US Open – Running on empty

Rally Stalls into Quarter-End

US futures are edging lower ahead of the open on Tuesday, as the stock market recovery continues to send flagging signals on the back of numerous reopening setbacks.

It’s been an incredible bounceback quarter for stock markets, building on the recovery that started in the final week of March, as central banks and governments around the world launched enormous stimulus programs in order to prevent a catastrophic economic collapse. The efforts were warranted but have resulted in equity markets looking quite disconnected from the reality of what we’re seeing around the world.

This month has seen the rally running on reserves and we’re now heading into the end of the quarter in a consolidation phase and looking a little vulnerable to a correction. It’s hard to build a case for a correction in markets that are so buoyed by the level of stimulus we’re experiencing but the red flags are popping up.

The rallies are being sold into earlier and while a number of indices are seeing strong support levels for now, the momentum is definitely building against them which could be problematic if they break. For example, 25,000 is suddenly looking a little at risk in the Dow, the same could be said of 6,000 in the FTSE 100. If these levels break, we could see downside pressure build quickly in the short-term. Albeit not to the extent that we witnessed earlier in the year.

With various states in the US halting lockdown easing or even reversing them in some cases, investors may be becoming a little concerned about what they’re seeing. Full national lockdowns may not happen as we experienced previously but the recent trend is still not encouraging and could still be quite damaging for the economy.

Oil may linger around $40 for a while

Oil prices are coming off a little, in line with US futures, with WTI down more than 1%. It had pushed back against $40 at the start of the week but has so far failed to break and hold above this level for very long.

It may be that WTI prices hold around the $40 mark for now and consolidate, with the momentum that drove prices higher in May and June clearly waning. Targeted restrictions won’t be helping oil prices and should they become more broad-based, I expect they’d come under pressure once more. If so, $35 would be the first big test for WTI but it could slip further depending on the severity of the situation.

Gold losing momentum again

Gold is looking a little lost just as it appeared to be gather a head of steam. It took a while to penetrate $1,750 but already it seems the yellow metal is facing significant resistance around $1,775.

Perhaps this shouldn’y come as too great a surprise given the battle it potentially faces around $1,800 which was a hugely problematic area in the early part of the last decade. I expect we could see a repeat, although given the amount of stimulus there is at the moment, it may not hold for too long. Patience may just be key in the near-term.

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