Gold - A bear market rally?
Big movements in market yesterday and today so far. In a world that has been full of bad news we are seeing some positive surprise.
The major bad news was British prime minister Boris Johnson was moved to ICU with complications related to COVID -19. On last count, he is stable and in good spirits. Hope and pray he gets through this one.
Finally, a possible flattening of the curve in US and in Europe. In President Trump’s words, “finally we are seeing the light at the end of the tunnel.” May be the virus is leaving town through the Holland tunnel.
The drug hydroxychloroquine is making all the noise. Until yesterday the Governor of New York had banned the use of the drug outside of hospitals. But he reversed it and also admitted that the drug has been effective in the hospitals. So, in Trump’s words is it a game changer.
Whatever it is, stocks and gold levitated. Stocks were up 7% and Gold was up 4 %. I thought they were inversely correlated but markets have not been following old conventions. Let’s check the various asset classes.
EQUITIES
The up move from 23 Mar is a bear market rally. Our earlier assumptions of seeing a top must have been a bit premature. It looks increasingly we will see higher than the highs of 26 Mar. Markets are so emotional it is difficult to set targets based on conventional rules.
Upside levels to watch will be 23,900 in the Dow and 2795 in S&P. A break of the above levels can carry the S&P 500 even another 200 points higher but not more. The risk remains more to the downside.
BONDS
As suspected bonds topped out at 182^31 on Friday and declined sharply yesterday. There is still chance of it going back to 185 but it is not required. Greater bearish potential exists to the downside and our eyes are set into the 150’s.
EURO
The structure of the Euro is open to many interpretations, but we think it should break to new lows at 1.0635 of Mar 22.
GOLD
Investors are panicked that there is not enough gold out there to fill in the contracts and this sentiment aligns with a bear market rally. Repeated tries at 1700 and a break below 1550 should confirm the next directional move.
COVID-19 Update
Probably there is no better city in the world than NY to test a severe, resource constraining outbreak virus like COVID-19. The government and medical fraternity have thrown everything at it including lockdowns and experimental treatment options.
In a world where scientists have had a lack of evidence to evaluate treatment options for a virus that could destroy the nation, evidence is being produced in real time. If they were skeptical about the merits of its application in China and Europe (hydroxychloroquine) or the testimonies of recovery patients, they now have an 1100 patient clinical trial running in NY for more than a week. Plus, they have a much larger anecdotal pool to evaluate after the treatment was made optional for doctors to prescribe around the country.
So many have been waiting eagerly to hear the results as the discussions around the drug is highly politicized and reporting is very controlled.
The raw data coming out of New York is very encouraging. Daily ICU admissions are down three straight days and daily intubations are down to two straight days from over 300 to 70. This positive change in direction should be very supportive for Main Street and Wall Street. Until last week a treatment option was not in the reckoning for many market participants. So, we will see how this will play out.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.