US Open – Fears of holding positions over weekend, Gold hedge fund selling, Too late OPEC

The global stock selloff is showing no signs of slowing down.  The coronavirus is now in 50 countries and has infected over 83,000 people.  Fears are growing that further spreading of the virus will happen in both the US and developing countries that may not be prepared to contain it.

The broad-based selling this week has delivered some phenomenal moves that could easily take most of the major indexes into bear market territory.  The S&P 500 is down roughly 15.8% from the record highs seen just a couple weeks ago.  Wall Street will likely stomach another 5% drop, and long-term investors will likely salivate at buying any panic selling that takes the market 25% or 30% off from the record highs.

Holding positions over the weekend will be tough as the global spread of the virus intensifies.  If we see further quarantine efforts in the US over the weekend, traders would not be surprised if we see another gap down to start next week. 

The Fed funds futures market is now pricing in almost 4 rate cuts and calls for a global coordinated central bank intervention are growing.  It is hard to make a case for what will stop this selloff.  Further easing will not having any real impact if we see quarantine measures disrupt people going to work, traveling, or business production.  Credit markets are getting ugly too as the junk bond sell-off worsens.  The biggest widening of spreads in over five years will make life difficult for companies to refinance their debt. 

Expectations are still pretty high that the market will eventually snap back, but right now no one wants to get in the way of this selling.

Gold

Why are we not at $1,700?  Gold’s selloff during the worst trading week of stocks since the financial crisis is being attributed to hedge fund selling.  Hedge funds do not want a disastrous February performance and need to sell winning gold positions to counter their losing stock holdings.  Gold should start showing signs of life regardless of what stocks do over the next couple weeks.  If panic selling with stocks continues next week, gold will likely reassert its safe-haven status or if markets show signs of stabilizing, we could see the broad based commodity plunge ease.

Oil

OPEC + was wrong with their optimistic assessment of the impact of the coronavirus and they are paying for it.  Much of the world expected this virus to mostly impact China, but the global spread is going to wreak havoc with global travel and trade. 

Next week, OPEC + will have to deliver a deeper production cut as oil prices remain in freefall.  How much support that will provide prices will likely be limited as the oil trade remains focused on the global spread of the virus. 

Ten days ago, the Saudis needed to convince the Russians that an emergency meeting was needed.  An emergency meeting would have provided Brent some decent support at the $55 a barrel level and WTI crude at the critical $50 level.  The commodities rout would have broken those key thresholds but would have given oil a higher baseline.  Oil is too close to dangerous levels that could spell disaster for the industry.  The impact of this virus is drawing comparisons to the financial crisis and if sellers are targeting those support levels we could start to hear calls for WTI crude to fall to the $30 region.    

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