Australian dollar hangs on amid market panic

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was strong last night as EUR and CNY wilted:

The Australian dollar hung on versus DMs:

EMs were stronger:

Gold is still bid:

Oil is weak:

Metals too:

And miners:

EMs stocks are at the cliff:

Junk lifted a little:

Treasuries were wildly bid:

And bunds:

And Aussie long bonds:

Stocks were flat:

Westpac has the wrap:

Event Wrap

US July retail sales rose +0.7%m/m (est. +0.3%) and +1.0%m/m for the core control group (est. +0.4%), with only minor -0.1% revisions to the prior month’s strong report. August business surveys from the Philly Fed (16.8, est. 9.5, prior 21.8) and NY Empire (4.8, est. 2.0, prior 4.3) soundly beat expectations, with the Philly report maintaining solid expectations, though these did “wane” in the Empire report. New orders remained continued to be strong. 2Q unit labour costs at +2.4%q/q (SAAR), versus est. +2.0%q/q, were also stronger than expected, with sound upside revisions to the prior quarter (5.5% versus prior -1.6%). Productivity rose 2.3%q/q (SAAR) versus est. of +1.4%. July industrial production slipped -0.2%m/m (est. +0.1%m/m), but the prior month was revised to +0.2%m/m from flat. August NAHB homebuilder sentiment survey index rose to 66 versus expectations of unchanged at 65. June business inventories did not rise (flat versus expected +0.1%m/m), whilst sales rose and the inventory to sales ratio pulled back from the recent high (of 1.40) to 1.39.

UK July retail sales rose +0.2%m/m on both headline and core (both expected to slip -0.2%m/m). Revisions to annual data meant that headline sales rose +3.3%y/y (est. +2.5%) and core rose +2.9% (est. +2.3%). There was a notable lift in July on-line sales.

ECB’s Rehn (Finland) said in an interview with DJ/WSJ that they were preparing for substantial stimulus in September. He said it’s better to overshoot than undershoot on stimulus, and need a significant easing package in September. The weakening economy justifies a monetary policy response which should include rate cuts and substantial bond purchases, and beat expectations.

Chinese comments on US trade tariffs stated that the US had violated prior consensus and that China would take countermeasures on US. An hour later, the Chinese Ambassador to UK held a press conference on the “gravest situation in HK since the handover”. He spoke strongly about unwarranted foreign intervention in HK and unbalanced media reporting, calling for both to stop.

Event Outlook

NZ: manufacturing PMI has trended lower over the past two years, but is holding just above the 5o level (expansionary/contractionary).

Euro Area: Jun trade balance is released.

US: Jul housing starts and building permits are expected to show stabilising activity. Aug University of Michigan Consumer Sentiment is anticipated to hold at an upbeat level of 97.0 from 98.4 in Jun.

DXY was lifted by US retail sales, which were great:

Advance estimates of U.S. retail and food services sales for July 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $523.5 billion, an increase of 0.7 percent from the previous month, and 3.4 percent above July 2018. … The May 2019 to June 2019 percent change was revised from up 0.4 percent to up 0.3 percent.

Industrial production was soft:

Industrial production declined 0.2 percent in July. Manufacturing output decreased 0.4 percent last month and has fallen more than 1-1/2 percent since December 2018. In July, mining output fell 1.8 percent, as Hurricane Barry caused a sharp but temporary decline in oil extraction in the Gulf of Mexico. The index for utilities rose 3.1 percent. At 109.2 percent of its 2012 average, total industrial production was 0.5 percent higher in July than it was a year earlier. Capacity utilization for the industrial sector decreased 0.3 percentage point in July to 77.5 percent, a rate that is 2.3 percentage points below its long-run (1972–2018) average.

But builder confidence was up and mortgages are booming again as the long bond crumbles:

Hard to see the US falling too far when housing is warming up. Stocks will have to crash and shatter household sentiment.

Will they? Charles Gave explores the question:

I always try to be a rules-driven investor. And when the US stock market is down -3% in a day, taking it to -6% from its peak in three weeks, when 10- year US treasury yields have halved in nine months to just 1.55%, and when gold is up 20% in three months, it is a good time to review those rules to see what they can tell me. The answer is: quite a lot.

