Mid-Market Update: Reopening doubts and US-China tensions sink risk, Buffett loves cash and abandons airlines, Oil’s dance, Gold’s weak rally

‘Sell in May’ continues as airlines get dumped, US-China tensions are back, and as the virus spread accelerates in some parts of the US as many states begin reopening.  Reopening doubts are growing after President Trump had to acknowledge the virus was more lethal than initially thought.  Trump, known for being overly optimistic, now sees the death toll from the coronavirus reaching as high as 100,000 in the US. 

The reason financial markets are not substantially lower is because tech giants are surging higher.  Not everyone is Warren Buffett and will sit on a huge pile of cash.  Investors are jumping out of airlines, financials and real estate and overloading on big-tech.  Airlines might not see a return to prior crisis levels for a couple years and low interest rates are here for the foreseeable future.   Tech is where everyone wants to be. 

Buffett

Warren Buffett’s role as savior during market turmoil did not happen this time as the Fed and US government were swift to react.  Buffett’s annual meeting was rather negative.  Buffett gave up on airliners, emphasized the uncertainty that remains from COVID-19 and seems to prefer holding cash and wait for the next downturn.  Buffett ended by saying “Never bet against America”, but he seems poised to wait a while before putting his record pile of cash to work. 

EUR

Euro area PMI reading collapsed to record contraction.  European manufacturing will not bounce back anytime soon.  Germany delivered its 16th straight contraction and lowest reading since the Great Recession. 

Tomorrow, Germany’s Supreme Court decides on whether it is constitutional for the country to participate with an earlier part of QE.  They are expected to rule the ECB’s Public Sector Purchase Program is legal, a case that is been going on for over 5 years.  Germany’s constitutional court has been known to surprise markets and one tomorrow could send the euro into a tailspin.  If Germany’s top court imposes how much support can be given out, this could weigh tremendously on Italy’s debt markets. 

Oil

Crude prices shrugged off earlier declines as historic oil shutdowns accelerate across the globe.  Oil initially traded lower following renewed US-China tensions on both the source of the coronavirus outbreak and on meeting obligations under the phase 1 trade deal.

A lot needs to go right for economic activity to pick up and financial markets were somewhat blindsided by President Trump’s tariff threats.  The economic recovery is fragile and crude demand will struggle to rebound if Trump continues to go down this route.  Oil prices remained resilient as President Trump seems unlikely to follow through on any tariff threat that will hurt the US economy this close to the Presidential election. 

Oil consumption will improve in some parts in the world, but likely lag in the US.   As COVID-19 spreads across America, small towns and rural regions are still likely a few weeks away from seeing their respective peaks.  Energy traders looking for the US to deliver a boost in crude demand will likely need to wait a while longer. 

Energy markets continue to maintain a constructive stance with oil prices as shale drilling in the US was cut in half over the past couple of months.  With no room left to store oil, crude supply will likely meet demand over the next several weeks.  Optimism that the oil market could deliver a deficit by June will likely keep oil prices relatively supported. 

Oil’s gains were short-lived after Texas oil regulator Sitton’s comment that oil quotas are dead, ahead of tomorrow’s meeting.  The Texas Railroad Commission is not ready to agree upon curtailing production even though everyone is cutting output.  Texas will deliver oil cuts, it just might happen in a coordinated way. 

Gold

Gold prices are higher but appearing a little vulnerable as doubts grow that US government will be able to deliver another stimulus package.  President Trump remains committed to not considering another round of stimulus unless it includes a payroll tax, while Democrats focus on sending aid to people who aren’t receiving paychecks. 

The backbone to the gold trade has been accelerating stimulus worldwide, but major economies seem to be slow in delivering the next tranche of support.  Europe seems to be spinning wheels with announcing new stimulus measures and politics seem to be taking center stage with America’s next response. 

Gold is also facing some headwinds as imports plummet to India, the second largest consumer of gold.  India’s demand for gold will take months to rebound and that along with less expansive stimulus measures worldwide could delay gold’s run (in dollar terms) to record high territory. 

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