Weekly view - Going for gold
Safety-seeking investors ploughed into gold last week and out of the (usually) safe-haven Japanese yen. Gold is certainly on a strong run since the start of 2020, while other classic safe-haven assets like the Swiss franc and Japanese yen have fared less well. JPY investors reacted to poor Q4 Japanese growth data, which surprised to the downside after consumer spending and corporate investment contracted significantly in the wake of last year’s consumption tax rise. We remain positive on gold and defensive currencies but will be monitoring how the coronavirus manifests itself in South Korea and Japan, two countries critical to the global supply chain, as well as how the virus develops elsewhere. In the meantime, we have downgraded our 2020 Japanese growth forecast to -0.3%.
US Democratic presidential contenders went head to head in a televised debate broadcast from Las Vegas last week. Michael Bloomberg, who seeks to unseat Joe Biden as the party’s favoured moderate candidate, came under attack from all sides in his debate debut. Bernie Sanders continues to pull ahead in polls for winning the Democratic nomination. This appears to be good news for Trump’s chances of re-election. As Sanders’s chances increase, markets believe that so do those of a Republican presidential victory. We are less confident in an easy win for Trump and keep protection and gold in portfolios. Super Tuesday, when the greatest number of states will hold their primary elections on 3 March, will be critical.
Improving sentiment out of Europe offered grounds for optimism, with rising European PMIs, notably including Germany. However, to curb enthusiasm, we are now starting to see the first effects of the coronavirus in slower deliveries as the global supply chain suffers and new cases are discovered in Italy. Meanwhile, a flurry of M&A hit the banking sector last week from the US to Italy. We expect more to continue as the industry consolidates, which is why we favour event-driven strategies in the hedge fund space. When it comes to credits, we stay selective and prefer to go down an issuer’s capital structure (including CoCos) to investing in lower credit quality issuers.