US equities declined following downbeat outlooks from some of the largest US banks and after record plunges in both retail sales and the NY Fed’s Empire Manufacturing survey. Now that we are finally seeing data that shows the COVID-19 impact to the US economy, investors are having a hard time becoming optimistic that economic activity will come back this quarter. Unless markets see a medical breakthrough or a stronger drop-off in new cases, the rebound from last three weeks will end up being a bear-market rally, thus raising calls for a retest of March 23rd low.
Oil
It is getting very ugly again for energy markets. There was no shortfall in bearish oil drivers today. The EIA report gave a reminder that stockpiles are still ballooning and that the entire world continues to fill up whatever storage capacity remains. The worst US retail sales reading on record should weigh on sentiment as virus containment measures in the US will remain in place at least through May. The bears are back after both Brent oil and WTI crude fell below key technical levels, the $30 and $20 a barrel level respectively. Crude prices slumped earlier in the session after IEA reminded energy traders that the historic OPEC + pact can’t cover the coronavirus pandemic demand shock.
This was a pretty bearish EIA weekly crude inventories report. US stockpiles surged to a record high of 19.25 million barrels, much higher than the consensus estimate of 12.0 million and a large jump from the last week’s 15.2 million build. Many are ignoring the decline in crude imports, inflows dropped to lowest levels since 1996, since American businesses have locked in purchases of Saudi Arabian crude that will probably arrive over the coming weeks. US crude production was only down 100,000 bpd and exports jumped to a record high as many Asian nations attempt to fill up their strategic reserves.
Oil prices could easily fall a few more dollars in the short-term. A bottom for oil prices may only be in place when we start hearing more about voluntary production cuts by big oil producers and after several of the smaller US shale producers go under. Another oil price crash could be brewing, but a bottom won’t be in place until most of the energy space curtails production.
Gold
Gold prices are softer today as the dollar firms up following a strong wave of risk aversion. Gold’s rally is taking possibly a timeout here, but the bullish outlook appears to be firmly intact. Gold could easily see a pullback towards the $1700 an ounce level before it makes another attempt at cracking the $1800 level and then possibly test the record highs made in 2011.
Mexico
The Mexican peso appears to be stuck in a tight range despite a recent wave of dollar weakness. It is difficult to get excited about investments in Mexico as the economy remains in shambles and the government has yet to deliver any meaningful stimulus programs. Mexico President Lopez Obrador will eventually cave and deliver tax cuts and bailouts. The economy is not in a “transitory crisis”, but in grave danger. Mexico will see two consecutive years of negative economic growth, something that has not happened since the Great Depression.
Mexico peso seems destined for further pain as they will have one of the sharpest contractions in LATAM. The Mexican economy was already in trouble before COVID-19 and now it seems inevitable for the worst-case scenarios to happen.
Colombia
Colombia’s central bank unveiled new stimulus programs to bolster up the strongest economy in Latin America. Permanent liquidity along with additional bond purchases will be received by Wall Street. Colombia’s efforts in battling the coronavirus are somewhat comforting investors. President Duque will try to open some parts of the economy, but “not social life” after the national lockdown ends on April 27th.
Colombia’s Colcap Index will remain an attractive long-term investment but right now lower oil prices, further sovereign downgrades and a messy fiscal situation could keep it vulnerable.
Markets are giving a pass on both the February readings of manufacturing production and retail sales, both which saw the economy was peaking just before the coronavirus pandemic happened.
Brazil
Brazil’s economy is in desperate need of stimulus and the pressure is on Congress to allow the central bank to buy corporate bonds. President Bolsonaro’s handling of COVID-19 has been very poor. Any delay in passing spending bills or fixing issues with the newly created credit lines could provide pressure on the Brazilian real.
Bitcoin
Bitcoin continues to grind lower as sentiment has taken for the worse. Bitcoin will not trade on its own fundamentals, but on the overall risk appetite from financial markets. Doom and gloom outlooks might trigger another scramble for cash that will punish the entire crypto-space. Bitcoin was already looking vulnerable on a technical basis, so if the risk averse feeling persists, a massive selloff could be brewing.