The gold rally might get tested in the near-term with the Eurozone fright having past and China resuming currency liberalisation. I expected a bit more risk seeking this week as markets moved past the fears of a few weeks back but the results were pretty muddled.
- Bonds are still pressing highs but momentum is ebbing.
- Gold is similar with early weakness giving way to a weekly close near highs.
- Equities are heavy but holding recent lows. It is tough to gauge the impact of the US financial reform debate, with banks trading relatively heavy but wider market moves not reacting to the news flow on that topic.
- the Australian dollar and Canadian dollar should benefit a lot from stabilising macro news. Both got dumped more on liquidity than fundamentals when the Euro made lows. The movements this week support the story that stability is returning but only weakly with movements being a bit lacklustre. Action in the AUD may be slightly muddled by the Australian leadership change but the big news on that front is probably yet to come as the mining tax negotiations get underway.
On the Eurozone fright, I don't think I had given enough weight to the idea the Germany could abandon the Euro. The smaller size of the PIGS, and particularly Greece, made me quickly assume that either Greek debt would be written down or Greece would leave the union. How can anyone benefit from a currency union where the strong members are encouraged to leave? Anyway, with the Euro keeping gains and moving up through the week my view may be becoming more mainstream.
On China, it seems like the world is still debating whether the announcement last weekend really means anything (or this). China is in an odd spot of wanting to dip a toe in with gradual currency movements but knowing that once its intentions clear the market will front run the policy. This makes timing difficult but ultimately it all appears to be heading toward a stronger yuan and stronger Chinese consumption. This may uncover some domestic imbalances as it goes forward but near term this also points towards stability.
I also wonder if the traders aren't a bit too negative on the G20. The view seems to be that either there is nothing to talk about or talks might degenerate into an ugly round of finger pointing. I expect politicians will err on the side of vague positive statements and keeping disagreements out of the public eye. Even acknowledging that the world can not return to the pre-2008 configuration of trade and capital flows might be viewed as above expectations.