US Open – Violent oil trade resumes, Stocks ready to fall, Yen soars on risk aversion, Gold tumbles on German optimism

It is still all about oil.  After the yesterday’s jaw-dropping oil price collapse with the expiring May contract, many investors took some calm that the impact to the rest of the curve was limited.  Today, traders are saying that they are not waiting till the next expiry to make oil prices crumble again.  Except for the US putting 75 million barrels of crude into its strategic reserve, there is nothing to make energy traders believe that storage constraints, rising inventories, and demand concerns will be alleviated. 

Pressure on oil prices could also stem from rolling contract issues that will happen at the beginning of next month when the oil ETF rollovers.  With US storage tanks likely to get topped off within a month, too many negative drivers remain in place for anyone to start to have a constructive view with oil prices in the coming weeks. 

Earlier in London, WTI crude collapsed 40% and triggered a trading halt after falling below $12 a barrel.  Now trading comfortably in the mid-teens, WTI crude could tentatively start to form a wide trading range between $14 and $18 zone. 

After yesterday, anything is possible with crude and a tumble to single digits should not be ruled out.  Negative prices are a risk but with storage capacity almost reached, shut-ins are going to become a recurring theme that should provide some support with oil prices next month.    

Stocks

US equities are poised for a lower open on lingering concerns that the historic oil plunge will cripple a key part of the economy and as earnings season continues to see further cautious comments across the board.  Yesterday, the historic oil crash had limited impact on US stocks, but that won’t be the case going forward as the rolling of contracts won’t wait so close to expiry.  Oil prices will remain heavy in the short-term and since many energy stocks have recently rebounded, they are ripe to see a lot of pain this week.

On the earnings front, Coca-Cola reported better than expected results in first quarter but noted that coronavirus impact this quarter would be material and that they cannot get a handle on how they will finish the year.   

Emerson Electric had mixed results, but the outlook was terrible as the company braces for long-term damage from COVID-19. Emerson, an oil and gas equipment maker slashed their guidance for the remainder of the year.

Lockheed Martin reported annual gains on both the top and bottom line and maintained much of their guidance. They noted that the impact of COVID-19 is uncertain.

Yen

The Japanese yen rose against all its major trading partners earlier on uncertainty over North Korea leader Kim Jong Un’s health and extended its gains as the oil rout continues and begins to weigh on asset classes across the board.  Multiple sources have since reported that the North Korea leader is not critically ill.  With no clear transition plan in place since Kim’s children are too young, some believed his younger sister, Kim Yo Jong would be next in line. 

The yen seems ripe to make a strong advance as the oil rout is likely to keep further pressure on a crippling industry and as US stocks have run out of reasons to climb higher.  Yesterday’s historic plunge with oil prices was suppose to be a technical situation that could possibly play out again next month, but not the very next trading day.  The yen could outperform since sentiment is slowly turning negative and risky assets could be in for further pain over the next couple weeks. 

Gold

Gold prices tumbled after the German ZEW survey showed a surprise dose of optimism is brewing for the eurozone’s largest economy.  The expectations survey came in at 25.2, much higher than the consensus estimate of -42 and a strong improvement from the prior -49.5 reading.  If Germany is turning corner sooner than many are expected, that will provide a major speed bump in gold’s run to record territory. The path is still likely to be higher for gold, but continued optimism that the rest of Europe is turning the corner could derail a quick return to back above the $1700 level.

The surprise upbeat German outlook has financial markets starting to see light at the end of the long tunnel, but a long recovery is still the base case for Germany, with GDP remaining negative until the third quarter.  The survey also noted that they don’t’ expect a return to pre-coronavirus levels before 2022. 

If downside pressure persists, gold will find major support from the $1630 to $1650 region. 

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