2 Jun 2020

WHAT HAPPENED YESTERDAY

As of New York Close 1 Jun 2020,

FX

U.S. Dollar Index, -0.48%, 97.87
USDJPY, -0.20%, $107.57
EURUSD, +0.24%, $1.1126
GBPUSD, +1.13%, $1.2486
USDCAD, -1.37%, $1.3583
AUDUSD, +1.75%, $0.6784
NZDUSD, +1.26%, $0.6281

STOCK INDICES

S&P500, +0.38%, 3,055.73
Dow Jones, +0.36%, 25,475.02
Nasdaq, +0.66%, 9,552.05
Nikkei 225, +0.84%, 22,062.39

COMMODITIES

Gold Spot, +0.78%, 1,741.85
Brent Oil Spot, +2.42%, 37.70

SUMMARY:

U.S. ISM Manufacturing Index for May ticked up to 43.1% (consensus 44.0%) from 41.5% in April. This the third straight reading below 50.0%, which is the dividing line between expansion and contraction. The key takeaway from the report is that upticks were seen in the key measures of new orders, production, employment, prices, backlog of orders, and new export orders. All were still below 50.0%, yet they corroborate the view that the downturn in manufacturing activity wasn’t as bad as the downturn seen in April. Dollar fell on Monday as risk sentiment improved on optimism that the worst of the economic downturn caused by the global spread of the virus may be in the past. U.S. manufacturing activity eased off an 11-year low in May, the strongest sign yet that the worst of the economic downturn was behind as businesses reopen.

AUD led the way on a day when risk currencies went on the tear. Stops of anyone with risk averse FX positions were triggered as AUD/USD broke 0.6784, testing higher than pre-Covid-19 levels. No one piece of news provided a reason for the strong rally, it was just capitulation and positioning.

The major indices posted modest gains on Monday, as the market remained resilient to selling pressure and enthused by reopening prospects. The S&P 500 (+0.4%) and Nasdaq Composite (+0.4%) both increased 0.4%, while the Russell 2000 (+0.8%) and Dow Jones Industrial Average (+0.7%) pulled ahead.

Early in the day, investors showed little conviction following the nationwide protests over the death of George Floyd and a Bloomberg report that suggested Chinese officials instructed major state-run agricultural companies to pause their purchases of some U.S. agricultural products. Despite the negative backdrop, reopening optimism slowly pushed stocks higher.

Separately, reports indicated that OPEC moved up its production meeting to June 4 and that it’s close to reaching an agreement with Russia to extend production cuts by another two months. WTI crude futures declined 0.6% to $35.28/bbl despite the news.

CHINA HALTS SOME U.S. AGRI PURCHASES AMID HONG KONG TENSIONS

China has ordered major state-run firms to pause some purchases of farm goods from the United States, including soybeans, as Beijing evaluates tensions with Washington over Hong Kong, Bloomberg News reported on Monday, citing unnamed sources. Chinese buyers have also cancelled an unspecified number of U.S. pork orders, according to the report.

In a worst case scenario, if Trump continues to target China, Beijing will have to scrap the phase one trade deal, a second source familiar with the government plan said. “There’s no way Beijing can buy goods from the US when receiving constant attacks from Trump,” the person said.

IMPACT: The worsening of US-Sino relations is not unexpected and the trade deal will reasonably disintegrate over time given the state of affairs between the two countries. A more important nuance to note is that China instructed this order during domestic turmoil in the U.S., where riots are causing widespread havoc and political uncertainty, as if to inflict maximum pain on the lower-income farmers in fly-over states to revolt against the government. Silver has broken out and looks set to be on a strong trend, as we have been consistently advocating, this will turn out to be the trend that we will speak of for months to come.

POLICE FIRE RUBBER BULLETS TO DISPERSE PEACEFUL PROTEST NEAR WHITE HOUSE

Police fired tear gas and rubber bullets to disperse peaceful demonstrators near the White House on Monday as Trump vowed a massive show of force to end violent protests over the death of a black man in police custody.

At nearly the same moment, Trump spoke in the Rose Garden and vowed to end unrest in major cities across the nation “now,” saying that he would deploy the military if state governors refused to call out the National Guard. “Mayors and governors must establish an overwhelming law enforcement presence until the violence has been quelled,” Trump said. “If a city or state refuses to take the actions that are necessary to defend the life and property of their residents, then I will deploy the United States military and quickly solve the problem for them.”

Dozens of cities across the United States remain under curfews at levels not seen since riots that broke out following the 1968 assassination of Martin Luther King Jr. The National Guard deployed in 23 states and Washington, D.C. Democratic presidential candidate Joe Biden met with black community leaders in a church and said he would create a police oversight board within his first 100 days in the White House if elected.

