US Mid-Market Update: G7 Rate Cut Domino hopes, Biden Rally, BOC delivers as markets await the rest, Oil mixed on OPEC hopes and inventory data, Gold rally pauses

The financial market rollercoaster ride continues as risk appetite seems to be focusing on global stimulus bets, former-VP Biden’s strong Super Tuesday, and on hopes that stocks are closer to a bottom.  The key driver for markets will remain that world’s largest central banks will put easing on steroids and governments will deliver a wrath of fiscal stimulus. 

After a good night of sleep, I’m taking back my criticism of the Fed’s decision to cuts rates yesterday and not wait until the March 18th meeting.  The Fed knows that you can’t cure the virus with a rate cut or make people go to a soccer game.  The Fed had to act for the rest of the world. The Fed rushed to cut rates by 50-basis points, so other central banks could follow in line and to prevent the dollar from appreciating too far.  The Fed also saw a bit of a liquidity problem beginning in the financial system.  The repo market stress was building as the bond market was screaming for the Fed to cut rates.  Further rate cut bets will continue to put pressure on the repo market and this will only force the Fed to grow that balance sheet even further. 

BOC

The Bank of Canada decided to follow the Fed’s lead and cut rates by 50 basis points and signaled they are ready to adjust rates further if needed.  The BOC’s decision tells Wall Street that we should see a domino effect of global easing from the rest of the G7 central banks.  The BOE could deliver an emergency 50bps cut later this week with the ECB could following that up next week with a 10bps cut at their March 12th meeting.  The BOJ is running out of options with rate cuts and will likely try to rely on fiscal stimulus. 

Biden

Super Tuesday has narrowed down the Democratic field to a Bernie vs Biden matchup.  Biden did much better than expected and secured several wins across the country.  One of the biggest risks to the outlook for US stocks was having Bernie Sanders (and all his regulatory threats on tech and healthcare reform) win the presidency, but last night showed many Democrats are ready to go all-in with Biden.  Bloomberg had a strong outing but was unable to overcome Biden’s strong momentum that stemmed from endorsements from Buttigieg, Klobuchar and O’Rourke.  Bloomberg’s endorsement of Biden should show that Biden will have the financial advantage over Sanders and eventually President Trump. 

Wall Street will be happy to see either President Trump re-elected or a Biden Presidency. 

Oil

Oil prices were riding high on OPEC + expectations.  West Texas Intermediate crude kept most of its gains after the EIA inventory report showed a smaller than expected build with stockpiles.  Despite all the demand destruction for crude, US production reached another record high at 13.1 million barrels a day.  The US is cleaning house with rising exports and will continue to try to take advantage of disruptions and quarantines all over the world. 

As the OPEC + meetings near, the Russians and Saudis will continue posturing. WTI crude sold off after an OPEC delegate said Russia proposed the OPEC + maintain the current cut levels into the second quarter. Expectations are still high OPEC + will deliver this week. Russia is just trying to make sure they get the smallest share possible of 1 million barrels in proposed cuts.

Gold

The gold rally is taking a break and waiting to see the remaining wrath of global easing.  Gold will likely need to see a couple more emergency rate cuts from the other G7 central banks and the assemblance of a fiscal response before we see traders take prices towards the $1,700 an ounce level. 

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