US Open – Stocks rallying again, more virus record highs, Oil’s glut, gold declines, LATAM in focus

US stocks are trying to keep the rally going for a fourth consecutive day even as six states report record new coronavirus cases.  Reopening plans in Arizona, Florida, Nevada, Oklahoma, Oregon, and Texas, are not going well after each state posted a record high with new cases.  Beijing’s second wave and the escalating situation on the Himalayan border between India and China is also doing little in denting this well supported stock market. 

Yesterday, risk appetite was roaring after a historic rebound in retail sales, renewed infrastructure talks, and after Dexamethasone, a cheap steroid drug, showed a study that reduced death rates by around a third among severely ill COVID-19 patients.  The late morning selloff stemmed from Fed Chair Powell’s call for further fiscal policy support to limit the economic damage of the COVID-19 pandemic.  Wall Street is skeptical that partisan politics will delay the infrastructure stimulus package, and that seems to be what the economy needs in the short-term.

This stimulus supported market however is starting to show chinks in its armor, as doubts grow that the EU will make a decision with the recovery fund this Friday, possibly needing weeks, while the US government will struggle to get an infrastructure deal this side of the November Presidential election.     

Oil

Oil prices can’t shake oversupply concerns and short-and-medium term demand weakness.  The API report suggests that oil stockpiles are staying leaving their record highs anytime soon.  US crude stockpiles rose by 3.86 million barrels last week, down from the 8.4 million build from the prior week. 

The crude demand outlook will take a hit as negative growth rates are likely to come in worse than previously estimated.  The great lockdown across the globe has lasted a lot longer than consensus expectation and while hopes are high for treatments/vaccines, a complete return of normalcy in travel and trade is nowhere near. 

China’s second wave of the coronavirus cancelled more than 1,200 flights and will likely see harsher restrictions to prevent the outbreak from spreading further outside of Beijing.  China seems they have a handle on the second wave, but the immediate hit with economic activity and travel will keep prices heavy. 

Crude’s supply and demand fundamentals are turning negative in the short-term and after WTI crude’s historic rebound hit a wall with the $40 level, prices should continue to consolidate back towards the mid-$30s. 

Gold

Gold markets can’t make up their mind.  The stimulus trade has done wonders for global equities but lately it seems little for gold prices.  Gold’s path higher has been battling improving economic data and potentially major breakthroughs on treatments of COVID-19 and high hopes for a vaccine.  Escalating tensions between India and China, the Koreas, and the US-China trade war should provide some underlying support in the short-term.   

Gold remains in consolidation mode but the downside risks to the global economy and expectations for further stimulus should help prices ultimately accelerate much higher. 

LATAM

Chile’s central bank prepared fresh monetary accommodation for what will be the worse economic downturn in 40 years.  The Chilean central bank is unleashing further help to credit lines and launched an asset purchase plan.  Interest rates were kept steady at 0.5% for a second consecutive meeting, which matches the low seen during the global financial crisis.  The bank extended their credit line facility to $16 billion.  Chile’s central bank will purchase as much as $8 billion in assets over the next six months and expectations should be high that they will mirror the Fed in buying corporate bonds and other loan-backed securities. 

The BCCH plans to continue providing significant monetary stimulus for a prolonged period.  With such a negative economic outlook and lingering coronavirus risks, the central bank seems likely to remain aggressive with accommodation and that should coincide nicely with the Chilean government’s new $12 billion stimulus package. 

The Chilean peso has been rallying following the government’s robust stimulus package announcement and will likely see further support from the central bank that will maintain elevated monetary stimulus for a prolonged time. 

Brazil

Brazil’s central bank will need to deliver another massive rate cut, the ninth straight one in an extended easing cycle.  Developments on fiscal or virus front are forcing the BCB to be much more aggressive.  Brazil posted a record 34,918 daily cases of coronavirus, as the crisis worsens. Transmissions are not slowing down and the economic outlook will refuse to be constructive until the virus shows signs of easing. 

The BCB indicated that this rate cut will be the last one, but outlook has only gotten worse since the last policy meeting.  The central bank will likely need to revise their forward guidance to signal more rate cuts are likely coming. 

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