US Open – Fading the $1.2 trillion stimulus package, Oil can’t shake oversupply deluge and demand destruction concerns, Gold softens on cash scramble

US stocks are poised for another volatile soft open as investors fade the hopes of $1.2 trillion stimulus package.  One of the key lessons learned during the financial crisis was that you can’t trust the government to act swiftly.  Treasury Secretary Mnuchin is urging leaders to act now otherwise be prepared to see depression-like unemployment that could have 20% of the public without work.

Adding to the volatility is the Fed who has been piecemealing massive stimulus efforts that are beginning to make credit markets functioning properly and bringing down spreads (futures and underlying products).  Treasury yields have delivered historic moves as market dislocations with futures pricing failed to match up with the underlying instrument.  A lot of the recent volatility stemmed from investors abandoning holdings of commercial paper, FX forwards and general collateral.  The Fed may have got it right now, but it took too long and permanent damage has been done. 

Oil

Oil prices seem to be fighting a three-headed monster that is a global recession, oversupply deluge, and demand destruction.  It doesn’t seem like anyone is getting on a plane anytime soon and with social lockdowns likely to remain in place for at least a month, oil seems like it has only one direction to go. 

Even comments from Kremlin’s Peskov that “Russia is monitoring the oil market” and “would like to see higher oil prices” is failing to produce any significant bounces.  Energy markets may believe the Saudis and Russians will get serious about returning to the negotiating table if oil breaches the $20 a barrel level. 

The coronavirus pandemic dealt a deadly blow for oil prices and even when the world is beyond the virus, oversupply conditions will remain firmly in place.  Oil’s plunge may be over once we see prices test the $15 a barrel level. 

Gold

Gold prices are weakening as investors scramble for cash once again.  Gold’s bottom made yesterday however should hold as recession concerns surge and on massive stimulus from the Trump administration.  Gold will remain volatile over the next few sessions as investors await to see if the Trump administration is unable to quickly pass its massive stimulus plan.  If we see a repeat of the financial crisis when Congress was ineffective in acting swiftly, the scramble for cash will continue. 

Gold is struggling here, but the if the massive stimulus plan gets done this week, prices could target the $1,600 an ounce level. 

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