Mid-Market Open: Lots of good news, 2009 all over again, Oil market nears balance, Gold drops

Traders are returning from a holiday weekend with no shortages of headlines.  The good headlines focus on further progress in the race for a coronavirus vaccine and the reopening of the global economy.  The bad ones focus on the new “cold war” between the world’s two largest economies and rising coronavirus cases in 18 US states.

Reopening

Much of today’s rally is with the global reopening theme.  Japan formally ended their National State of Emergency for remaining prefectures.  In London, PM Johnson announced that non-essential retailers will be able to reopen in England from June 15th.  Germany is eyeing a lifting of travel warnings for 31 European countries from mid-June and social distancing rules could be eased from June 29th. Prospects for continued improvement with economic activity will only grow as the global reopening process continues.

Merck

Merck also delivered multiple doses of good news with development plans on both a treatment and vaccine against COVID-19.  Merck’s triple threat of press releases this morning reminded Wall Street that the pharmaceutical companies are doing whatever it takes to win the race for a vaccine and treatment against the coronavirus.

Cold War/Second peak

The US-China relationship has all the makings for a new “Cold War” but for now, no one is buying that this will disrupt the frenzied buying that is taking place with stocks.  The other big concern for many investors is the uncertainty that a second peak could be just around the corner and that could disrupt many reopening efforts.  The pictures of mass gatherings over the weekend have many concerned the plateauing of coronavirus in the US might not last.  Cases are starting to rise across a dozen states, but the total newly confirmed cases is still below 20,000 a day.

The stock market rally is drawing many comparisons to 2009 and that should scare investors away from shorting it.  The Fed and friends’ efforts have pumped enough stimulus into the global economy that risky assets will remain supported for the rest of the year. Eventually the balance sheet and ridiculous debt levels will come home to roost, but that story is not a 2020 one. 

The S&P 500 surge over 3,000 crushed the souls of many short sellers.  The stock market should continue to climb higher, but once this short-covering move is over, range trading should settle in place.  The Nasdaq futures were at one point this morning just 1.6% away from the February all-time high.  Tech will lead the way, but as market breadth improves the Nasdaq will need to sag.

Oil

Crude prices continue to benefit from a relative smooth reopening of the global economy and as the oil market appears on target to reach balance next month.  Tanker prices are coming down to earth as production cuts continue to ease the need for finding places to store crude.

WTI crude is starting to brush up against critical resistance from the breakaway gap that took place when the Russians and Saudis failed to reach a deal and tentatively ended the unofficial partnership that was OPEC+.  The curve suggests the oil price rebound has run its course.  The battle for market share will likely see non-compliance with production cuts after the market reaches balance next month.

If global demand continues to improve, the Russians will likely start ramping up production and I think everyone is expecting that.  The crude demand outlook should continue to improve, but the supply side will continue to look dicey.

Gold

Gold’s upward trajectory remains intact, but today’s wrath of positive news has it looking very vulnerable for a retest of the oil-driven commodity price April 21st low.   Too much good news on the virus front, reopening momentum, and roaring Nasdaq, has gold prices reeling.

For gold, risk appetite needs to wane a little for it to get its mojo back.  If signs of rising cases continue in the US, the reopening of the economy is unlikely to continue to go as smoothly as it has started.  Gold will benefit on rising stimulus bets when economic data confirms the US consumer is battered and as many jobs become casualties to a changing economy.  Gold needs financial markets to become frustrated again and that should not take long to happen.

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