European stocks were still not showing any signs of recovery at the time of writing, after falling sharply at the open. Crude oil prices also fell after Brent reached a post lockdown high the da prior, while gold extended its advance amid continued haven flows and expectations that yields will remain depressed for a very long time due to recent actions of central banks. The dollar was trading mixed, with the dollar index up after a two-day sell-off – but still looked vulnerable.
So, with risk being off the table, it looks like the markets are finally responding to flare-ups in virus cases, which are disrupting and slowing down the reopening of major economies. The situation in the US is also posing a threat to Trump’s re-election chances. Joe Biden is currently leading in the polls, putting him in pole position to secure the 270 electoral votes to win the presidency. But in some states the race is too close to call, and a lot will now depend on how the Trump administration deals with the virus situation. If the markets become convinced business-friendly Trump will be defeated, then the US stock market rally may well falter.
- In the US, cases are still rising in hot spots such as California, Florida, Texas and Arizona
- Two German districts are now under lockdowns after local outbreaks. Restrictions are re-imposed in parts of north-eastern Spain
- Latin America is the hotspot with Brazil having registered the second-highest daily death toll on Tuesday (1374) since the pandemic started, surpassing the June 4 total (1,473)
- Globally there are now 9.2 million Covid-19 cases and around 477,000 deaths
Also weighing on risk is profit-taking following the recent sharp gains, especially as the economic calendar is very light today. But we have seen every dip being bought and this could turn out to be another such occasion, despite everything that’s happening around the world. Equity market investors know full well that major central banks have got their backs. So, while I totally agree with many other analysts that valuations are sky-high and the pandemic is far from over, the Fed and other banks stand ready to act if stocks drop again on economic worries.
But one thing that is clear is today’s stock market weakness is helping to fuel the rally in safe-haven gold:
The precious metal broke out of its recent consolidation at the back end of last week, taking out key resistance around $1745. The metal hasn’t looked back since, as every short-term dip has been supported. For a long as price holds $1745 now, the path of least resistance would remain to the upside. The bulls are eying $1800 next, where we may see some profit-taking should gold get there.