One of the core tenets of my approach to portfolio construction is that to hedge the equity portion of my portfolio, I know I can use gold if the economy is in an inflationary period, and long-dated US treasury bonds if it is in a disinflationary interlude.

The trick is to determine whether the economy is in an inflationary period or not. I tend to look at the markets. If gold has outperformed the 10-year US treasury over the previous five years, I can stop asking questions and hedge with gold. Conversely, if the bond market has outperformed, I can go ahead and hedge with long bonds, providing its valuation is not too demanding.

Now please take a look at the chart overleaf. The upper pane shows the price of gold plotted against the total return index of the 10-year treasury. The lower pane shows the ratio of the two series. Looking at the ratio, it is clear that from 1971 to 1984, investors should have used gold as their hedge. From 1985 to 2002 they should have chosen US long bonds; then from 2003 to 2012 gold, and from 2014 to May 2019 US long bonds once again.

Since May 2019, when the treasury total return/gold ratio fell below its fiveyear moving average, I have been recommending that investors switch from overvalued bonds to gold as the preferred hedge for their equity exposure (see The Inflation Shift And Portfolio Construction). Usually, these two assets—long-dated US treasuries and gold—tend to be negatively correlated. When treasuries are going up, gold tends to go down, and vice versa.

But in the last few months, both have powered ahead at the same time. This left me scratching my head, and as usual when puzzled, I reached for the history books to see when in the past both treasuries and gold have looked overbought at the same time. Specifically, I looked for other occasions when the three-month rate of change for each asset was above its respective standard deviation at the same time.

The conclusion is striking: we are in a panic. There were plenty of market panics in the 1970s, when real rates were negative. Then from 1980 to 2007, when short rates were “normal”, they were almost non-existent. However since 2007, there have been several occasions when— unusually—both treasuries and gold went up at the same time.

Here they are:

• The beginning of the global financial crisis.

• The end of the global financial crisis.

• The bond market meltdown in peripheral Europe which prompted Mario Draghi’s “whatever it takes” put.

• The slowdown in China which led to the G20 “Shanghai agreement”.

• The latest panic.

Each previous panic was dealt with by governments and—more importantly —central banks, including the Chinese central bank, ganging up to stop the rout. However, given the current chill in relations between Washington and Beijing over trade and technology, it is hard to believe that the latest episode will be halted thanks to a cozy cooperation deal between Donald Trump and Xi Jinping.

So what should investors do? My immediate advice would be to do very little right now. Acting in the middle of a panic is seldom a good idea. I would just continue selling bonds, and so raising cash.

Structurally, I maintain my call to hedge the equity risk in a portfolio with gold, since bondholders are most likely to be the victims of the next crisis. Indeed, I believe that in the next crisis, trading in some bond markets may be discontinuous, as in Argentina in recent days (see Lessons From The Argentine Shock). In the coming crisis, I fear there may be very little to choose between some European bond markets and Argentina.

Investors who believe the Hong Kong situation will not deteriorate further (see Hong Kong Q&A (Part II)) should hold on to their Chinese bonds (over the last 12 months, the 10-year Chinese government bond is up 7% in US dollar terms, handsomely outperforming the total returns on both one-year US T-bills and the S&P 500). And they should concentrate their equity holdings in high quality stocks relatively immune from the vagaries of governments, and hedge them with gold. Praying might also help.

Actually, gold also hedges deflation. The one thing it does not hedge, in the short term, is a genuine market panic which crashes stocks. That tends to lead to a safe haven bid in the USD and smack gold.

I see four swords of Damocles hanging over the equity market and ready to swing:

  • Hong Kong Tienanmen;
  • hard Brexit;
  • trade war deterioration, and
  • an oil crash.

Bond yields are picking up on all four and so are central banks. Equities are only watching the latter.

When one sword falls then all heads roll, including the Australian dollar.

David Llewellyn-Smith


  1. Exactly what I have been thinking. Gold stocks are in danger if the selling becomes a crash. We need a slow burn of panic to keep people edgy but not outright collapse.
    I am glad US markets had a breather overnight.

    • Penguin,
      I think the US and Aust equity sell off has just started, and gold is nearing a high for now.
      I’d like to buy miners too, but I don’t really know much about them.

      • Gold is due a correction — miners too. Sit tight for now. There will be better opportunities. The sector is notoriously volatile so don’t leverage up or you may get carried out.

