Fauci optimism and more stimulus lifts stocks off lows, China nightmare sinks oil and drives gold higher

Treasuries climbed as stocks traded mixed as investors evaluated the latest news on China’s biggest political event, vaccine optimism from Dr Fauci, gradual lifting of coronavirus lockdowns and rising expectations for more stimulus to come to the world’s largest economy.   

Global equities are lower after China’s released a new bill that will tighten its control on Hong Kong, another log being thrown into the fire that is tensions between the world’s two largest economies.  The recent rebound in equities had signs of exhaustion before this latest turmoil in Asia. 

Risk aversion however is not getting a free pass, as the voice of reason throughout this pandemic, Dr Fauci remains optimistic with vaccine hopes.  Dr. Fauci noted that he looked at the Moderna data himself and that it is really promising.  Fauci also acknowledged that staying closed for too long could cause “irreparable damage”. 

Stimulus is nowhere near being done in America, as early signs show that economic activity is not coming back as strongly as hoped.  The Trump administration will likely focus on the next round of stimulus next week and that should make it difficult for anyone to turn bearish in the short-term. 

Oil

Geopolitical risks alongside an exhausted rally from improving supply-demand fundamentals have oil prices trading lower.  A good part of the recent oil price rally was attributed to China’s recovery, which saw crude demand return to near pre-pandemic levels, but now the outlook is starting to look wobbly.  China’s proposed security law for Hong Kong will further escalate US and Chinese tensions and that will put large parts of the phase-one trade deal at risk. 

You can’t have the two largest economies potentially ending economic harmony and have investors expect the oil market to continue go its way towards balancing. 

Despite the initial weakness, oil has pared losses as US oil and natural gas exploration continue to plunge.  The oil market will get balanced and that might be why oil refuses to break.  The weekly Baker Hughes report showed that the unprecedented downturn continues for American drillers. The US shale industry will never be the same as oil prices seem like they will remain capped below the $40 a barrel level for the rest of the year. Industry consolidating is inevitable as many companies can't stay afloat with prices below the $40 level .

Gold

The gold trade was overcrowded and calls for a bear trap were growing, but then China’s decision to impose national-security laws in Hong Kong brought back another challenge facing the world’s second largest economy.  The global economic recovery is very fragile and geopolitical risks and trade tensions will likely keep demand strong for gold. 

Gold’s recent bearish catalyst has been the relatively good start to the reopening of the US economy.  With some form of eased restrictions with lockdowns taking place all over the country, investors will remain concerned that US is vulnerable to several spikes with new cases over the next couple of weeks.  Georgia opened three weeks ago and so far, has not had a significant increase with the rate of new infections as many people continue to stay home.  It seems gold could see support either with a lackluster pickup in economic activity as Americans remain cautious to leave their homes or if a second wave of cases occurs.    

Gold prices were looking ready for a pullback, but China’s latest power grab will trigger a tremendous amount of instability in Asia.  Gold still needs to break above $1,760 before investors will look to see if the fundamentals still will give it a greenlight to record high territory (in dollar terms). 

Bitcoin

Bitcoin enthusiasts had a bad week.  After failing to crack the $10,000 level, it seems prices are starting to pullback.  The news front has been rather quiet with the crypto space and lack of catalysts are likely to continue to weigh down on Bitcoin.  If risk aversion gains traction, Bitcoin could be one of the first risky assets that gets dumped.  It seems  the rally that stemmed from newfound institutional interest is over.  Bitcoin however will still benefit from continued stimulus being pumped into the global economy.  Currency wars are not going away anytime soon, and Bitcoin should still benefit from bearish sentiment with modern government backed currencies.