US Open – Stocks rise on easing COVID-19 restrictions, Oil’s glut, Choppy gold trade, Brazil and Colombia in focus

Stocks are rising on optimism coronavirus-related restrictions will be eased in the US and around the world.  Financial markets are off to a good start this week as economic activity could start to come back and as investors continue to remain optimistic that scientists will find a potential treatment for COVID-19.  Remdesivir, Gilead’s potential treatment for coronavirus had a setback with a trial in China last week.  Gilead noted it had low enrollment and investors still remain hopeful the FDA will approve it.

Alaska, Georgia, South Carolina, Tennessee and Texas are all beginning to reopen smaller parts of their economies.  The problem is that reopening will mean added costs to small business in creating an environment that is safe for the consumer and employees.  The easing of lockdown measures will likely only provide a limited rally here.  Later this week, big tech results from Amazon, Apple and Facebook, will weigh heavily on whether stocks finish positive for the week.

This will be a busy week with central banks.  Further stimulus is expected to come from the BOJ and ECB, also another reason why stocks are seeing some support.

Oil

The harsh reality is setting in that over the next month the world is about to hit crude storage capacity.  The problem is that no one wants to be the first to deliver deeper production cuts.  The OPEC + production cuts are about to get injected with steroids once tank tops are reached, but the costs and risks that go with shutting down a well will make this go down to the wire.

It is very expensive to shut-in production and the risks of damaging the well will keep many producers waiting to the last moment to act.  Oil is in for another wild ride and energy traders should not be surprised if we see prices continue to remain heavy.

We probably won’t see a retest of last week’s historic plunge to -$40.32 a barrel, but the supply glut story will remain the key one for oil.  WTI crude could easily drift lower toward $10.42, the previous lowest level ever that occurred in 1986.  Difficulty in arbitraging the spot and forward prices could easily drive WTI crude to single digits again in the coming weeks.

Gold

Gold prices are struggling for direction as high hopes for more stimulus from the ECB and BOJ are weighed down by lockdown easing optimism.  The Fed also meets this week, but they will likely not rock the boat this week (target range unchanged and no increases to IOER rate).

Easing lockdown measures are prompting hopes economic activity will start to gradual improve.  Rolling reopenings across the globe however will not be as smooth and investors are hoping, so the bullish case for gold should remain intact.

Gold is finding formidable resistance around the $1760 region, but that might not last the deeper we get into the trading week.  This is a big earnings week for tech and energy results and a battered consumer along with uncertainty on when economic activity will return will prove difficult for companies to become overly optimistic.

Gold should see further support from both the BOJ and ECB as they respectively increase their stimulus efforts this week.  Gold could test the $1800 an ounce level this week if the BOJ and ECB do not disappoint and if the tech sector begins to focus on recession risks.

Brazil

The political situation in Brazil took a turn for the worse.  President Bolsonaro’s administration is struggling with its fight against the coronavirus and as impeachment risks peak following the resignation of Justice Minister Moro, an iconic figure in the battle of corruption.

Political uncertainty will not bode well for Brazilian assets and especially the Brazilian real.

Colombia

Colombia’s new mandatory 2-week lockdown starts today, where some construction businesses are reopening, and manufacturers will apply and await government approval to reopen.  COVID-19 has almost tested Colombia’s ICU capacity, but that seems not to be derailing reopening efforts.  If new cases accelerate, the government might have to walk down the May 11^th reopening plans.

This is a short week in Colombia, with the Labor Day holiday coming this Friday.  Much attention will fall on Thursday’s Colombia central bank rate decision.  Colombia’s central bank is expected to cut rates by half a percentage point to 3.25%, the lowest level since 2014.  Colombia’s economy remains vulnerable due to the coronavirus impact to the economy and the falling peso.

Colombia is still one of the preferred investments in LATAM, but inflows will struggle if COVID-19 doesn’t show signs of plateauing.

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