IMPACT: It’s as if we are living in an upside down world, where two vying politicians are taking contrasting approaches to the situation. Expect the situation to be used as a political leverage by either party, as they say, people tend to be more united in a crisis, the question is against what and who? In any case, the clear outcome will be more incessant money printing, again Gold, Silver and Hard Assets.

U.S. LAWMAKER PREPARES BILL AIMING TO END COURT PROTECTION FOR POLICE

With cities across America in turmoil over the death of George Floyd, a U.S. lawmaker plans to introduce legislation this week that he hopes will end a pattern of police violence by allowing victims to sue officers for illegal and unconstitutional acts.

U.S. Representative Justin Amash, a conservative independent from Michigan, won support from a Minneapolis Democrat on Monday for his “Ending Qualified Immunity Act,” which would allow civil lawsuits against police, a recourse that the Supreme Court has all but done away with. “Be sure of this. We will propose and push for bold action,” Senate Democratic leader Chuck Schumer said on Monday.

IMPACT: The bill joins a flurry of Democratic legislation in the House of Representatives and Senate. Democratic senators have pledged to introduce separate measures that would create a national registry for police misconduct and stop the transfer of military weaponry to local police departments.

The militarization of the U.S. Police Force has been a huge concern over the past years, society has been likening it to George Orwell’s 1984 book of a police state under a totalitarian regime. Will the bill be the silver bullet to quell the protest? Probably in calmer times it might have been effective, but we are in uncharted waters. The riots are not a linear response to George Floyd’s death, but rather the outcry of deep seated issues within today’s society, to succinctly put it, it’s the pent up frustration caused by the divide between Main Street and Wall Street and the haves and the have-nots for decades.

US COMPANIES ISSUE SHARES AT FASTEST RATE EVER

U.S. companies dumped more than $60 billion in shares into the strong rally in May (+40% off lows). Companies like The likes of Southwest Airlines Co and cruise operator Carnival Corp have issued new stock to raise money. Major shareholders in companies such as BlackRock Inc and U.S. drugmaker Regeneron Pharmaceuticals Inc have cashed out their stock, with the market rebound far from certain to last.

IMPACT: Companies who have the best visibility due to boots on the ground seem to be making a last hurrah to squeeze out any possible source of cash, these are not the actions of someone who is confident of a “V-Shaped” recovery.

DAY AHEAD

RBA Meets Later Today. It’s only been a couple of months since it launched its first ever quantitative easing program and the RBA has already begun winding down its purchases of Australian government bonds. In contrast, other central banks, including next-door neighbour — the Reserve Bank of New Zealand — have either increased or are likely to increase their asset purchases in the coming months.

Although the RBA is targeting the yield curve as opposed to setting outright targets on the amount of bonds it buys may be one reason why Australia has not had to intervene as heavily in the bond market, another reason is the quicker turnaround in the economic outlook, which has helped bond yields stabilize.

SENTIMENT

OVERALL SENTIMENT: Same story, different day. Good news is good news and bad news is not as bad as feared. Cities across the US burnt with the fires of discontent over the murder of an unresisting, restrained man by police officers in broad daylight with cameras rolling and bystanders pleading. What happens in the dark of the night when a person of colour is confronted by cops like these with no one and no cameras to bear witness?

As the fires burn, the President of the US of A — the undisputed king of politics of divisiveness — rages on with threats of violence against protestors. Stocks continue to rise with companies frantically issuing stock and debt, and major shareholders in big corporates selling their holdings as fast as they can. With looting in the streets, and Wall Street stealthily robbing Main Street, the silent cries of those living with inequities and inequality will ring loud and clear.

TRADING TIP

Weeks Where Decades Happen

As Lenin once said “There are decades where nothing happens and there are weeks where decades happen.” Complex systems have emergent outcomes that are not the sum of its parts, human society is such a system, it can work for a long time until it suddenly breaks and its impact and timing can never be predicted by the best of us. If we look back in history, it usually ends spectacularly in civilizational collapse, political change of guards for better or for worse, and revolutionary policy reforms that will have long-lasting repercussions. We believe we are living in such a time, 2020 will go down in history as a pivotal moment where a virus exposed all the bones we hid under the cover of Unconventional Monetary Policies and the impact it had on society. For more than 3,000 years, Gold and hard assets (Land, Art etc.) proved its worth during such paradigm shifts and it has the best track record of survivability over any asset we know of today. History never repeats itself but it rhymes.

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