

Australia consumer sentiment collapsed again and declined by 9.5% to 79.5 in

August, after a 6.1% drop in July as Victoria’s lockdown caused fears across

the nation, with all five components declining.

Despite the improvement industrial output, July data show that China’s

recovery is still uneven with consumption barely able to keep up with the

output rebound. The slowing output growth with the continuous fall in retail

sales suggests that weak demand is holding back further recovery. People’s

unwillingness to go out to eat is the primary drag to consumption, for now

labor data are steady.

Domestic consumption is particularly vital to its economy’s sustainable growth

right now as China touted the so-called “dual circulation” i.e. to be more

self-reliant, a result of growing risks of external demand (dragged by

coronavirus and geo-political tensions). Overall, the pickup in recent months

hasn’t able to erase all damage from the pandemic yet.

Overall slowed recovery pace

Pace has slowed, along with imbalance recovery among sectors, it’d take longer

for the economy to crawl back to the intended level. Also, the weaker-

than-expected data increased the odds of a rate cut in the coming months.

Meanwhile, to reduce the risks of cash squeeze amid massive government bond

issuance and maturing interbank funds, the People’s Bank of China just added

the most short-term funds, since May, into the financial system.

Tuesday 12 August morning, Russian President Putin proudly presents Sputnik-V, the

very first covid-19 vaccine to be registered, with its name referencing the Soviet

Union’s first satellite launch in 1957.

The vaccine that might cure the virus who killed near 750,000 around the world is

jointly developed by the Ministry of National Defense and the Moscow-based Gamaleya

institute.

The victory might have outrun the world but its safety remains highly doubted. Experts

have warned Russia not to enter Phase 3 trials unless it’s fully tested. Normally,

approval comes after but not before Phase 3 but Russian government eliminated such

requirement early in April, this fast-tracks everything. The trails will start Wednesday 13

August in Russia and several other countries where the vaccine would be administered

to thousands of people now.

On this point, Putin showed no second thoughts on the plan to launch in October. He

even added that his own daughter had taken the vaccine but till now, no scientific data

have been released for the world to verify its effectiveness. The rush of Putin is of

obvious political concern, disregarding guidelines and so.

No matter what, despite the many unanswered questions, we assume that such

“breakthrough” would still pose a pressing need for other trails underway to move

faster. Closely watched R&D that’re undergoing Phase 3 testing include one from the

University of Oxford with AstraZeneca and another from Moderna with the U.S.

National Institute of Health.

At this point, we remain optimistic and cautious about the development of a genuinely

effective vaccine, hopefully massive application could be available before the first half

of 2021 ends.