US equities were stronger overnight with the S&P up 0.7% following more considerable gains in Europe and Asia. Tech stocks again led the US rally, while the manufacturing ISM also beat expectations for July.

The beat on the US manufacturing ISM continues its recent outperformance, with July printing at a better-than-expected 54.2, new orders also robust at 61.5.

But like other surveys, employment remains in a contracting territory at 44.3 suggesting it’s much easier for stimulus to stoke the manufacturing engines but less effective at getting people back to work.

Yesterday’s mood was brightened considerably with China’s manufacturing PMI for July was also above market expectation, rising to 1.6 pts to 52.8, its highest level since January 2011, which lifted commodity markets and wiped away the usual Monday morning blues.

Still, the composition of China’s economic recovery offers a roadmap to the rest of the world that is not especially bullish for a consumer-driven rebound.

It’s easier to normalise the supply-side of the economy than the demand side in a post-pandemic shock environment. Still, that seemed to work well for commodity exporters into China, and the market will take a win as a win.

Even oil rose the most in nearly two weeks, tracking a move in stronger equities, as economic data signalled a flicker of life in languishing demand.

But the fact that oil prices continue to stabilise with odds stacked against, it is very, very soothing for a cross-asset market risk perspective.

Asian markets look set for gains

Asian stocks looked poised for gains on Tuesday after a technology-fueled rally in the US amid positive economic data and further stimulus. But who knows, it’s August after all.

However, it seems investors are already inoculated from the virus while camping under the tech umbrella. While this bullish market view is supported by the primary thesis that the market remains lightly positioned in stocks that are at risk to the virus and that the wall of money argument continues to resonate.

I am judging by the further gains in the equity market. Investors have little issue fading the Fed’s warnings on the economic outlook after a sustained stronger-than-consensus run of financial data to start the month.

The endless monetary policy response from the Federal Reserve Board also raises the bar for when negative pandemic news hurts risk appetite. But the extent to which equity and energy markets continue rallying and the US dollar sells off on a broad-based basis is hugely dependent on how markets react if improving data stabilises higher or goes into reverse.

A better-than-expected nonfarm payroll this week could resolve tensions around the unemployment debate and justify new highs in stock and see oil prices challenging the tops of new ranges. With the Fed likely to remain accommodative for the foreseeable future, this remains incredibly positive for risk markets.

Currency markets: The Euro

EURUSD is starting the week on the backfoot trading down to near 1.1700 from Friday’s high of 1.1909 as the short squeeze that began after the London Fix on Friday was pretty persistent on Monday even despite European equities trading up 1.5% on Monday, after bouncing from the early lows.

For now, the EURUSD top side conviction has stalled as with Covid-19 outbreaks in Europe/Japan weighing, and with US tech sector soaring, it has brought back US outperformance to the forefront.

Still, the correction over the last 48 trading hours has not weakened the market’s bullish resolve.

Ultimately at the end of this period of consolidation, the USD will prove to remain unsurprisingly counter-cyclical, outperforming in the ‘downturn’ and ‘slowdown’ phases and underperforming during ‘recovery’ and ‘expansion.’ phase.

The Malaysian Ringgit

It is refreshing to see the local currency whipping boy competing for top the charts these days. The Ringgit is benefiting from improving regional growth differentials as China’s economy continued to recover fast.

At the same time, the global market chase for yield in finding a home in MGS duration as positive real Malaysian yields remains exceedingly favourable when compared to US negative real yields. Throw in a dose of stabilising oil prices, and the currency underdog ringgit continues to show true grit.

Also, last week, the Fed extended the FX Swap lines through March 2021, which is alleviating a lot of concerns about around quarter-end and year-end funding issues, which is also supporting the local currency landscape.

Gold holds firm

Gold holds firm even as Dallas Federal Reserve Bank President Robert Kaplan said he would not be in favour of explicitly tying forward guidance inflation.

Gold remains in a holding pattern, likely ahead of this weeks Non-Farm Payrolls (NFP) but got a nudge from a slightly weaker US dollar overnight.

However, with negative real interest rates, renewed concerns over inflation, rising US-China tensions, and an increase in worldwide COVID-19 cases, demand for bullion has remained firm.

And what is critical to the view from a hedging perspective is that gold investors care about the level of inflation, not the changes in inflation.

From a level perspective, inflation hedges like gold are far probably a whole lot cheaper today than when inflation could arrive.

Finally, what makes gold investing so appealing over the short-term or the medium-term perspective that when US real yields are lower or negative, investors have no opportunity cost in owning bullion, making gold as cheap as chips to carry.

Still, US real rates continued their decline last week, but the driver switched from higher break evens to lower nominal yields.

With the policy rate at zero, the curve flat and breakeven primarily normalized. Still, with absent inflation, it is hard to see real yields falling much lower in the current environment unless a vaccine becomes available, and the Fed commits to yield curve control.

In this context and given that vol and skew have risen more in gold than in currencies, spot gold could then face temporary consolidation.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp