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US equities were stronger Monday, the S&P rising 0.3% to close once again just shy of February’s record high. European stocks were more robust as well, but it was a mixed picture in Asia; China’s CSI300 rose by 2.4% after a PBoC stimulus injection had investors speculating that it could mean a supportive monetary policy from the PBoC. The Asia open has gotten off to a resounding start with the S&P 500 racing higher after US House Speaker Pelosi expects bipartisan support for a House Coronavirus Bill. This is one of the few positives we’ve heard in some time from the Democratic side of the floor and one would suspect it would be politically advantageous timing for the Democrats to steal the limelight during the Democratic convention by announcing the stimulus deal. Muggy, sluggish, and unsettled conditions are typically mirrored in markets at this time of year and political malevolence and the lingering pandemic have only added to stresses in 2020. Still, it was another day where everything rallied except the US dollar. Indeed, it’s an ideal investor situation with all assets pretty much roped to the hip of US policy stimulus, and the expectation is for more to come. Yes, big tech is doing its part, but when the bearish argument is centering on the failure to make new record highs on the S&P 500, it would suggest sentiment is in a pretty good place, especially with high-frequency indicators that investors track for the US not indicating that the recovery is falling off the cliff. FOMC minutes should reveal a dovish narrative on yield curve control and average inflation targeting, which is already showing signs of soothing rates after the selloff last week. But given what’s already priced, the market is unlikely to reassess the Fed’s medium-term rate path meaningfully. At the same time, the policy is super supportive; yet it may still disappoint those looking for the bazooka. The equity vs. higher yield riddle is less of a puzzle this week as rising inflation breakevens have offset higher yields so far, but risks are rising. History does suggest the relationship between equities and inflation expectations has been powerful during the crisis as they rise from shallow levels. Inflation expectations themselves have been more correlated to small-cap stocks than they have to 10-year nominal yields, oil, or gold since 28-Feb. As for the US-China escalation drums beating in the distance, I’m starting to wonder if US investors even care anymore, viewing it more of an “Asia thing” or changing their tune if Trump makes a move in the polls which could embolden the US administration trade hawks. Gold Markets After plunging 10%, washing out leveraged players and retail buyers who arrived late to the party, bullion has made an enduring comeback as strategic asset allocators bought the dip only to be followed up as those very same players who were recently washed out were getting back in the saddle after a break of $1,960 triggered reverse buy stops and sending more players back on to the golden rally bus. The dollar is trading a bit weaker and some pre-FOMC positions squaring are taking place. And while the latest bout of volatility has likely shaken gold investors to the core, the broader macro backdrop remains broadly unchanged, suggesting more and more stimulus will be needed to mend and repair the global economy severely fractured by the coronavirus. So gold remains a viable diversifier asset in this type of environment. And all the while, the US-China escalation drums beat in the distance as Taiwan formally signed and agreed to buy F-16 jets in a move that is likely to be denounced by China. Gold traded firmly in Asia and Europe but jumped in late European and early US hours. The reason for the rally was not immediately apparent as the markets started the week with no exasperating economic or political drivers. US-Sino tensions appeared more relaxed, given the US Administration’s more conciliatory tone on trade. The fresh injection of liquidity by the PBoC seems to support Chinese equities and may have also helped lift gold. Japan reported weak Q2 GDP data, which may have boosted safe-haven bullion buying. The latter underscored just how fragile the market remains to another secondary coronavirus shock. A weaker USD helped the rally with the move up reinforced by lower US yields; the yield on the 10-year Treasury fell to 0.66% from 0.71% previously. Lending support to gold was the rising tally in coronavirus cases globally, notably in India. Slightly higher UST yields are not a rally capper; it means something else needs to do the heavy lifting. So with commodity and oil markets getting a bounce for the PBoC liquidity injections, it benefited gold as inflation breakevens rose to offset the slightly higher yields from last week. Currency Markets The dollar is doing what it should do: falling on lower US yields as dollar bears take their last kick at the can before the release of the FOMC minutes, which is kind of on script. Interpreting what the lack of progress on a US fiscal stimulus means for the USD remains difficult. When politicians are more concerned about the price of stamps in the age of e-mail than putting food on people tables, I’m not sure what to think of the messy state of US politics, which is enough to encourage perma dollar bulls to sell the greenback anyway. But with the congressional bill close to a deal, the USD implication depends on whether the market views the “risk-on” element in the countercyclical narrative where positive risk sentiment, even if driven by US exceptionalism, sees the dollar weaken. But the levels of ambiguity remain thick, so trading the dollar straight up isn’t the cleanest trade on the book. With USD short positioning already massive, there could be some concerns that the FOMC minutes don’t check off enough dovish boxes that could see another unwind of oversold dollars. PipsWin.com has stated that a clear break is needed for the momentum to extend. The level is pretty much in-line with the previous highs in EURUSD coming in at 1.1910/20. The Ringgit The Malaysian Ringgit should trade more favorably as the US dollar weakens on positive risk sentiment. Still, traders may hold a defensive posture, not willing to test 4.18 ahead of tomorrow’s FOMC minutes. I suspect the Ringgit will take its cue from the broader G-10 dollar movement today. Additionally, oil prices are trading at 5-month highs, which should be favorable for the Ringgit.