EU Close: Modest de-risking ahead of Earnings Season and on US virus concerns, Oil rises, Gold holds $1800 level

Second quarter results will be awful for many companies and Wall Street will now get a clearer picture of how bad the labor market got for corporate America.  The economic recovery is struggling and with the virus not under control in the US, large corporations are likely to announce massive job cuts over the coming weeks.  A lot of businesses are holding back investments to make sure their balance sheets are robust enough and now that the economic recovery seems it will take a lot longer and is no longer V-shaped.

European stocks climbed higher after improving production data, growing optimism EU leaders will reach an understanding next week with 750 billion-euro economic response, better-than-expected preliminary results from BASF, the world’s largest chemical maker, and on positive news with Gilead’s coronavirus treatment and BioNTech’s COVID-19 vaccine.

S&P futures seem to be in no man’s land while Europe looks like it is becoming the next flavor of the month.  Europe looks like it may start to outperform as the coronavirus pandemic will likely drag down the US and many emerging markets for much of third quarter.  US stocks have the Fed’s unprecedented backstop in place, so a massive pullback would require a lot to go wrong to see significant weakness.  Next week, the banks kick off earnings season and if they become overly negative about the US consumer, risk aversion should continue to drag Treasury yields lower.

The dollar is starting to look like it could become a punching bag as the outlook starts to improve for Europe.  Safe-haven flows on coronavirus risks have kept the dollar from freefall, but investors might be trying to get ahead of the Europe trade.

Oil

Crude prices are rising on upbeat COVID-19 vaccine and treatment news, a softer dollar, and after the EIA improved their oil demand forecast for the rest of the year.  WTI crude remains anchored below the $41 level and will likely struggle for any major moves until after Tuesday’s OPEC+ JMMC meeting.  Compliance should be high as OPEC output has plummeted to the lowest level in almost three decades.  Crude prices could slide if OPEC+ signals the oil production cuts will likely taper from 9.7 million bpd to 7.7 million bpd at the end of the month.  The demand outlook risks warrant a discussion for OPEC+ to consider extending production cuts into August.

Gold

Gold prices continue to see strong inflows as the coronavirus hospitalizations climb, investor caution grows for the mega-cap tech outperformance, and on a broadly weaker dollar.  Gold pared some of its earlier gains after the NY open after Gilead’s analysis indicated that remdesivir reduced mortality risk for Covid-19 patients by 62% compared to standard care.

Gold’s short-term outlook remains very bullish as tensions will likely increase next week between the world’s two largest economies, investors brace for large layoff announcements as banks kick off earnings season, and the COVID-19 spread in US and Latin America still do not show any signs of plateauing.

US-China tensions have taken a back seat with this last part of the gold rally, but that could change early next week.  The US is expected to make an announcement next week about the South China Sea that will likely only create more tension for the hotly contested region.

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