US Open – Risk rally after EU stimulus deal, earnings, and improving virus outlook, Dollar in freefall, Oil unleashed, Gold and Silver Shine

European equities and US stocks are off to another great start as EU leaders finally reach a landmark deal, US virus cases appear to be peaking, and earnings results continue to impress. 

EU leaders wrapped an $860 billion rescue fund, splitting almost in half (390 billion euro in grants/360 billion in loans) with grants and low interest loans.  The funds will not be released immediately, with 70% allocated in 2021 and 2022, while 30% will be disbursed in 2023 and determined by how bad GDP declines.  The EU was able to agree upon terms of common debt,a strong boost for European integration.  Before the pandemic, many investors doubted the EU would ever come near to forming a fiscal union, this deal was a step closer to that and alleviates any short-term concerns that another Brexit would happen. 

Earnings

After the close, IBM delivered a solid earnings beat that is helping keeping the tech rally intact.  The numbers showed significant declines in both earnings and revenue but the numbers came in better than expected and cloud revenues continue to improve. 

Coca-Cola delivered decent results with an expected decline in concentrate sales as restaurants remained mostly closed in the quarter. Coca-Cola did show July unit case volumes were down mid-single digits, which confirms the trend is improving and should only get better if reopenings are not reversed.

Philip Morris delivered a strong earnings beat and raised outlook. Synchrony Financial, the biggest provider of store credit cards showed the US consumer was resilient. Credit card spending dropped almost 19% and total balances fell 4%.

Virus

The virus situation in the US is showing signs of improvement.  The case curve seems to be flattening and hospitalizations continue to trend lower.  President Trump also reversed his stance on masks and tweeted an image of himself wearing a face mask and indirectly called it patriotic.  Over half of the US has mandatory mask orders in place. Trump’s troubling poll numbers have created a sense of urgency in changing the narrative so it is no surprise he is also bringing back his 5pm coronavirus task force briefings. 

FX

The dollar continues to get beat up as the EU recovery fund agreement continues to drive a broad rally for risky assets.  The dollar is in freefall against the commodity currencies and it is starting to look like the European currencies are playing catch-up. 

Oil

Crude prices are surging after both EU leaders wrapped up a landmark rescue fund and as the US seems to be getting a handle of the coronavirus spread.  The virus data in the US suggests coronavirus cases are peaking, California, Florida, Georgia and North Carolina showed meaningful declines. 

Oil is tentatively breaking out of its tight trading range, but still seems to lack a strong enough catalyst for WTI crude to break above the $45 level. Positive developments on the vaccine front have provided some optimism that crude demand will come closer to pre-pandemic levels next year.  Phase III trials are only getting started, so traders should not expect any immediate updates. 

Gold

Gold prices got a fiscal booster shot after EU leaders agreed upon a history rescue fund deal.  Gold’s rally is accompanied with surging stocks, so if big tech earnings disappoint after the close, demand for safe-havens could remain strong.  Gold’s path to record high territory remains likely as more stimulus will be unveiled by the US shortly, Presidential election uncertainty will grow, and expectations the coronavirus will re-emerge in the fall. 

Silver has also been on fire and continues to play catch up to gold.  The reopening trade is triggering strong industrial demand for silver and now that the $20 level has been cleared, bullish momentum might not see much resistance until its closer to the $22.50 level. 

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