US stocks are finishing the week on a down note after consumer spending, the key driver for the economy plummeted by a record 13.6% in April as lockdown measures crippled demand for discretionary goods. This was the second consecutive record decline for consumer spending and it confirms expectations that the economy will have the worst contraction since the Great Depression.
A tremendous amount of caution is in the air as investors await President Trump’s decision on China. For much of the week global equities were having a great week as reopening momentum accelerated but escalating tensions between China and the US will have a negative impact with the global economic recover.
Financial markets are eagerly awaiting Trump’s press conference that will announce new policies that will punish China. A tit-for-tat response is expected and eventually all these punitive actions will start to weigh down on the global economic recovery.
The Fed has embraced the idea to provide frequent direction and it seems most appearances are modestly supportive for risk appetite. The Fed continues to provide further clarification with the number of stimulus programs they have unveiled, and it seems the uncertain outlook with a possible second wave will keep the gas on the stimulus pedal.
Fed Chair Powell noted that they are days away from making the first lending under the Main Street Lending program. The Main Street program will help medium-sized businesses access capital markets. Regarding negative rates, Powell reiterated that the Fed does not think it is an appropriate tool. He did acknowledge what money markets are pricing and admonished that is complicating their job.
Powell will do what is necessary to support the labor market and that should keep expectations for the Fed to remain accommodative for the foreseeable future.
Oil prices are finishing up its best month ever on a down note as worries emerge that escalating tensions between the US and China could derail part of the global economic recover. The oil market continues to make its way towards balance but it seems the record rebound is running out of steam here. The global easing of lockdown restrictions have helped improve the demand outlook significantly, but that should start to put pressure on struggling oil-producing nations to keep up their end production cut promises. Higher prices and demand could mean much needed revenue for many countries and that is why expectations will grow for a lack of compliance with the agreed upon OPEC+ production cuts.
For WTI crude to claw back above the $40 a barrel, energy traders will need to see a fresh catalyst, possibly a surprise outage or hurricane season event.
Gold continues to rally as US-China tensions simmer and after Fed Chair Powell noted that a full recovery of the economy will depend on people begin confident its safe to go out. Powell’s comments cement expectations that more stimulus is likely needed to support the labor market and as risks are high that a second wave of the coronavirus will hurt confidence with the outlook.
Gold has everything going for it except strong physical demand. Gold should remain supported in the short-term as central bank buying is strong, prospects for further global stimulus seems very likely, and as friction remains high between the world’s two largest economies.
Bitcoin prices were unfazed after yesterday’s Goldman Sachs investment advisory call that condemned investing in cryptocurrencies. Bitcoin has steadily rallied as institutional investors are making cryptocurrencies a small part of their portfolio and it seems investors are not buying Goldman’s case that Bitcoin is not an asset class. Goldman took concern with that Bitcoin does not generate cash flow or earnings, has too much volatility, and is not a proven hedge against inflation, all arguments that were pretty much already known by the cryptocurrency traders.
Bitcoin is finishing the week closer to its recent highs and seems like it is ready for another crack at breaking the $10,000 level. Rising tensions between the US-China have not sparked a major wave of risk aversion and if that remains the case, the argument could be made to see Bitcoin to remain well supported in the short-term.
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