Wall Street appears set for a period of calm as traders await how COVID-19 slowly spreads across the U.S. New cases will rise, but it will take a couple more weeks to rate how much economic activity improved following regional reopenings. It is hard to imagine stocks will be able to keep on rallying as spikes in new cases will derail the reopening efforts in key cities. Economic activity will only see a modest pickup if the second quarter has the U.S. become the curbside pickup economy.
The U.S. ADP payroll report pretty much confirmed what jobless claims has been telling us over the past several weeks. Job losses will be in the 20 million ballpark this Friday and the unemployment rate will surge to around the 18% level. It is hard to get excited about U.S. stocks right now as the economic pickup will be lacklustre and the jobs recovery in travel, entertainment and retail, will be rather slow.
Oil
Oil’s nice rally is over, and it seems that going forward WTI crude will be somewhat range-bound between the $20 and $30 levels. he energy markets are not quite balanced and deeper curtailment efforts will be needed over the next few weeks.
The EIA crude oil inventory showed crude production fell below the 12-million-barrel-per-day level for the first time since February of last year. The weekly EIA inventory headline number came in at 4.59 million barrels, below the 8.7 million consensus estimate. Oil bulls can’t get overly excited with this report as the demand outlook is still bleak and production cuts need to be more aggressive. Imports from Saudi Arabia rose to a six-week high, a good sign for Brent crude, but not necessarily for U.S. shale.
The distillate inventory build was a whopping 9.5 million bpd as net exports almost halved from the prior week. The one positive out of this report was the pickup in gasoline demand as parts of the country reopen.
The next couple of weeks should see volatility ease somewhat for energy traders. Any hiccups with the reopening of the economy in the U.S. could see WTI crude fall towards the $20 a barrel level. Oversupply concerns will also weigh on prices, but with tank tops nearly reached, the production cuts will work themselves out.
Treasuries/FX
To the surprise of no one, U.S. debt issuance will hit a record high to cover the skyrocketing deficit. The quarterly refunding announcement sent the 10-year Treasury yield to the highest level since April 15. The second quarter was expected to see redemptions, but that obviously won’t happen as massive stimulus measures were announced to counter the impact of the coronavirus.
The deficit seems set to hit $4 trillion as law-makers remain determined to deliver additional economic stimulus. Fiscal hawks are nowhere to be found and will only emerge once the economy exits a disastrous second quarter. TIPS were unchanged as inflation is hardly a concern right now.
The Japanese yen was the best performing currency after both the U.S. private payroll data confirmed for many that the unemployment rate will surge closer to 20% and after the European Commission warned the North-South divide will only get worse. The integrity of the bloc’s single currency could once again be at risk as the indebted members will see slower recoveries.
Yesterday’s German Constitutional Court ruling reminded investors that Germany might prove difficult in allowing further massive QE programs. Everything is just starting to look bearish regarding the euro.
Gold
Gold prices just can’t shake off reopening momentum. Despite expectations that COVID-19 deaths could rise to 3,000 a day next month, investors are staying optimistic as new cases are not spiking. The virus, however, will take longer to spread deep into rural corners of the country. Gold prices may continue to consolidate until either cases spike in the rest of the country or the scattered economic rebound disappoints. Gold should see strong support come from the $1,650 level in the short-term and should still target $1,800 over the next couple months.