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Gold at new highs; global demand saddles oil market

‘There’s a clear disconnect between economic fundamentals and markets’ – Lukman Otunuga, Research analyst of FXTM.

NOMPU SIZIBA: As always, there is much happening in the global economy and markets. The big highlight, of course, has been the surge in the gold price, which has remained steady above the $2 000/oz mark for the last number of sessions. Meanwhile, increasing Coronavirus cases, especially in the United States, continue to cause some concern. Markets are keenly awaiting yet another fiscal stimulus deal that’s been forged between the Republicans and Democrats.

To discuss these issues and more, I’m joined on the line by at Lukman Oyunuga, a research analyst at FXTM. Thanks very much, Lukman, for joining us. So what’s your reading of the Republican/Democrat stage of negotiations in terms of another massive fiscal stimulus this year? And, assuming that it does go through, can we expect markets to run even harder, although of course this money would be directly injected into the real economy?

LUKMAN OTUNUGA: Well, certainly the $2 trillion package that was passed all the way back in March provided a critical lifeline for households and businesses. You just need to look at the $600-a-week employment benefits given to roughly 30 million people; that paycheque protection from them kept the wheels running in the economy in the face of Covid-19.

So, even with that handsome fiscal package that we saw back in March, economic growth in the United States contracted by 32.9%, while unemployment claims data in general was quite shaky. So I think this is going to have a significant impact on the markets right now. Democrats have brought up a proposal costing roughly $3.5 trillion, while Republicans are countering with $1 trillion. I think anything below $2 trillion will be met with disappointment in markets. That’s something we need to really keep a close on.

NOMPU SIZIBA: Goldman Sachs has warned that if a discovery of a vaccine happens soon, especially around November, this could see equities and bond markets unravel. In your mind, when the vaccine does come, what do you think will happen to all of the massive stimulus programmes, as well as the capital markets in terms of their activity?

LUKMAN OTUNUGA: Firstly, I think right now we live in a period of negative yields, especially when adjusted to inflation. There’s a clear disconnect between economic fundamentals and markets while that correlation between bond markets and global equities has actually been broken by the …… measures enforced by central banks, other than quantitative easing, QE, pushing bond prices higher. I think …… …… main results that jumped …… to risk appetite, but then with the focus back on fundamentals, this would encourage central banks to actually turn the taps on stimulus, which could result in a steep decline in the only stock markets …… or bond markets as normality returns.

So, even though it’s good news that a vaccine will be found, I think that sharper return to normality could actually create terrors …… in financial markets.

NOMPU SIZIBA: So you must be a very happy investor right now. We know that you’re a gold bull, and of course the gold price has shot through that $2 000/oz level. But the question is, to what extent can it go higher?

LUKMAN OTUNUGA: There’s no place like gold, Nompu. We’ve been talking about gold since the start of the year, and it’s been the focus after repeatedly hitting all-time highs. I think today it jumped above $2060/oz. If you want to put colour to this, gold’s explosive movement [like a] a speeding train reaching full velocity with a fundamentals keeping the engines running at maximum capacity. We have a …… dollar negative yield as well, pre-election jitters, many coronavirus cases – the list goes on.

So gold is fundamentally driven right now. And I will be surprised if prices actually try to test that $2 100 level before we experience a decline lower.

NOMPU SIZIBA: From where you see things right now, do you see that the Coronavirus infections are going to continue to post some destabilising effects on the global economy, or not really?

LUKMAN OTUNUGA: I still think the fact that coronavirus cases are still large in the United States and other parts of the economy, it still poses a key risk, especially when we consider how major economies like the UK, Europe and the United States are still nursing those people affected from the first line of lockdowns.

Other than that, we’ve got the aggressive monetary and fiscal policies which have mitigated the damage inflicted by Covid-19. But I still don’t think we’re out of the woods right now. Another amount of lockdowns triggered by a second wave will be enough to revive concerns of a slowing global growth, and really hit global sentiment.

NOMPU SIZIBA: Yes. Of course, when we had a QE shortly after the global financial crisis, it was really of benefit to the emerging markets. But how do you see emerging markets right now? We’re in a situation where all countries are basically impacted and affected by Covid-19, especially their economies. And, of course, emerging markets would have been hit quite hard because they don’t have the level of resources that your more developed markets do have. So, what’s your view on emerging markets and how they’re going to fare for the balance of the year, at least?

LUKMAN OTUNUGA: Especially emerging markets –Covid-19 is taking no prisoners; that is including emerging markets. An interesting thing I saw while you were saying this, we can see that poorer base dollar weakness remains a major theme. But, other than the South African rand, and one or two emerging market currencies, in general emerging markets haven’t really been able to exploit that thought to the dollar weakness. And, even more, when we look at emerging market oil producers, they still remain at the mercy of struggling oil prices.

I think that, as things move on, lingering concerns in the form of slowing global growth, geopolitical risks, and US-China trade tensions, all go to countries’ …… confidence, meaning that emerging markets actually could remain under pressure in Q3 and possibly Q4. It’s the same everywhere – local stocks, global stocks remain supported by fiscal and monetary policy, while the fundamental picture paints a completely different story.

NOMPU SIZIBA: Coming to South Africa directly, of course we’ve just been borrowing lots of funds internationally to aid with the fight against Covid-19. How are you seeing the country’s fortunes right now? And what are observers’ views around the country’s alcohol and tobacco sales ban? These bans have really affected industry, and some reckon that a lot of jobs and businesses are going to be closed forever.

LUKMAN OTUNUGA: Certainly. South Africa was a founding member of the IMF in 1944. It was interesting how they asked for a loan of $4.2 billion, and it’s been approved. Today I’m not going to talk about the negativities, the …… the National Treasury has forecast a contraction of 6.1%, or the ballooning debt-to-GDP ratio, or the fact that almost 30% of people are unemployed. We need to look at the positives, the fact that, okay, if the loan is used in the right direction for health, extending child support, disability grants, creating jobs, then one just needs to be hopeful that the money is used in the right direction. So South Africa has been given another chance with this loan. We just need to see whether the funds are used in the right way over the next few months.

In regard to the ban on alcohol, it’s not really my place to say anything. But the government has given a reason why, in terms of COVID-19 impacting South Africans, this ban has been put in place to help the health of people, But this will come with expensive job losses. So it’s a Catch-22. Honestly, I don’t know what to say about this. Time will tell whether this will be the right decision.

But, just to end it on this note, looking at the South African rand, so far so good. The South African rand has actually been mixed against the dollar since the start of this month and it seems to be a proxy for emerging market risk. You know, if situations outside of South Africa continue to improve, and the United States approves that defensive fiscal package, this could be positively received by the South African rand. So that’s some good news there.

NOMPU SIZIBA: Thanks to Lukman Otunuga.

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