The last month of the quarter started off with market turmoil dragging all the major indexes lower as the coronavirus spreads further in the US, with many investors questioning if the hit to GDP will extend well beyond the second quarter. The coronavirus is now in 70 countries with almost 90,000 cases, which led to 3,069 deaths and 45,000 recovered.
In addition to the spreading of the virus, China’s factory activity posted the worst reading to date and well below analysts’ consensus. Once markets opened last night, investors salivated that the bottom could be near as hopes were growing central banks would deliver a global policy response to contain the economic impact of the coronavirus.
The rebound also intensified after Pete Buttigieg announced the end of his presidential campaign, with what many Democrats believe was the right thing to do as it gives the moderates a better chance at winning on Super Tuesday. Buttigieg had a successful campaign and his departure is great news for Biden. With Biden and Bloomberg likely to be the last two real challengers for Sanders, it seems the moderates only hope is to make sure Bernie does not get 1,991 pledge delegates and take this to a “brokered convention”. Bernie is right to be fearful that he would lose a second ballot with superdelegates.
This will be another wild week for financial markets, but optimism is growing that central bank intervention will prop up risky assets and that scientists and drug companies are getting closer to developing test treatments and vaccines.
The 10-year Treasury yield is down for an 8th consecutive day. The 10-year Treasury yield seems poised for the inevitable fall below the 1% as markets brace for over 100 basis points in rate cuts this year. The Swiss franc is becoming the favored safe-haven currency after the yen declined after the BOJ injected liquidity into local markets.
Despite some investor appetite for equities, the yen and franc both could rally further as it seems less likely we will get a coordinated effort central banks. Rate cuts will not cure the economic impact of the coronavirus, only a vaccine will do that. It seems we could see the ‘stay-at-home’ economy deliver a global growth shock that could last for quarters. The dollar will remain vulnerable in the short-term as the Fed will protect the stability of the financial system and will be forced to cut rates aggressively.
OPEC + may have lucked out as the dead-cat bounce may have bottomed out. Oil’s freefall appears to be over on expectations that a global central bank response will support risky assets and as energy traders choose to ignore any reluctance from the Russians on deeper production cuts. Earlier in Moscow, Russian Energy minister Novak said he did not receive any proposal from OPEC+ calling for deepening of 1M bpd in oil production cuts. OPEC + will not let three years of coordinate efforts go down the drain for nothing. If oil had probability odds on how deep of production cut to expect, it would be 100% for 1 million bpd in deeper cuts.
The demand destruction for oil is not going to get better anytime soon, but we could still see the beginning of the stabilization for prices. China is optimistically hoping to see their business comeback fully online, but the rest of the world is still at risk of delivering rolling quarantines that will disrupt every demand forecast. Their is also a key risk that the virus could intensify in China once workers fully return. If China is successful, we could see the rest of the world’s outlook be somewhat optimistic for the middle of the second quarter.
Over the next couple of weeks, West Texas Intermediate crude could see its new range trade between the $40 and $50 levels.
Gold is higher as the first trading day of the month has hedge funds jumping back on virus-safety/global stimulus trade. The longer-term bullish outlook for gold is intact and short-term investors should not be surprised if prices make another attempt at the $1,700 an ounce level. Gold was the unfortunate victim last week of extreme unwinding of long-term bullish bets to compensate for terrible losses in stock trading. The whole world is looking at a massive drop with interest rates over the next couple quarters and gold will clean house.
The biggest risk for gold is if the Fed disappoints and only cuts rates by 25 basis points or if they cut by 50 bps and say they are done. Everyone knows the data is going to be bad over the next couple of months, so higher gold prices will require to have expectations of massive stimulus and easing met.
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