US Open – Stocks try to rebound on fiscal hopes, Dollar higher on liquidity concerns, Oil’s freefall to resume, Gold struggles, Bitcoin bottom, LATAM Update

Here we go again.  Promises of a coordinated fiscal, monetary and regulatory action initially helped US stocks rebound following the worst selloff since 1987.  However, quarantine measures across both the US and Europe are intensifying and some investors are skeptical that any fiscal announcement will just trigger another selling opportunity.  Expectations are growing that Treasury Secretary is getting close to getting a stimulus package of at least $850 billion later today.  

With the VIX closing above the 2008 peak, investors are bracing for another wild session that could see more trading halts triggered.  While some investors have began scaling into the major indexes, the VIX suggests we could see still see another 10-20% lower before things bottom for S&P 500 futures. 

Treasuries/FX

The yield on 10-year Treasuries is rebounding after collapsing over 35 basis points from the 1.00% high made at the end of Friday.  Erratic conditions will likely persist and right now it seems Treasuries remain the only true safe-haven.  It seems that a tiny problem in the bond market forced the Feds hand into delivering another emergency meeting.  The demand for safety will remain in place as foreign ownership will likely need to continue to pile into this trade.  The 10-year Treasury yield seems like it could slowly be forming a key range between 0.60% and 1.00%.  We are not quite there for calmer markets, but it seems financial markets are getting closer. 

The dollar is rallying against all its major trading partners after liquidity concerns made the premium using dollars against the euro surged to the widest since 2011. 

The dollar will likely continue to see strong safe-haven flows into Treasuries as investors vary on how prolonged US economic activity will deteriorate.  The hit to GDP could be in the high-single digits and no one knows if that will linger for one, two or three quarters. 

Oil

Yesterday’s oil price decline was a game changer as the demand outlook for crude took another hit as lockdown efforts globally will likely see travel come to a halt for a couple months and as oversupply concerns remain high as the Saudis and Russians seem poised to wait this virus out.  Saudi Arabia is not shying away from the price war and are on target to boost oil exports to a record 10 million barrels a day. 

The slight rebound with oil prices is mainly being attributed to short-covering and a disruption with Iraqi production after the Gharraf oil field halted production due to the coronavirus concerns. 

Until energy markets have certainty on how long the virus will cripple daily life activity, travel and trade, oil prices will continue to grind lower.  Barring any major risk-on rally, West Texas Intermediate crude seems poised to test the 2016 low of $26.05 level. 

Gold

Gold failed to deliver safe-haven comfort as funding stress saw another scramble for cash.  Gold’s safe-haven trade has left many puzzled as investors try to find the best long-term trade.  Some investors in China are preferring holdings with rebar, a steel rod which is more of an infrastructure investment that will see higher demand from vast new construction projects.  Gold’s bullishness should reassert itself if the $1,450 an ounce level holds.  If that breaks, you cold see the algos dominate the technical trading and send prices towards the $1,415 region.

Bitcoin

Bitcoin seems to have found some support, mainly thanks to first-time buyers.  Bitcoin could very well be a cat and it seems it has nine lives.  The past month’s institutional selloff drove Bitcoin prices towards the key 2019 low that formed after its first death that occurred after rising just shy of the $20,000 level.  Despite the heightened volatility that is in place, Bitcoin’s stabilization could prove to be bullish as some investors believe it may have already hit rock bottom. 

LATAM/EM

Mexico

Mexico’s peso is at record low and it could get a lot of worse as many investors are skeptical that the Banxico is late to the game in cutting rates and the government has done a terrible job in tackling the pandemic.  Mexico could be undertesting and with no restrictions on large crowds, their healthcare capacity could be overwhelmed with a massive spike in new cases.  As of this writing, Mexico has yet to postpone the Gun N’ Roses concert this weekend that saw over 90,000 attend last year. 

Brazil

Brazil is not being aggressive enough in delivering stimulus to combat the impact of the coronavirus.  The government needs to ask Congress to raise the fiscal deficit and unleash spending initiatives.  The central bank (BCB) seems they will cut rates by only 25- or 50- basis points at the March 18th meeting.  Brazil needs greater fiscal and monetary steps taken in order support the economy and bolster up confidence.  The Brazilian real and stock market could remain vulnerable for further pain. 

Colombia

LATAM is joining the lockdown efforts to help flatten the curve of the coronavirus.  Colombia, Venezuela, Chile and Uruguay will all partially close their borders, ramp up quarantine initiatives, and prevent large social gatherings.  Colombia is shutting down borders until May 30th, and the economic impact will continue to weigh on the peso. 

South Africa

South Africa has nothing going for it.  The economy was weak before the coronavirus and now it seems pretty obvious they will not meet their fiscal targets.   A sovereign downgrade away from junk seems inevitable and the rand could be on its way to the record low of 17.00.

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