US Open – Risk aversion on economic doubts and virus concerns, Oil’s glut, Gold shines

Stock market gains are slowly getting wiped out as the second coronavirus wave hits the US.  New Mexico, Oregon, Florida, Texas, Arizona are having large increases in new coronavirus cases.  As the overall cases rise above 2 million, Texas had its highest one-day infection total, Florida’s weekly cases jump to highest level, California shows hospitalizations rose to a four-week high.  Some of the rises in new cases is also being attributed to the increase in testing. 

Financial markets recalibrate after Powell’s downbeat assessment to the outlook and are heading for the sidelines.  While the Fed’s policy is set to support a higher stock market, an improving earnings outlook will be required for stocks to get their groove back.  The cyclical reopening rotation is over and small-cap stocks could see further downside in the short-term. 

Treasuries/FX

One of the key takeaways from yesterday’s FOMC decision was that Fed policymakers are expecting rates will stay just above zero through 2022.  With the 2-year Treasury yield on lockdown, bond traders are moving up the yield curve.  Longest-dated debt was supposed to deliver a steepener but risks to the outlook will delay that the trade.  Global bond yields are tumbling as risk aversion runs wild.  The Japanese yen and Swiss franc are outperforming as virus concerns and growing expectations of a slower economic recovery weigh on sentiment.

Oil

Supply glut overhang and diminishing crude demand expectations are sinking oil prices sharply.  Second wave coronavirus risks on crushing hopes for a steady global economic recovery that was spearheading prospects of improving crude demand. 

Following yesterday’s downbeat outlook by the Fed, energy traders are worried permanent damage to the economy along with a second wave of the coronavirus will cripple prospects for a strong second half of the year.  The supply glut issue to is not going away anytime soon as US crude stockpiles rise to a record high. 

In less than a week, the supply and demand fundamentals both turned bearish for oil markets.  WTI crude should find some support at the $35 level, but if that breaks, bearish momentum could easily target the $30 region. 

Gold

Gold prices are roaring higher as concerns grow as the relentless stock market rally appears over for now, second US virus wave concerns become the consensus and a slower economic recovery seems destined to be met with much more stimulus.  The only thing that could derail gold right now is if risk aversion intensifies too much that investors start to scramble for cash. Gold seems poised for another attempt at $1750 and then possibly the $1800 level. 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst - The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geopolitical events and monetary policies around the world. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC and Bloomberg, and is often quoted in leading publications including the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University.
Ed Moya