US Open – Regional Lockdowns Expectations, Stress Tests, Oil rebounds, Gold consolidates

Equities are trying to continue their painstaking climb up a rocky wall of virus uncertainty, supported by global fiscal and monetary stimulus but somewhat limited on growing expectations regional lockdowns will limit the economic recovery trade over the next several weeks.  Deterioration in the US outlook and the Fed’s latest bank stress test results are dragging risk appetite.  Tech stocks are this week’s best performer as Wall Street continues to prefer growth stocks or value ones. 

US stocks are still holding up despite the biggest-ever surge in coronavirus cases, as expectations remain high that the country might face regional lockdowns and not a state-wide reversal of reopening plans.  As testing expands, many investors will focus on increasing hospitalization rates across the south and west coast. 

Stress Tests

The Fed’s stress test cast a cloud of uncertainty after banks will have to resubmit capital plans later this year.  The Fed also put a limit on dividend payouts and forbid third quarter share buybacks.  Investors will need to prepare for another review most likely in September.  Wells Fargo looks vulnerable for a dividend cut, while Goldman Sachs and Morgan Stanley posted the steepest drop in capital levels, as they heavily depend more on capital markets.

Oil

The oil demand recovery story was dealt a blow this week after the US registered the biggest-ever jump in coronavirus cases, suggesting many states may have to visit regional lockdowns soon.  States will do their best to avoid a complete reversal with reopening phases, so the economic recovery should not complete stall out. 

WTI crude has not been able to do much after capturing the $40 level and seems destined to continue to consolidate between the $35 and $42 level over the next couple weeks.  The rapid demand rebound is not happening, but stimulus efforts, pauses in reopening of businesses, improved treatments for the virus are limiting the downward pressure on crude prices. 

Oil prices are slightly higher in early trade mirroring the broader fluctuations with US equities. 

Gold

After nearly testing the $1800 an ounce level earlier in the week, gold prices are consolidating as the US dollar firms up.  Gold will continue to see strong support as the coronavirus situation deteriorates globally and as central banks and governments will continue to pump in more stimulus to avoid strains to the financial system and to salvage as many jobs as possible. 

Gold prices (in dollar-terms) seem destined for record high territory as the latest spike in COVID-19 cases will see a much slower economic recovery that will keep the stimulus trade going strong.  The global recession might be deeper than expected, but a scramble for cash (extreme risk aversion forces investors to sell their gold positions for cash) will not likely take place for gold given the optimism with eventual rebound and breakthroughs on the treatment and vaccine front. 

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