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Trump Trumps Fed Chair (Daily Close)

US Stocks gained slightly as the S&P closed just shy of all-time highs Monday, powered by rising energy stocks and easing fears over a full-blown trade war as low level talks between China and the US are set to resume this week. S&P 500 added 0.2%, while the Nasdaq ended unchanged on easing trade concerns, a lower dollar and some decline in rate hike expectations following D. Trump’s Fed criticism. European shares outperformed and EM stocks also managed to post some gains. The dollar dropped for a second day as news broke out that D. Trump said he expected J. Powell to be a cheap-money Fed chairman, lamenting to wealthy Republican donors at a Hamptons fundraiser on Friday that his nominee instead had raised interest rates. Asked yesterday if he believed in the Fed’s independence, Trump said: “I believe in the Fed doing what’s good for the country.” This gave the dollar rally further room for pause while jolting stocks and bonds higher. 10Y US Treasuries dropped 4bps and 10 Y Bunds dropped 1 bp with Italy also rallying strongly by 11bps. Gold climbed 1%, strengthening for a second day just as the dollar extended its decline for a second day as well. Below are some observations supporting the case for gold at this juncture. We just like it when the financial media throws gold under the bus after a long period of underperformance. There is no better contrarian indicator, most of the time. When combined with the COT report last Friday which showed commercials going net long gold and sentiment hitting a 26-year low with hedge fund short positions at record highs, this Bloomberg article raised the odds of being the little green flag that we thought it was. EM central banks have been net buyers of gold for a decade now. They surely had a reason or two to do so at the same time as gold production from the major gold producers went down, likely implying that the equation on the physical side could only be balanced thanks to more DM central bank gold lending activity becoming permanent. Venezuela was forced to lend and to probably sell gold and perhaps the central bank of Turkey was as well. After all, it was only last week that Turkish President Erdogan invited Turkish households to sell some of their gold as well (and buy the ailing TYR with the proceeds) but as regards the central bank, it could easily not have followed the advice, preferring to sell Treasuries instead as Russia did a couple of months back as it liquidated 90% of its Treasury holdings. The current aggravation of the EM currency crisis is a political phenomenon largely caused by the US administration (Many of Turkey’s problems are of its own making but the catalyst for the accelerating crisis was 100% made in USA with the latest batch of sanctions) from which EM countries will draw a lesson! We recall a few years back the RBI Governor making a speech for his departure where he said India was not interested to build a US curve anymore (or borrow in USD) preferring to borrow in local currency instead. India is doing just fine in todays near global EM currency crisis (and despite recently soaring oil prices). Maybe this is no coincidence that their dollar dependency has been sharply reduced... The “cherished” dollar of D. Trump is a flawed currency (like many others with the distinct difference that it is over owned and overrepresented in international reserves and portfolios in relation to the size of the US economy i.e. 60% vs. 20%) and the US President is now engaged in a policy mix that will for sure debase it further over time... perhaps not this year as long as EM currencies remain in the doldrums but then next year or the year after next... I suspect this EM crisis is not finished but that it will be one for which lessons will be drawn. Correlation between gold and the S&P is largely nil as the shot gun powder thrown in this article variance analysis suggested. The lack of correlation is a positive for portfolio construction. Gold is negatively correlated with the dollar and if one was lucky enough to get the dollar right this year, holding gold vs. EUR or EM currencies fared “between badly and ok” but not as bad as if the position was held in USD terms. We would suggest the following explanation of for why gold traded lower so far this year and that is pure trend following + strong dollar + strong equities indeed. If we believe that the dollar has got a problem down the road (if anything because we do not see who is going to finance the gargantuesque 1.2trn annual fiscal deficits promised by the Trump administration) and if we think the Fed might soon have to stop tightening under the pressure of D. Trump, then we would want stick with gold a little longer as well... Finally, if we think stocks will not climb to the sky either, it is another reason to own gold. The time for the Nasdaq to serve as the only hedge against everything going down will nit last forever. This is a delayed and abbreviated version of our premium subscription-based report published ahead of the US and European session every day. 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