US Open – Market nervousness before an earnings storm, OPEC spin, Gold rally on pause

US stocks are lower in what was supposed to be a lackluster session with much of the world on holiday.  Investors are bracing for tomorrow’s earnings season kickoff, which will likely focus on the banks’ cautious outlook for the US consumer.  Investors find themselves in a precarious position going into this week since the S&P 500 Index has already recovered 50% of the coronavirus pandemic selloff.  The consensus on Wall Street was that Fed’s actions followed by the US government’s stimulus package was enough to trigger a bear-market rally, but that rally has produced a 25.8% rebound.  Last week, the Fed’s shock and awe moment provided another boost for stocks.  While global equities have rebounded so much from the March 23rd low, April will likely be the cruelest month in fighting COVID-19 for the US, supporting expectations that large parts of the economy could be closed throughout the summer. 

Right now, US stocks refuse to break because the only trade is the stimulus trade.   The US government got a $2 trillion stimulus package done at the end of last month and last week, the Fed announced up to $2.3 trillion in aid to support the economy, easily overshadowing the prior largest economic recover package in history, which was the $831 billion stimulus package during the global financial crisis.

Earnings season might not shock many, as corporations will withdraw their 2020 guidance and long-term outlook.  Earnings season however might be the key trigger for investors fade the stimulus trade.  The harsh reality remains that stocks will not have a clear outlook for much of 2021 also as rolling shutdowns might be how we live in America until breakthroughs are made on medical treatments and a vaccination for the coronavirus. 

Oil

Now that the OPEC + pact reached a lackluster production cut deal, damage control by the US, Saudis, and the rest of the OPEC members will try to spin markets into believing this deal will help balance oil markets.   If everything works out perfectly the production cut deal, when including SPR purchases could make the total cuts worth 20 million bpd.  The problem is that short-term hit to demand is likely around the 30 million bpd area, oversupplied conditions remain in place.  Energy traders will be skeptical of any sharp rebounds with crude prices as a rolling shutdown theme over the next year will likely mean crude demand will not return to normal levels until 2022. 

Turmoil will remain in the oil industry and while many US shale companies were saved this past week, consolidation will still happen.  We might not get an oil price crash to single digits, but prices will struggle to trade significantly higher from current levels.

Gold

Gold’s bumpy road to record territory should remain in place after the Fed’s additional actions to deliver up to $2.3 trillion in loans to support the economy.  The Fed’s balance sheet seems poised to double to the $10 trillion level and that should provide a nice backdrop for the gold rally to resume.  Today’s softness is more of profit taking move and as some investors start to go heavily shift back into equities. 

Bitcoin

Bitcoin’s weakness could be a big red flag for the overall risk appetite barometer.  If financial markets are at a key inflection point and the overall risk-on trade has run out of steam, cryptocurrencies could be the first major asset class that gets sold.  Bitcoin could be very vulnerable here as investors become nervous that the snapback rebound is about to get faded.  Bitcoin is no longer trading on its fundamentals and will likely see little mainstream adoption until financial markets are beyond the coronavirus pandemic. 

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