      • Noticed your 5800 call on the ASX yesterday and just finished some charting on it. Same answer! Decent resistance, although if we break through that, 4200 is looking very likely. I’m out and waiting to see what happens if and when we hit 5800.

        I like Silver Dominic. SVL.

    • Gold stocks crashed in the GFC meltdown because:

      1. Gold had been in a bull market for 5 or 6 years already and the market was well invested in gold stocks (investors were sitting on healthy profits)
      2. The GFC led to a liquidity crisis which meant that investors had to sell what they could, when they could, esp profitable positions.

      Bear in mind that the gold sell-off was very brief and the bull market soon resumed.

      The situation is different today because we are at the end of a bear market in gold and stocks are still relatively depressed so you don’t have a wide base of institutional investors with profits to cash in. That said, there should be some weakness but not material or sustained.

      The next round of stimulus (fiscal and monetary) will be one for the ages. The GFC printa-thon will seem like a kiddies tea-party by comparison. For the purists, monetary inflation will be off the dial. As Charles Gave says, the bond melt-down ahead could be epic and if it comes to pass as he suggests it would literally smoke the entire global financial system, whose capital base is made up of … (drum roll) … Govt bonds! (A regulatory requirement I might add). Oh and then there’s all those pension funds that are heavily invested too — and insurance companies. Retirement is sure going to be a misery for hundreds of millions of people. No sunset G&Ts for you!

      But don’t worry, central banks will simply print even more money to buy all the bonds that are puked in the hundreds of billions per day. Sounds like a golden opportunity to me 😉

      • HadronCollisionMEMBER

        In what way? I was planning on dumping some cash (not a lot) into TransferWise USD.

        I wonder to what extent super funds are bearish enough, I might move my balance from growth to conservative.

      • HC
        Dominic’s comment ” The GFC printa-thon will seem like a kiddies tea-party by comparison.” seems pretty spot on. The CB’s (NOW)have no alternative. So this means there are no one-way bets. At zero rates any asset is worth something between zero and infinity with both the outliers included in the range. Going ‘conservative’, in such an environment might mean you get smashed by asset inflation on a scale never seen before.
        Note that I am at the stage of Itag’s chicken entrails below, so my opinions are worth something between zero and infinity possibly trending towards the lower bound!

      • Dominic, I loaded up on NST at $2 (shifted some into DCN recently)… I think I and others have made a bit over the last few years…

      • @ HC
        Bonds are heavily owned by pension funds as they are usually seen as income instruments and reliable ones as you know precisely what coupon is going to be paid — dividends are less certain. The point is $15 trillion of bonds have a negative yield i.e. you pay to own them. That isn’t sustainable –bonds are in a gargantuan bubble with only CBs to backstop them (with a money printer). Pension funds are rooted either way — they need income, not capital erosion.

        Good call. NST a very good stock — have owned it myself since similar level. Sold some recently but maintaining a core position. DCN is probably decent too. Am about flat after the price collapse and some subsequent averaging in

      • Hi Penguin
        Why DCN? The CEO seems pretty determined to rip the company off? I see the possible return to future Cash flow but the next 3 years look very dodgy? (I’ve been burned by a few of these over time that look good on the surface)

      • Flawse, give us the low-down on Dacian. I’m involved but only small and sitting on a modest loss after averaging in. These speccy miners are a nightmare, for sure. I wish I’d gone into this business — buy some exploration rights, raise some money, dig a hole, make some positive noises and voila! you’re in business and have a job as long as you can persuade investors to keep funding exploration.

        With DCN it looks like their contractors have c0cked up but I’m open-minded. Hit me with it ..

      • Dominic I stumbled on this site. It might be lacking the latest release from DCN
        Looks a pretty good site to start.
        I have some NST (not enough 🙂 ) – the bloke knows how to run mines!
        Morgans recommended RMS – no debt and profitable – but the price is up 50% in the couple of weeks since. I was overseas, with very limited internet access, when it came out so I missed the boat – but as NST shows 5 to 8 baggers may not be that uncommon if this plays out as we think.

