Mid-Market Update: Rally is here to stay, Bullish US data, Dollar down, Oil higher after EIA report, and Gold rises

US stocks should continue their painstaking climb up a treacherous wall of geopolitical uncertainty, supported by unlimited stimulus and as investors rotate back into value stocks.  The US economy continues to benefit from reopening momentum, but a big part of this week’s rally is a big rotation into reopening stocks.  If this stock market recovery mirrors 2009 or 2000, we could see many people jump back into the most beaten-down stocks. 

The dollar is getting picked on today as risk appetite remains in place.  Deteriorating US-China relations should prevent the dollar from completely getting hammered over the coming months. 

US Data

Today’s economic data suggests that this will be a deep, but quick recession.  The US weekly jobless claims release showed another 2 million plus Americans filed initial claims, but continuing claims dropped for the first time.  The jobs data is still disheartening but some positives can be taken away from today’s release.  Continuing claims came in at 21 million down from 24.9 million and better than the consensus estimate of 25.7 million.  The insured unemployment rate also improved from 17.1% to 14.5%.  Core durable goods also came in better than forecasts, while first quarter GDP was revised slightly lower. 

With still a lot of money on the sidelines waiting to get back, you might not see too much weakness with US equities.  Sluggish economic activity or a second peak/wave is already priced into this market and it will likely take a new risk event to drag this market lower.  Possible risk events could come from the Fed, but they are nowhere near pumping the breaks on stimulus and the Presidential election, which would require Wall Street to begin pricing in the risk of a blue wave. 

HK/China/US

The headlines coming out of the world’s two largest economies are not putting much of a dent into the stock market rally.  China is determined to strengthen their hold on everything and have not backed down with their controversial national security law for Hong Kong.  US Secretary of State Pompeo’s comment that the US could no longer certify Hong Kong autonomy from China, raises expectations that Hong Kong could eventually lose their special trading status.  It seems unlikely that the US will continue to go that route as Hong Kong is a major business hub and home for hundreds of US businesses.  The US seems to be positioning, possibly giving China a chance to clarify or tweak their intentions for Hong Kong.  The impact on global equities is limited for now as this still seems to be a regional story and that the US and China seem set to hold up their respective parts of the phase-one trade deal.  A western coalition against China seems likely but that could take months to really take form. The situation in Hong Kong will eventually weigh on financial markets, but for now the impact is limited.

Oil

Crude oil prices initially sank after the EIA crude oil inventory report showed a huge build with inventories.  The headline saw a 7.93-million-barrel build, nearly matching yesterday’s API report, but nowhere near the consensus estimate of 1.3-million-barrel draw.  Production is picking up and that was to be expected as the reopening of the economy continues and as some Americans resume air travel. 

When you consider that 2.1 million barrels went into the SPR, the total nationwide inventory build was at a four-week high at just over 10-million level. 

Gasoline inventories delivered a larger than expected draw, but diesel stockpiles continue to show persistent builds.  The economic recovery remains cloudy and until aviation bounces back and distillate inventories come down, WTI crude will remain capped. 

US production is reported at 11.4 million bpd, but that figure is probably too high as imports are being exaggerated and exports are low-balled. 

WTI crude is slightly higher following a mixed report that showed a massive build and did not deliver any strong demand recovery signs leading up to the Memorial Day holiday weekend.  Crude prices seem destined for range trading in the short-term until the oil market reaches balance alongside improving global economic activity.  

Gold

Gold is higher on further deterioration with US and Chinese relations, speculation over negative interest rates, and record inflows with gold ETFs.  The stock market remains strongly supported, but it won’t be at the expense of safe-haven selling.  Gold has struggled to break above $1800 and that the next couple of weeks could be a frustration phase for bullish investors. 

Risks of deflation and lack of physical demand have put a mild damper with the short-term outlook for gold, but the longer-term bullish fundamentals still firmly remain intact.  Gold will continue to benefit from increased central bank demand, robust physical demand when China and India see improving economic data, and fresh injections of stimulus from central banks globally.    

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