Another volatile trading week saw central banks globally ramp up stimulus efforts while governments inch their way closer in delivering economic support. The coronavirus pandemic is delivering a far worse economic impact that anyone imagined. Social distancing may have not been aggressive enough for some of the major cities and the next few weeks could see healthcare capacity reached.
US stocks are starting to find some support, but that could very well change if Washington disappoints in providing economic support. Secretary Mnuchin’s comment that the coronavirus bill is too meager took some of the air out of today’s rebound.
The labor market is about to see sharp rises in unemployment with restaurant, retail, hotel, and travel businesses. With both the US and Europe poised for recessions, further economic pain could make this market turmoil mirror the global financial crisis which means global equities could still see another 10-20% of weakness.
Desperate times call for desperate measures. West Texas Intermediate crude finished the week on a terrible note as the crude demand outlook was dealt another blow as extreme measures are rolled throughout the US, skepticism on how effective it will be for the US government to fill up the SPR, and if Texas could bring back OPEC + to life.
The US crude benchmark is in trouble as many temporary solutions will ultimately lead to a slow painful death for much of the US shale industry. The US government will likely pump up prices and temporarily support many shale producers that will probably still go under as prices will likely remain very low over the next year. The Trump administration might ultimately inflate WTI crude prices so much that buyers may end of preferring purchasing Brent crude. The shale industry needed to consolidate and even if the government fills up their SPR for a decade, there is only limited space for the shale’s sweet crude.
OPEC Secretary Barkindo’s meeting with the head of the Texas Railroad Commission means energy markets could see Texas for the first time since the 1970s. For a revival of OPEC +, a lot would have to go right, ultimately seeing Russia, Saudi Arabia, and Texas all agree to delivering at the very least a 10% cut from pre-pandemic levels. Energy traders are skeptical that Russia and possibly the Saudis want to help US shale. Saudi Arabia tried to kill the shale industry in 2014 when they let oil crash from $100 to $30, so this time they may just go along with inviting Texas to the June OPEC meeting, but fail to be the one that carries the lion share of production cuts.
Gold can’t shake a strong dollar. Gold finished the week on a high note as the dollar finally gave back some of its recent gains. Gold’s flight-to-safety trade could be ready for takeoff as the dollar’s momentum could be running out of steam following the Fed’s continuous efforts in stabilizing funding markets. Gold will benefit from a wrath of global stimulus and should slowly work it way back towards the highs from earlier in the month.
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