Following the coronavirus lockdown, global central banks have been printing away merrily on their endless money-printing machines with no accountability or end in sight. Needless to say, they did manage one thing -- a total collapse of the economic and financial system back in March, which was scarier than the 2008 collapse at one point.
It is different this time because not only is this a financial problem but also a corporate and a sovereign one as well, given how fast the global economy came to a screeching halt and the debt and balance sheets of companies blew up as their top lines just vanished in a matter of days. But this unprecedented amount of quantitative easing QE), especially by the Federal Reserve, has led to a collapse in the U.S. dollar against most developed market currencies. It is a race to the bottom as global central banks debase their fiat currencies; the one that does better is the one that is printing the least relatively -- the lesser of the evils.
Over the last week, the dollar has had an extra push lower versus the euro, Aussie dollar and even the sterling. This move lower in the dollar has caught many off guard as some of the more active managers were expecting the dollar to rally as global growth data showed muted signs of a rebound and risk was picking up as the Fed was trailing back on its quantitative easing purchases.
On the other hand, gold and silver, two precious metals, have been breaking new ground this week, with silver up 18% in three days to around $23 per ounce. Silver had lagged gold a lot, with gold now almost at 2011 highs, so silver is playing catch-up. This aggressive break above $20 probably helped the dollar to fall, which caused an even higher push. A classic case of chicken and egg.
Earlier this week on Monday, money started rotating into laggard value lower-dollar beneficiaries such as oil and platinum that have been lagging due to their own fundamental reasons. They recently broke out, or tried to following the momentum in silver, gold, and the lower dollar. This was exacerbated by profit taking in technology names, namely Amazon.com (AMZN) , Apple (AAPL) and Microsof (MSFT) amid second-quarter earnings season. Sector rotation is a powerful thing as growth over value has been the trade of the past few years, and everyone is eager to call the turning point. When everyone is positioned a certain way, technically, that can cause violent moves over a short period of time.
The key to all stock and asset classes rests on the direction of the dollar. We are now resting on some key multiyear support on the U.S. Dollar Index (DXY) around $94.50. A break lower from here would be very risk-asset bullish, especially for the commodity-centric names. But one needs to ask, "Why is the dollar falling?" Is it because there is more QE in the system boosting asset prices, or is it because the U.S. is losing its dominance as global growth risks pick up?
We seem to be following the narrative that suits us the most without questioning why. Names such as gold and silver have sound structural reasons to be long, but one doubts that's the case for oil. It is important to be selective and not just chase the breaks.
Congress soon will pass the next stimulus bill, as the Coronavirus Aid, Relief and Economic Security (CARES) Act ends in July. The GOP is suggesting an extension in federal unemployment benefits of just $100 a week, down from the $600 a week in the initial act. This is not dollar-bearish, Indeed, it is less money printing and accommodative than earlier.
Whatever bill Congress comes up with, it needs to be announced before August as these benefits have incentivized people to stay home rather than work. Could the labor non-farm payroll numbers show weaker prints from August onward? Only time will tell, as looking at other broader economy indicators demand is nowhere close to being back to where we were earlier in the year.
