The epidemic doesn't go away during the summer season. The total number of cases of COVID-19 exceeded 18 million, with an average of 250 thousand new cases per day. In Australia, Victoria, a state of disaster has been declared and restrictions have been imposed. The Manila authorities in the Philippines have done the same, while Boris Johnson is to consider the isolation of London.
All this may have consequences for the economy and the financial markets. Investors are already accepting real negative interest rates on 10-year US bonds. This means that they accept the cost of keeping their money in safe treasury securities. For the same reason too, gold may continue to rise, which this morning again reached the highest price in its history, approaching $2,000 per ounce.
Investors also seem to be abandoning the US dollar or do not believe in its strengthening in the near future. According to CFTC data, the total exposure to the decline in the value of the US dollar on futures contracts is the highest since April 2018. Thus, assets valued in USD also seem to be more expensive. The exception is crude oil, whose price has fallen to around USD 40 per barrel. Let us recall that OPEC and its allies decided at their last meeting that they would start supplying more oil to the market from August. Oil, therefore, flows in a wider stream, but some countries are introducing restrictions, reducing demand for it, which may hurt the price.
The foreign exchange market seems to expect increased volatility of the AUD/USD rate, and the reason may be tomorrow's decision of the Reserve Bank of Australia on interest rates. The volatility implied by the Australian dollar currency options market has increased throughout the curve. For overnight options it increased from 7.93 to 15.42, and investors continue to hedge against a possible drop in AUD/USD. The market also seems to fear a drop in the main interest rate to 0.1%.
The market sentiment may also be threatened by the statement of the U.S. Secretary of State Michael Pompeo, who pointed out that the U.S. may be blocking other Chinese applications and software besides TikTok. It seems that we are entering another unexplored ground in relations between the US and China.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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