Mid-Market Update: Markets try to shake-off bumpy start, Main Street Facility Opens, Oil higher on Iraq, Gold pares losses

Wall Street is off to a bumpy start to the trading week as investors grapple with a slew of coronavirus concerns globally, stalling reopening momentum, and expectations the Trump administration will be done sending stimulus checks after July. 

Investors are become unsettled now that China appears to be showing signs that they are midst of a second wave of coronavirus cases.  A resurgence of the coronavirus in China means the rest of the world could see a similar scenario in the coming months.  The COVID-19 playbook for the US was supposed to follow China, but now it seems the US may see an extended first wave.  Beijing is reinstating some restrictions after 79 new cases emerged over the past four days. Beijing was thought to be done with battling the virus as they had two months of smooth sailing without any new infections.   

The US is still in the first wave of the coronavirus as it expands deeper into the country.  With over 20 states seeing increases with new cases, expectations are growing that lockdown measures will return or intensify as many of these outbreaks are not under control. 

Economic activity will not rebound in a V-shaped way, as ongoing hotspots keep a large part of the country stuck in the stay-at-home economy.  Businesses will brace for an extended first wave and likely skeptical to continue rehiring and investing in their businesses.  The looming risks of a second wave in the Fall will continue to put pressure on the outlook. 

The Chinese are better at social-distancing (wearing masks) than Americans and if they are having a second wave, it only seems inevitable that the US will struggle significantly against the virus as they are not able to isolate. 

Despite virus concerns US stocks are off session lows as investors continue to believe these markets are supported by central bank and fiscal stimulus, and that this round of risk aversion might only trigger a 5-10% pullback.  The Fed’s long-awaited opening of the Main Street Facility is here and equities continue to get a boost on any news on programs that support small and mid-size businesses.  Businesses will be able to borrow up to $600 billion through three facilities. 

Oil

Oil prices are mirroring US equities as lingering virus concerns weigh on the outlook for crude demand.  Crude prices tumbled earlier in Asia on concerns Beijing is having a resurgence of the pandemic, casting doubts that the Americans and Europeans will see much of break from the virus as it is expected to be back this Fall.  If the coronavirus continues to see a scattered number of new hotspots, global air travel will not return to pre-pandemic levels anytime soon. 

Oil’s tentative rebound from the lows came from reports that Iraq was living up to their end of the OPEC+ production cuts.  Baghdad’s signal to cut oil exports by at least 15% in June helped oil recover most of the virus concern driven selloff.  WTI crude is likely to struggle to break out of its $34-40 range anytime soon. Renewed optimism that OPEC + production cuts could remain in place if we see second wave concerns intensify have oil prices refusing to enter freefall. 

Gold

Some investors attributed gold’s softer start to solely to a “strong dollar”, but it seems it was also driven lower on concerns the Trump administration is determined to end the extra $600 for unemployment benefits in exchange for a return-to-work bonus.  The stimulus coming from the US government in July is uncertain and likely to be a partisan battle that will not help the outlook for the never-ending stimulus trade.

Gold continues to attract traders ahead of the $1700 level and should see this week’s wrath of central bank decisions support calls that the global stimulus punchbowl will continue to grow.  The BOJ, BOE, BCB, and Russian central bank will all do their part in delivering more accommodation and that should help gold alongside risky assets. 

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