Yesterday bad was good, today bad is bad. We’re talking about the reaction to weaker data in China, which yesterday bought a modestly bullish reaction in markets but today it is the opposite. The Aussie was weaker, together with stocks in Asia, whilst EUR/USD flat-lined and the yen gained. The data was external trade, which was much weaker than expected, with exports rising just 1% YoY. This measure has averaged 10% over the past year. But the fact that markets did not getting excited is not surprising, because further monetary stimulus will do nothing to help weaker external demand.
The dislocation of gold. The past two months have been the most stable for gold for 18 months, looking at the price variation. This is even more remarkable given the flow of dire news on the global economy over this time, such as the eurozone sovereign crisis along with expectations of slower growth in China and other emerging markets. Gold is another example of the dislocation from previous relationships we are seeing in markets. For most of the past four years gold has traded inversely with global real interest rates. So if real rates (interest rates minus inflation) fell, gold rose. If investors were not being rewarded over and above inflation elsewhere (or were being rewarded but less so than before), they have been more inclined historically to seek returns from a non-yielding asset such as gold. So, having seen a correlation of -0.60 through last year (on a six-month rolling basis), gold and real interest rates (we use a simple global measure) are now positively correlated to the same extent. Of course, bullish arguments for gold are never hard to come by and they are still being thrown around. But similar to the way in which the Aussie has diverged from previously strong relationships with both the global risk cycle and commodities, gold is also behaving differently compared to the past few years. If finance teaches us anything it’s that nothing lasts forever, and this should hold true for gold just the same as any other asset. This could still turn out to be gold’s first down year since 2001.
Stronger growth outlook for Australia. In Europe at least, we’re not used to seeing growth numbers being revised up, but this is what the Reserve Bank of Australia did for its 2012 outlook in its latest monetary policy report. This was based on stronger than expected consumer demand, although as always there are risks, not least from the stronger currency. Growth for this year is predicted at 3.75%, much faster than we’re currently seeing in Europe or the US. This lends further weight to the view that the RBA is likely to keep rates on hold for the remainder of the year and that, behind closed doors, will be hoping that the currency does not appreciate any further from current levels.