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June 20, 5:00 pm EST Stocks traded to new record highs today. Oil was up 6%. The 10-year yield traded below 2% for the first time since the day following the Trump election. These are all significant signals for global financial markets. But the most important signal of the day was the move in gold. Remember, the great macro trader Paul Tudor Jones said last week that he thinks a break of $1,400 in gold would quickly bring about $1,700. Gold exploded to five-year highs overnight in Asia, and traded just shy of the $1,400 level today. Not coincidentally, the pop in gold prices overnight happened when the 10-year yield broke below 2%.
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So what is gold telling us? Gold is the bet that the trade war won’t be resolved. And that, along with the sharp decline in global government bond yields this year, is telling us that global central banks will be forced back into highly stimulative policy. Will it happen? With all of the scenarios that strategists are conjuring up, looking for potential cracks in the economy, it really boils down to “what will Trump do?” If he holds firm on demands of China, then the markets are right (pricing in economic slowdown, deflationary pressures, aggressive monetary stimulus and maybe military war). If he folds/ concedes to get a deal done. The markets are wrong. In either case, in the near term, ultra-low rates and the prospect of more monetary stimulus is fuel for stocks. And if the trade war were to end with a deal, the stocks would have the tailwinds of low rates and an economy that would probably pop to 4% growth. |