Mid-Market Update: Stocks steady, Yen rallies on data, Oil win streak snapped, Deficits drive yields higher, Gold softens, LATAM in focus

Wall Street appears set for a period of calm as traders await how COVID-19 slowly spreads across the US.  New cases will rise, but it will take a couple more weeks to rate how much economic activity improved following regional reopenings.  It is hard to imagine stocks will be able to keep on rallying as spikes in new cases will derail the reopening efforts in key cities.  Economic activity will only see a modest pickup if the second quarter has the US become the curbside pickup economy. 

The ADP payroll report pretty much confirmed what jobless claims has been telling us over the past several weeks.  Job losses will be in the 20 million ballpark this Friday and the unemployment rate will surge to around the 18% level.  It is hard to get excited about US stocks right now as the economic pickup will be lackluster and the jobs recovery in travel, entertainment and retail, will be rather slow. 

Oil

Oil’s nice rally is over, and it seems that going forward WTI crude will be somewhat rangebound between the $20 and $30 levels.  The energy markets are not quite balanced and deeper curtailment efforts will be needed over the next few weeks.

The EIA crude oil inventory showed crude production fell below the 12-million barrel per day level for the first time since February of last year.  The weekly EIA inventory headline number came in at 4.59 million barrels, below the 8.7 million consensus estimate.  Oil bulls can’t get overly excited with this report as the demand outlook is still bleak and production cuts need to be more aggressive.  Imports from Saudi Arabia rose to a six-week high, a good sign for Brent crude, but not necessarily for US shale. 

The distillate inventory build was a whopping 9.5 million bpd as net exports almost halved from the prior week.  The one positive out of this report was the pickup in gasoline demand as parts of the country reopen. 

The next couple of weeks should see volatility ease somewhat for energy traders.  Any hiccups with the reopening of the economy in the US could see WTI crude fall towards the $20 a barrel level.  Oversupply concerns will also weigh on prices, but with tank tops nearly reached, the production cuts will work themselves out. 

Treasuries/FX

To the surprise of no one, US debt issuance will hit a record high to cover the skyrocketing deficit.  The quarterly refunding announcement sent the 10-year Treasury yield to the highest level since April 15th.  The second quarter was expected to see redemptions, but that obviously won’t happen as massive stimulus measures were announced to counter the impact of the coronavirus. 

The deficit seems set to hit $4 trillion as lawmakers remain determined to deliver additional economic stimulus.  Fiscal hawks are nowhere to be found and will only emerge once the economy exits a disastrous second quarter.  TIPS were unchanged as inflation is hardly a concern right now. 

The Japanese yen was the best performing currency after both the US private payroll data confirmed for many that the unemployment rate will surge closer to 20% and after the European Commission warned the North-South divide will only get worse.  The integrity of the bloc’s single currency could once again be at risk as the indebted members will see slower recoveries. 

Yesterday’s German Constitutional Court ruling reminded investors that Germany might prove difficult in allowing further massive QE programs.  Everything is just starting to look bearish regarding the euro.

Gold

Gold prices just can’t shake off reopening momentum.  Despite expectations that COVID-19 deaths could rise to 3,000 a day next month, investors are staying optimistic as new cases are not spiking.  The virus however will take longer to spread deep into rural corners of the country.  Gold prices may continue to consolidate until either cases spike in the rest of the country or the scattered economic rebound disappoints.  Gold should see strong support come from the $1650 level in the short-term and should still target $1800 over the next couple months.

LATAM

Brazil

The main event in LATAM will be the Brazilian central bank rate decision.  The Brazilian real has had a bad start to the month following worse than expected industrial production and an outlook cut by Fitch.  The political situation is not likely to get any boosts anytime soon as the President and Congress can’t agree upon a reform agenda. 

Brazil’s central bank (BCB) is expected to cut the Selic rate by 50 basis points to a record low 3.25%, but traders should not be surprised if they are more aggressive and bring it down to 3.00%.  Since the March meeting the coronavirus pandemic and political turmoil have crushed growth prospects.  Even President Bolsonaro had to admit that efforts to flatten coronavirus curve have failed.  Long-term fiscal sustainability is at risk for Brazil and the BCB will be aggressive today and signal more cuts are coming. 

Chile

Chile’s central bank (BCCh) interest rate decision will likely focus on non-traditional measures to provide liquidity and further fiscal support.  At the last meeting in March, Chile’s central bank went all-in delivering a half a percentage point rate cut to 0.50% and increased the size of bank bond purchase program by $4 billion.  Interest rates in Chile have reached their lower bound and seem to be anchored for the foreseeable future.

When emerging markets find better momentum, the Chilean and Colombian pesos are likely to outperform the rest of LATAM. 

Peru

Peru was quick to react to the coronavirus pandemic shock to the global economy.  The Peruvian reference rate saw two full percentage point rate cuts in mid-March and early April.  Peru’s central bank is expected keep rates steady at 0.25% and reiterate they will continue to provide ample liquidity.  Peru will likely see an expansion of stimulus in one of the upcoming rate decisions.  The Peruvian sol could be stuck in broadening pattern formation that will see prices remain stuck between the 3.35 and 3.42 range. 

Colombia

Colombia’s central bank will present the quarterly report which should be rather downbeat.  Colombia’s economic growth outlook will continue to get downgraded after the government extended their lockdown through May 25th. 

Financial markets are always forward looking and will start to begin gravitating towards Colombian assets.  Colombia’s economy will start to look constructive as oil prices have stabilized optimism is high economic activity will start to pickup in the near future. 

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