  2. I’ll also say that is major buying of US 10 year, it’s a freight train, where will is stop.
    Each night I think we will get a pull back but it just keeps flying, even on the nights equities bounce the bond bid just keeps going
    It’s relentless.
    There will be a day you don’t want to be in bonds not yet, but it’ll be a brutal sell off when the bond bubble pops
    Anyway for now, stay on the fright train
    Think once we break these levels on Aussie bonds the move will be fast down to 0.50:60% in Aussie 10 year
    Seems to be holding for now

    • HadronCollisionMEMBER

      I am a bond novice but long a small parcel 10 year. Up 10% in about 4 months, about 5% less Tx costs.

      Like I said, small parcel so trying to defray the transaction costs.

    • Be careful. Freight trains have a habit of coming off the tracks spectacularly. There is no market in history which has done otherwise. Literally bond prices have gone parabolic — time to take a chunk of profits and leave the party. The parabolic phase is the warning. The only way these can possibly pay off once in negative territory is to be sold to a greater fool, otherwise it’s certain losses all the way. The pullback from the current rally could be quite violent.

      • Dominic
        Have to agree with you.
        My personal feeling is Aussie bonds have a long way to run, but I know exactly what you mean, there is no certainty in life
        When bonds do collapse it’ll be exactly as you say.
        It has been proven there isn’t a shortage of greater fools

  3. Who knows right, but will there be a HK Tienanman? China now holds a much different place in the world economically and politically, and controlling the media around such an event is much a different proposition now. Seems like it would be a gutsy move with more downside risk than upside. Surely it’s easier to pick off the instigators (and their families) and quietly disappear them.

  4. I became a member 4 years ago, and I can recall the same members writing that it was the end of the bond market and that yields were going to scream higher .

    4 years later, 30 year bond yields are at record lows.

    More government debt will only choke the economy, leading to lower government bond yields, just like Japan.

    MMT is the only danger to US government bond holders.

      • It’s deficit spending until something breaks (inflation) and then trying to control that inflation via targeted taxation. I give flexible taxation a 99% chance of failure, so they’ll panic back into rate rises (yields rising).

        Runaway inflation will annihilate existing bondholders.

        I’m a proponent of MMT as a means of shocking us out of our current mire.

      • I have great faith that some academic economist will make his reputation, get a PhD and a Professorship, by coming up with an even more ‘counter-intuitive’ theory. My humble imagination cannot possibly conceive of what that might be.
        There are however further steps to MMT, including total Govt control of everything, that will be tried. The difference will be that this time the total suppression of everyone not an insider will be supported by various forms of mind control. So MMT will not shock us out of our current idiocy. It is just another step into total insanity.

      • Re MMT – The EU and US will try it I imagine. Our non-productive 0ver-consuming economy might survive for a while on the money that will be printed. The whole thing will come apart when China, Russos, Japan and oil producers stop buying USD.

      • flawse, you’ve got to learn to LOVE total insanity. Cos, it is going to stay for a long time.

        Which would you prefer, embrace insanity or go insane yourself?

      • Dumpling – you are absolutely correct and I’ve managed to change my thinking these past few years. My super intelligent son had a fair bit to do with the change – he said to me ‘you have to stop investing on what ought to be done.’ He made a small fortune post GFC. He realised they were going to print insanely and from there it was just a matter of numbers.
        Note it is also why I (along with a few others like yourself) made the call on house prices contrary to MB years ago.

  5. MountainGuinMEMBER

    The USA is also predicted to hit (another) debt ceiling next month. While I have no doubt it will be increased again, Congress and Whitehouse games may lead to a hit when the world ec is really needing USA to drive growth.
    At least it will be interesting to see how far the Dems want to push Trump in what is probably the last debt ceiling game before the presidential election. Funding more wall construction is now cheap with the low Trsy yields…

    • Got to be the comment of the day!!
      Stares into my porridge!

      That said, the commenters here are the real reason to check in at MB.

    • Funny, I was just thinking the AUD reminded me of the poor fox I ran over at 80kph.

      Couldn’t make up its mind which way to run from the headlights of doom. Left, Right, Left, Right, *thunk*

      If the poor bugger had committed to a direction, it would have lived.

      • One less feral is a good thing though it’s like trying to bail a swimming pool with a thimble on a rainy weekend

      • On the other hand our CBers always DO something whereas we would have all been better off if they had just stayed sipping champers in the rarefied atmosphere of the CB and done absolutely nothing.

  6. AUD hanging on? Not sure which chart you are looking, but it seems to me that AUD is within 1c of the decade low. So freefall is a better word to describe it.