GRAPH OF THE WEEK: The S&P 500 and gold continue to post record highs, in spite of coronavirus

20th February 2020

Source: BlackBee, Bloomberg, February 2020

Despite the global spread of the coronavirus, stocks markets, including the S&P 500, continue to post historical highs. At the same time, the demand for gold is also surging and flirting with the US$1,600/oz mark. Such strong positive performance in both stocks and gold could be explained by the fear that stock markets could fall in the short term, thus having gold as a hedge makes total sense from a portfolio point of view. If history is any guide, as soon as the rolling 30 day correlation between gold and the S&P 500 reaches 75%, 5 times out 6 gold performed well while the S&P 500 contracted.

This week, having reached 85%, the correlation should turn negative, meaning that the S&P 500 could see a contraction of some sort. A positive correlation means that the S&P 500 and gold move in tandem with each other, while a negative correlation means that two stocks move in opposite directions, the correlation is bound between -100% and +100%.

There is a chance that both the S&P 500 and gold will continue to trade upwards on the back of the following: accommodative monetary policies of Quantitative Easing and rate cuts around the world, the continuous search for yield in a world where Greece’s 10 year bond delivers less than 1% with non-investment grade credit rating of B1, Argentina appearing like it will default on its debt again and Germany’s stagnating economy.

Key witnesses in Trump impeachment trial fired
Trump fired two key witnesses who testified against him at his impeachment trial, Lt. Col. Alexander Vindman, a Ukraine expert on the national security council and Gordon Sondland, US ambassador to the EU. Lawyers for Lt. Col. Vindman have stated that the firing was retaliatory in nature, which could be a breach of employment law.

Vindman and his brother were removed from their positions in National Security Council. “We sent him (Vindman) on his way to a much different location and the military can handle him any way they want,” Trump said. Gordon Sondland was among many who donated US$1m or more to Trump’s presidential inaugural committee in 2017 and was appointed as US ambassador to the EU in July 2018.

Source: BlackBee, The Guardian, The New York Times, February 2020

Argentina hints at eighth debt default in 200 years
Analysts have been predicting since last September that it is just a matter of months before Argentina defaults on its approx. US$100bn debt. Last week, the country announced that it will delay making payment on a peso-denominated bond as it works on restructuring debt it says it cannot pay under current economic hardships.

While Argentina has not yet technically defaulted, it seems that investors may get burnt once again, for the eighth time in the country’s history. In a world of low interest rates and low or negative yields, serial defaulter Argentina was able to issue a 100 years bond in 2017. The reason that investors continue to return to such serial defaulters like Mexico, Ecuador and Colombia, which have defaulted nine or more times, is because on average, those countries paid out returns to investors three times higher than those from US, UK and Canada. The fact that serial defaulters can borrow despite bad credit history proves that financial markets have a short memory.

Source: BlackBee, New York Times, February 2020

Source: BlackBee, February 2020

At a glance:

  • The Irish Government is in a political limbo at the moment as parties vie for enough support from each other to form a government. Fianna Fáil has once again decided against approaching Sinn Féin, and Micheál Martin has sought support from his party to approach Fine Gael. As it stands, neither Fianna Fáil nor Fine Gael are willing to go into government with Sinn Féin, and Mary Lou McDonald has said that it will be “very, very tricky” to form a government without one of the two.
  • Since last Friday, the number of reported cases of coronavirus around the world has risen from 31.5k to 64.5k, after the methodology used to count cases was changed. Japan, Singapore, Hong Kong, Russia and Canada have reported more than 200% increase in cases. Based on these figures, the percentage of deaths has increased from 2.02% two weeks ago to 2.15% last Friday, though this figure might reduce with time.
  • A small Korean Hedge Fund run by Ryukyung PSG Asset Management Inc., won big at the Oscars last week with their $500,000 investment in Bong Joon-ho’s Best Picture winning “Parasite”. The film cost US$11m to produce and has raked in US$165m in the box office so far. The Fund has returned c. 72% financing Korean films since 2018. 

Source: BlackBee, Irish Independent, World Health Organisation, Bloomberg, February 2020