Mid-Market Update: Wall Street relief on virus measures extended, Oil awaits Trump/Putin call, Gold steadies after record week, LATAM outlook

Wall Street is breathing a sigh of relief after President Trump gave up on his Easter goal for America to reopen.  An early reopening of the economy would have put more lives in danger and raise the risk of prolonging the coronavirus life in the US.  Social distancing guidelines have now been extended throughout April and no one would be surprised if they ended up getting pushed back to the end of June.  Stocks are in a tough place right now and range trading could persist over the next couple weeks.

If the economy does not restart until much later in the summer, risk aversion should return and deliver the retest of the S&P 500 low made last week.  The focus for many traders will be trajectory of the virus infection rates and death toll, which should suggest much of last week’s historic stock market rally will get faded once US healthcare capacity gets tested.

Despite unprecedented stimulus unveiled by the Fed this month, political risks will keep many macro-traders on the sidelines until we see a W-bottom form.  The political dangers for markets are how long will social distancing measures remain in place and how long will payments to US citizens last.

Oil

Oil prices are nearing the bottom.  Despite a significant number of bearish headlines, WTI crude has only tentatively dipped below the $20 a barrel.  The slowdown in oil refining will accelerate as the global lockdown intensifies as the coronavirus continues to spread.  Oversupply concerns remain elevated as tanks all over the world reach capacity.

Crude demand will be constricted for a few months after President Trump conceded and pushed back distancing guidelines.  Today, could be a key turning point for the supply side as President Trump plans to have a call about oil prices with Russian President Putin.  Trump knows he can still save about half of the shale industry if he can get the Russians to back down on increasing their supplies.  US shale needs oil prices closer to $40, with many E&P companies likely to go under with oil in the mid-$20s.  Trump might have to make Putin a deal he can’t refuse.

If nothing comes out of Trump’s call to Putin, oil prices could easily drop a couple dollars.  If some optimism stems from the call, WTI crude could stable in the low-20s area.

Gold

Gold prices are steadying following its best week since the financial crisis.  Gold’s supply chain for the physical metal was disrupted over the last 10-days, but that has now settled and taken away any momentum for higher prices.  Gold’s outlook remains bullish as the world adjusts to never-ending promises of monetary easing, but the next rally may be more of an escalator ride than elevator one.

Latam

Mexico

The coronavirus pandemic could be the straw that breaks the Mexican economy’s back.  Before the virus, Mexico’s economy was already in trouble with lower oil prices and PEMEX’s debt issues.  Mexico’s approach toward the coronavirus has frustrated the medical community and concerns are high that they could end up just like Italy.  Mexico is very late in delivering stricter stay-at home measures, just a couple week’s ago they allowed Guns N’ Roses headline the Vive Latino Festival in Mexico City.

The peso has been battered this month over several missteps by Mexican President Andrés Manuel López Obrador and a wait-and-see approach by the Banxico.  The peso rebound should mainly be attributed to the Fed’s unprecedented stimulus measures.  The peso extend losses against the greenback over the next few weeks as Mexico’s healthcare system hits capacity and the Banxico begins to play catchup with the rest of the world in providing stimulus for the economy.

Brazil

The coronavirus economic impact for Brazil will be far worse than government and central bankers were expecting.  A recession is likely for Brazil, however the stock market selloff may not worsen like the rest of LATAM as they are already the worst performing index.  Brazil equities could stabilize as the central bank will likely soon be allowed to buy private securities and Treasury bonds.  The Brazilian recovery will likely be lackluster in the second half of the year as the fiscal and monetary response was not aggressive enough.

Colombia

Now that Colombia’s central bank has finally joined the rest of the world in delivering rate cuts, it should be expected that more stimulus is not far away.  Colombia was the fastest-growing major economy in the Americas and will struggle for the rest of the year as oil prices, the nation’s biggest export struggle to stabilize and as liquidity concerns intensifying.  The COLCAP will likely be one of the preferred investments in LATAM as their recession is expected to be one of the smallest.  The next couple of months are about to get very ugly for Latin America and as central banks ramp up their stimulus measures, the dollar could remain attractive in the short-term.

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