Oil about to feel the pain again, Gold volatility remains
Just under $3 trillion in stimulus from the US and Germany basically bought two blockbuster back-to-back daily gains for global equities. Risk appetite however could fade as the fiscal policy implementation will likely not be timely in delivering aid and relief. The job market in the US and pretty much all over the world is about to get very ugly.
Earlier, doubts were growing that President Trump would not be signing the stimulus on Thursday. Bernie Sanders said he would derail a quick passing of the bill if Republicans continued their push to change the terms of money to the unemployed. The stimulus package is still expected to pass, but every day it got delayed could have been the difference for someone losing a job or even making ends meet. Checks are expected to arrive for most Americans within three weeks, but that might be too late for many that live paycheck to paycheck.
Congress was expected to learn from the lessons of the Global Financial Crisis that it is important to act swiftly. Partisan politics do not appear to be going away anytime soon and that does not bode well for the next couple rounds of stimulus that will be required over the next couple of months.
The coronavirus global spread is not easing up at all. The virus is staring to overwhelm US hospitals and the situation could get very ugly in NY over the next couple of weeks. Fortunately, social distancing measures are slowing the virus spread in NYC, but many New Yorkers have fled he city and could be bringing the virus across the country. The US is still in the early stages and lockdown efforts will probably need to happen throughout most of the country.
New cases are still emerging all across Europe and North America and it will probably have a greater impact with developing nations that don’t have robust healthcare systems.
Economic data is going to be ugly for the first half of the year. Singapore kicked things off with the worst contraction in a decade. Singapore GDP collapsed an annualized 10.6% in the first quarter from the previous three months. Singapore worst than expected GDP readings suggests the rest of Asia is likely to disappoint.
The main economic event of the week is US jobless claims. Its going to be really bad and expectations are for filings for unemployment to skyrocket to 1.6 million, but the forecast range have some targeting 4 million claims. Some individual states have been providing daily updates on how many applications have been submitted. California averaged over 100,000 unemployment claims daily, while Florida has just under 40,000 just this past Monday and Tuesday. So many Americans are filling for jobless that many states have reported filing systems have crashed due to excessive volumes.
This is going to be a terrible number, and no one would be surprised if over the next couple months, 10% of the workforce file for claims. The US workforce is approximately 160 million, so it is within reason to see a total of 16 million jobless claims.
The dollar saw its bullish streak snapped by the Fed’s unprecedented measures and if the jobless claims release is in the 2-million ballpark, that could continue to put pressure on the greenback, especially against the Japanese yen.
Oil prices appear ready to trade again on freefalling demand and oversupply concerns. The stimulus driven rally helped WTI crude produce a solid 15% gain from the Sunday low. The latest stimulus package from Congress however does not contain the $3 billion in funding that is needed to purchase crude for the SPR.
The coronavirus is still making its way across the US and it is still way too early to be forecasting a return of normal travel and trade anytime soon. The global spread of the virus could deliver another massive blow to the demand outlook if developing countries become inundated with cases.
The supply side argument will likely dictate where oil goes next. If tomorrow’s G20 conference call does not yield any substantial progress that the Americans were able to convince the Russians and Saudis to hold off on increasing supplies next month, WTI crude may finally break below the $20 level. If after the call, the Saudis voice some constructive comments on having further talks or even considering cutting output, many energy traders will be skeptical and possibly fade any rally that comes out of it. The Russians and Saudis want to win back market share from the US shale industry and providing higher oil prices in the short-term would make this crash in oil prices for nothing.
Gold volatility seems to be settling down from ludicrous speed. The spread between futures and spot gold is now around $20, much better than the $60 we saw the other day. Gold could see the climb towards $1,700 resume once the ugly economic hits the wires. Massive stimulus, the fading of the recent stock market rally, and disastrous economic data from the US and Europe should trigger strong demand for bullion.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.