Global Markets Review: Gold Surge Continues as US GDP Craters

Overview

The surge in gold prices continued unabated as investors flocked to the precious metal to hedge against future inflation and current geopolitical tensions. Advance second quarter gross domestic product (GDP) data raised the specter of deflation being the main threat to the U.S. economy.

Key Economic Events (Last Week)

• U.S. durable goods – Durable goods orders, a leading indicator of industrial production and capital expenditure, rose by 7.3% in June, beating market consensus of 7.0%. Core durable goods, which exclude transportation equipment like automobiles and aircraft, rose by 3.3%, which was below forecasts of 3.5%.
• Australia CPI (q) – The country's consumer price index (CPI) fell by 1.9% for the quarter ending in June, while the "trimmed mean" component came in at a worse-than-expected -0.01%. Although the headline figure was slightly better than market expectations of -2.0%, it still showed that deflation had gripped the economy.
• U.S. pending home sales – The change in the number homes that are under contract awaiting a closing transaction rose by a better-than-expected 16.6%, beating forecasts of 15.6%. Record low mortgage rates are the likely catalyst for this surge.
• U.S. monetary policy – The Federal Open Market Committee (FOMC) left interest rates unchanged and promised to support the economy as long as needed given that the "path of the economy will depend significantly on the course of the virus." In the press conference following the announcement, Federal Reserve (Fed) Chair Jerome Powell reiterated that both the Fed and Congress may need to provide further support. This statement seemed to imply that Congress needs to act quickly and hearkens back to his April comment that the Fed only has "lending powers and not spending powers." Additionally, Powell stated that this appears to be a dis-inflationary shock and that inflationary pressures are not evident yet.
• Germany preliminary GDP (q) – The country posted a worse-than-expected GDP reading of -10.1%, which was its largest quarterly drop ever.
• U.S. advance GDP (q) – The American economy shrank by an astounding 32.9% in the COVID-19 ravaged second quarter, but this was slightly better than the -34.5% that the markets were expecting. The "price index" came in much lower at -1.8% (consensus 0%), confirming that the world's largest economy is, potentially, in the throes of a deflationary spiral.
• U.S. unemployment claims (w) – U.S. jobless claims rose by 1.43 million, marking the 19th straight week above 1 million. On the bright side, it was lower than market expectations of 1.44 million.
• China manufacturing PMI – China's expansion continues, as its manufacturing purchasing managers' index (PMI) posted a better-than-expected 51.1 reading.
• Canada GDP – This monthly indicator of economic activity posted a reading of 4.5%, handily beating the 3.5% forecast.
• U.S. core PCE price index – The personal consumption expenditures (PCE) price index for June came in at 0.2%, which was in line with forecasts. Consumer spending, which accounts for about 67% of U.S. economic activity, rose at a better-than-expected 5.6% clip.

Global Markets Performance

Commentary

Forex

The British pound (GBP) was the best performing major last week, as it gained against all its major brethren. The combination of overall dollar weakness, a pullback in the euro (EUR) after its post-EU deal surge, and month-end flows appears to have given a bid to the pound. The EUR came in second, and the Swiss franc (CHF) came in third, as these currencies were the only ones to end the week on a net positive note. The rest of the majors ended the week net negative, with the worst performer being the flightless bird (kiwi) that is the New Zealand dollar (NZD). The Canadian dollar (CAD) and U.S. dollar (USD) battled it out to see who would be the second worst performer, and by a whisker, the loonie prevailed.

Global Indices

So much for the rotation into small-cap stocks with more reasonable valuations, as large-cap stocks reestablished their dominance. The technology-heavy NASDAQ and large-cap S&P 500 were the top performing indices, and along with the China A50 and Russell 2000, they ended the week on a positive note. Germany's DAX was the worst performer, ending the week down 3.8%, as investors weighed the effect that recent euro strength might have on German exporters.

Steve Jobs, who along with Steve Wozniak and Ronald Wayne founded Apple Inc. (AAPL) and went on to become a mythical figure woven into the tapestry of iconic entrepreneurs, is purported to have said that one should always "under-promise but over-deliver." Well, that's what Apple did (again) when it announced its third quarter 2020 earnings on July 30, 2020. The salient details:

• Revenue: $59.69 billion vs. $52.25 to $52.3 billion forecast
• Earnings per share (EPS): $2.58 vs. $2.04 to $2.07 forecast

The revenue number was a record for third quarter releases in company history. On top of that, Apple announced a 4:1 stock split. Shares of the tech giant soared on this news, which was a major reason why the NASDAQ ended the week on a such a high note.

Oil, Yields, and Gold

This week's FOMC meeting and accompanying press conference proved to be a non-event as the committee decided that the best course of action is to continue with the extremely accommodative monetary policy, with rates at zero, adopted at the onset of this crisis. Of note was the importance given to COVID-19, both in the statement and, later by Powell, in the presser, which reaffirmed market expectations that this will be the default policy for as long as needed.

Global bond yields have been plunging since COVID-19 was classified as a pandemic, suggesting that the bond market has been ahead of the curve, so to speak, in anticipating the effects this virus would have on the global economy. The FOMC and other central bankers seem to have come to that same conclusion, namely that darker days are ahead. The yield on the U.S. 10-year note closed the week at its lowest level ever, and German bund yields ended the week lower as well.

Crude oil (WTI) ended the week lower as concerns resurfaced about global demand, even as OPEC ramps up production. Gold surged 3.86% to make new all-time highs, closing the week around the $1,975 level. The pandemic's effect on the global economy, the ongoing U.S.-China dispute, and a markedly lower U.S. dollar are all contributing to gold's meteoric rise.

Key Economic Events (next week)

Chart(s) of Interest – GBPUSD

The British pound broke out above minor resistance at 1.2815 as the week began and ended the week just below the dynamic descending trendline that connects June 2015, April 2018, and December 2019 highs. A test appears imminent, with a successful breach targeting the 1.3480 December 2019 high. The pair is overbought, and a correction wouldn't be unexpected, but any retracement should be contained by previous resistance, now turned support, at 1.2815

Pivot Points and Fibonacci Retracement Levels

The pivot point is calculated from the previous trading periods' price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument's original move in price.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.