Voima Markets Newsletter—June 2023
Sam Laakso
Head of Voima Markets
Currency market table
| Gold price in | May | 3M | 1Y | 3Y | 5Y | 10Y | 20Y |
|---|---|---|---|---|---|---|---|
| SEK | 4.39% | 11.38% | 18.89% | 31.08% | 86.14% | 132.10% | 653.38% |
| NOK | 2.83% | 14.65% | 26.18% | 29.89% | 104.93% | 167.39% | 792.61% |
| EUR | 1.69% | 6.33% | 7.23% | 17.99% | 65.30% | 72.03% | 492.71% |
| JPY | 0.84% | 9.83% | 15.66% | 46.97% | 93.61% | 96.32% | 527.85% |
| CHF | 0.43% | 3.89% | 1.39% | 7.67% | 39.65% | 34.96% | 277.14% |
| AUD | 0.34% | 11.18% | 17.76% | 16.46% | 75.84% | 108.19% | 440.61% |
| GBP | −0.41% | 3.96% | 8.17% | 12.77% | 61.58% | 72.88% | 607.09% |
| CAD | −1.21% | 6.90% | 14.66% | 12.04% | 58.38% | 85.15% | 433.95% |
| USD | −1.37% | 7.49% | 6.82% | 13.67% | 51.19% | 41.54% | 437.65% |
The weakest major currency of the month in May was the Swedish krona (SEK).
Top news in the markets recently
China Takes the Yuan Global in Bid to Repel a Weaponized Dollar (Bloomberg)
ECB Hikes Again and Signals Rates Will Rise More Before Peak (Bloomberg)
Trader's comment 16 June 2023
Understanding different perspectives: a lesson from Ray Dalio
Let's start with a short quote from Ray Dalio's bestselling book, Principles: “Understand That People Are Wired Very Differently”.
To comprehend the world and its complexities, we must acknowledge the diverse ways in which individuals think. While there are commonalities in how people think, our varied backgrounds and cultures have often led to conflicts and major shifts in power throughout history. These conflicts and geopolitical changes have become more prominent in recent years as was discussed in the May edition of the Voima Markets newsletter.
Recently we witnessed some strong continuum to this trend: the June BRICS meeting.
Key highlights from the BRICS meeting
The recent BRICS Ministers of Foreign Affairs and International Relations meeting, held on 1 June, received limited attention from the Western media. However, in order to better understand where the world is headed, it is important to decipher some key highlights of the meeting, particularly concerning international trade, geopolitics and economics. Here are some notable points from the meeting statement and what I see in them:
- Call for Reform: Concerns were expressed about the use of unilateral coercive measures, accompanied by a commitment to enhance global governance and to promote an effective and accountable international system. This highlights the need for reform in international governance rising from the BRICS nations.
- Dissatisfaction with Sanctions: The negative impact of unilateral approaches and economic coercive measures on the world economy was recognised, emphasising the importance of open and fair multilateral trading systems. This expression likely stems from dissatisfaction over US and EU sanctions.
- IMF Governance Reform: Support was voiced for a quota-based and adequately resourced International Monetary Fund (IMF), along with a commitment to continuing the process of IMF governance reform. This indicates a desire for more influence in Western-led organisations.
- New Development Bank: The support for the BRICS New Development Bank (NDB) and its role in achieving sustainable development goals was emphasised. The NDB aspires to become a premier multilateral development institution, reflecting the emergence of a new world.
- Move Away from the US Dollar: There was an emphasis on financial inclusion and the use of local currencies in international trade and financial transactions, indicating a potential shift away from the dominance of the US dollar—a trend which has been progressing over the past two decades.
Takeaway: Consider the major trends in your asset allocation decisions
These major trends have been in motion for decades and we live in the middle of this historic change, where the Western hegemony is being rivalled by a group of rising powers. As a result and as is often in history, the coming decades are likely to be very different from the previous decades. Irrespective of their size, all investors should take these major trends into account when contemplating their investment decisions.
H2 outlook
The turn of the year ushered in some major trends in various asset classes. Throughout H1, broad stock market indices have risen together with the price of gold, commodity prices have continued to fall and the rapid rise of interest rates we saw in 2022 is starting to fade. As we move into H2, markets seem to be pricing in the so-called economic soft landing scenario which is plausible but not a given.
The US and EU economies are showing signs of resilience, although meaningful growth acceleration is still a distant possibility. The US labour market has shown some early signs of softening and some major recession signals such as the US yield curve, falling corporate earnings and decelerating GDP growth are also suggesting that the US is heading to a recession, of some magnitude, later this year. Despite this, major US and European stocks have been performing relatively strong.
Markets seem to be awaiting for the next catalyst that will dictate the next direction. The trends ahead are highly dependent on the severity of the likely US recession and the subsequent central bank interest rate decisions. From a historical viewpoint, the end of a rate hiking cycle calls for caution in growth-sensitive asset classes such as stocks. This is especially true if the reality deviates from the soft-landing scenario for the worse, which I consider more likely than deviation towards a better-than-expected reality.
Gold's outlook for H2 2023
It is worth mentioning that the price of gold in US dollars ticked at all-time highs in early May. Although the new highs were short-lived, an all-time high is an all-time high. Since then, gold prices have ticked lower, and after a six-month rally from November to May, the price of gold has been due for a correction—in which we are now.
Better-than-expected economic conditions, particularly in H2 2023, were the second risk I highlighted for gold in my 2023 market outlook in December. This continues to be a potential risk and headwind for gold when entering the H2. As of now, I expect gold's correction to bottom in Q3 but the strength of the subsequent move higher in gold is determined by and large by how well the US economy is doing by then.
Despite the potential headwind for gold in Q3, my outlook for gold remains positive in the second half of the year. Neutral market positioning, sentiment and gold-ETF fund flows indicate room for upside, and the fact that markets are pricing in the soft-landing scenario could turn out to be too optimistic. I continue to anticipate that gold priced in euros will reach a high between 61.50 and 72.70 €/g in 2023. At 57.00 €/g, that gives us roughly 8–27% upside potential for H2.
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