Asia follows US historic rally, Virus spread intensifies, Oil’s temporary rebound, Gold bulls are back

Asia is surging following a blockbuster session on Wall Street that was strictly based on stimulus hopes.  Traders are fully expecting that Congress will finalize a stimulus package very soon.   

Traders will need to choose their mantra: Don’t fight the Fed and Congress or Don’t underestimate the coronavirus.  It seems traders chose the punchbowl of stimulus trade following Monday’s largest rally for the Dow Jones Industrial Average since 1933.  It is hard to imagine that despite all the alarming COVID-19 headlines, all the major US indexes rallied between 8-11%. 

In the US, New York is seeing the case count double every three days with the feared peak of infection possibly coming as soon as two to three weeks.  The virus spread is also accelerating in Europe, with Italy consistently having over 8% gains in total cases and as the death toll approaches 7,000.  In Asia, Singapore stepped up measures to battle the coronavirus (shutting down bars and entertainment venues), India ordered a national lockdown for three weeks, and Thailand declared a state of emergency. 

There is a lot of momentum behind this risk-on move, but the news on the virus front is getting worse and it seems a bit premature to cheer the massive US fiscal stimulus bill before it is finalized and all the details are revealed.  Volatility is likely to remain on overdrive and it will be difficult to imagine a scenario that will see global equities further advance throughout the remainder of the week. 

FX

The Fed’s unprecedented measures have placed a firm bottom for the US dollar.  The Feds laundry list of measures that include currency swaps and unlimited liquidity should provide relief for the dollar’s major trading partners. 

Oil

Oil prices are benefitting from the stimulus-hope driven stock market rally that saw the energy sector outperform all its S&P 500 peers (a 16.3% gain, with Industrials coming in second with a 12.75% rise).  Massive stimulus bets appear pretty much priced in, so oil’s rally might not have much left in the tank.  Crude prices extended their gains after API report showed crude stockpiles posted a modest weekly decline.  Later this morning, the EIA report is expected to show inventories rose 3.3 million, but energy traders might prefer to focus on the export data.  Record high production will not last and this week should see the snapping of the five-week streak of the US being a net exporter.  The Saudis and Russians battle for market share should start impacting US exports now.   

Oil’s fundamentals continue to support a test and breach of last week’s low.  The lockdown measures to combat the coronavirus are being intensified all over the world and that will continue to cripple the demand outlook.  It is also unlikely for oversupply concerns will ease up anytime soon.  It is a hard sell to see the Russians and Saudis come back to the negotiating table, yet alone with Texas. 

Gold

Gold prices are little changed, but that is not likely to remain the case as chaos reigns in the futures and spot market.  Gold is definitely a safe-haven when you look at the premium futures is having with the spot market.  It turns out the cause was that the Comex warehouses might not be able to get their hands on enough inventory to facilitate physical delivery.  Gold futures are trading roughly $45 more than the spot market.  The coronavirus impact on travel is making life harder for stocks to come into NY.

Despite the logistical nightmare for the gold market, prices appear ready to burst higher following the recent massive central bank action, lack of supply as the world’s three largest gold refineries temporarily suspend operations, and a worse-than-expected global recession due to the coronavirus pandemic.  Gold volatility is going nowhere anytime soon, but it seems the Fed was able to kill its biggest headache, the scramble for cash trade.