US Open – Equities rise ahead of earnings storm, OPEC+ Taper Time, Gold Shines, LATAM Update

Global stocks are rising ahead of an earnings storm that will likely deliver the worst plunge in profits since the Great Recession.  With many traders anticipating roughly a 40% drop in corporate profits, businesses could be ready to deliver a round of job cuts to shore up their balance sheets. Wall Street remains fixated with the recovery trade but that will be hard to hypothesize as the path of virus is unknown.  The end result for many traders remains that the Fed is keeping rates near zero for at minimum a couple years, governments will continue to deliver fiscal stimulus, and that recovery ahead might have only got pushed back a quarter. 

The official start to earnings season is tomorrow, but one key trading update and earnings report provided a small boost to risk appetite.  Pepsico delivered stronger-than-expected results as COVID-19 stockpiling drove demand.  The first test of the consumer showed healthy demand for mostly unhealthy food.  Barclays also provided an update to their CET1 ratio, expecting an increase due to regulatory changes.  The bank also noted that may have headwinds to the CET1 ratio from procyclical effects on RWAs, and reduced transitional relief on IFRS9 impairment.

Oil

Crude prices are dropping ahead of OPEC+ meetings that could show they are ready to start tapering production cuts next month.  Currently the oil producing nations’ pack are cutting production by 9.6 million bpd and that could be reduced to 7.7 million bpd starting next month.  Crude prices softened after Saudi Arabia the lead in delivering production cuts will provide nine buyers their complete requests for allocations next month, while delivering falling short to fulfill the orders for five Asian customers. 

Energy markets remain vulnerable to another selloff and that could help make OPEC+ decide to keep the 9.6 million output cut intact going into August as coronavirus cases continue soar worldwide. The resurgence of the virus in Asia and intensifying spread in the US have so far not disrupted calls for global demand to rebound almost 20% this quarter to the mid-90 million bpd region. 

OPEC+ could justify the designated increase in production as of now, but if the virus continues to surge globally over the next week, the demand forecast will change, and the oil market could swing heavily back into oversupply territory.  With record oil inventories, the 23-nation alliance is anxious to restore lost oil revenues, so it seems that a taper tantrum is inevitable regardless if the output cut is extended by a month. 

Gold

Gold prices are rising but the gains are being kept in check as global equities rise ahead of the start to earnings season.  Gold should continue to rise higher as the record increases in Covid-19 cases worldwide will likely force US and European leaders into strongly signaling more fiscal stimulus is coming.  Over the next month, investors’ stimulus trade will benefit from the agreement of the $840 billion EU recovery fund and over a trillion dollars  more from the Trump administration.   If the dollar’s days are numbered, gold prices should have little difficulty in making that run to record high territory before year end. 

LATAM

The Latin America trade will likely take its queue from China.  Much of the upcoming economic data and central bank rate decisions will do little to impact the overall outlook for LATAM.

Chile

Chile’s central bank is likely to keep rates steady with the next policy move expected to be a hike sometime closer to 2022.  The focus with Chile has mainly been on the Chamber of Deputies approval to allow Chileans to tap their retirement savings.  If the bill passes, this could drag down Chilean stocks, bonds and the peso. 

Colombia

In Colombia, the Colombian peso continues to stabilize despite a constant increase with coronavirus cases. Much attention will be paid to the economic data for industrial production, retail sales and trade figures. Colombia’s recovery will likely be slow, but better than most of its Latin American peers. The Colombian central bank is likely near the end of their pandemic response as the risk of capital outflows grows if they maintain an aggressive stance.  Emerging markets are likely poised for massive spikes in the spread of the virus that is not improving in key countries. If emerging markets go down, that will drag Colombian peso much lower.

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