Mid-Market Update: Still Overextended, Decoupling from China, Apple and Tesla pain, Commodities crushed again, Dollar surge, Treasuries tumble

US stocks resumed their slide, with tech leading the plunge as investors scramble for the sidelines for a plethora of reasons: US-China tensions boil, high fliers such as Apple and Tesla are still overextended, and on fears that the US and world are about to see the worst from COVID-19.  The great rotation into cyclical stocks is not happening yet which means further pain could hit the major indexes.  Tech pain continues but when you consider how far the Nasdaq has rallied since the March low, it really isn’t that bad. The tech selloff could still drop another 5 or 10% before institutional investors start to scale back in.

Decoupling from China

The headlines are coming in fast and they all point to a further boiling of tensions between the US and China.  Yesterday, President Trump suggested ‘decoupling’ the US economy from China and reiterated massive tariffs from the US.  Investors are no longer pricing calm trade waters leading up to the election as Trump is not easing up the hard rhetoric even as stock market selloff continues.  After this morning’s pain, the Trump administration announced a ban on imports from three Chinese companies and signaled six more firms could be targeted as they try to clamp down on allegations on forced labor.

COVID Death Toll forecasts

The post-pandemic world is not here quite yet and new forecasts from the Institute for Health Metrics and Evaluation at the University of Washington might keep a lid on any relief rallies until a couple vaccines get the greenlight.  The model by IHME forecasts the US could have more than 410,000 deaths by the end of the year as the winter wave of the coronavirus hits.  If the country aggressively eases COVID-19 restrictions and people fail to social distance and wash hands, the death toll could be as high as 620,000 deaths.

Apple and Tesla pain

Investors looking for an excuse to sell Apple jumped all over Goldman’s reiteration that growth potential doesn’t appear strong enough to justify the stock’s valuation.  Apple could still fall another $8 before testing the first significant technical level that would likely attract many algos and high frequency trading systems.

Tesla is getting picked on today after failing to get added on the S&P 500 index and as Nikola and General Motors form a strategic partnership.  Concern over Tesla’s profitability metrics, momentum in China, and rising competition will weigh on the bull case over the coming quarters.

Oil

Oil prices are collapsing as the global market selloff sends the dollar higher and after price cuts from Saudi Aramco and Adnoc confirm the demand recovery is struggling.  It is getting very ugly in the energy space as the revised base case scenarios for a return to a pre-pandemic crude demand levels keeps getting pushed back.  The latest IHME forecasts (see above) could suggest large pockets of advanced economies will see a return of shutdowns, which will cripple calls for reopening momentum to continue.

WTI crude won’t stabilize until the stock market panic eases, which could mean prices will hang around the mid-$30s for the next couple of weeks.

Gold

Gold is down again but when you compare today’s pain to the rest of the commodities, it is starting to look constructive.  A stronger dollar and broad market selloff that continues a scramble for cash was unable to send gold below the $1900 level and that could be a good sign for bullion bets.  Decoupling from China and COVID-19 winter worries for the north are spurring demand for safe-havens and that should lend some support for gold.  Gold by no means is in the clear and the $1900 level will be key to hold this week.

Gold is likely to get a boost from the ECB later this week as the euro area’s recovery has both softened and as downside risks grow, warranting more action before the end of the year.  Gold traders need to remember that after this hurricane of pain a rainbow will come.  The stimulus trade is intact for gold as uncertainty to the global outlook brews. Gold is still likely to remain rangebound between $1900 and $2000 this month.

FX/Treasuries

The dollar is not ready to die just yet.  Risk aversion is driving the strong demand for US Treasuries, which is keeping the dollar rebound intact.  The stock market selloff is sending yields sharply lower as the 10-year Treasury yield falls 5.1 basis points to 0.667%.  The dollar is benefiting from Brexit worries, safe-haven flows from escalating US-China tensions, and concerns the winter wave of the coronavirus might be worse than initially anticipated.    The dollar weakening will eventually continue, but for now it will have to wait.

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