The longer-term perspective argument, that stocks will be much higher in the years to come, continues to see equity inflows provide some support in today’s rally. The stock market rally of the past few weeks has been done in four phases: The first phase was the monetary policy actions by the Fed and friends, the second was the fiscal response, the third one is the optimism that the virus is peaking in global hot spots, and fourth driver is speculation the US economy could reopen within 4-8 weeks.
Considering how slow China’s recovering is becoming, it is hard to argue that the US and European economies will recover quickly. If China is only halfway back up and running, patience will be needed to see how the rest of the world will turn out. Europe is a few weeks behind China, and the US is a couple weeks behind Europe. The next few weeks will provide further clarity on how bad will this global recession become and that should eventually derail this weakening stock market rally. The fiscal and stimulus responses have been strong in the US, but the implementation and shortfalls will likely see a good part of the economy remain in shambles. The current risk-on rally may continue another day or week, but ultimately if this market crisis plays out like the others, a massive selloff should be brewing. A W-bottom could play out and stocks over the next few weeks could see a retest of the March 23 lows.
Oil prices are settling around the middle of its two-week range. Oil prices are well off the session highs after the weekly EIA report showed inventories delivered a 15.2-million-barrel build verse an estimated build of 9.7 million barrels. Crude exports plummeted 10% as coronavirus lockdowns continue to destroy demand. The largest build since 1982 will put some pressure on oil prices, but also on US shale as storage capacity concerns will force them to limit output.
Oil prices are still fairly supported ahead of the upcoming OPEC members and allied producers meeting. While everything on the demand side of the equation for oil prices screams for prints well below $20 a barrel, with global storage tank capacity nearly reached, nobody wants to be short ahead of Thursday’s meeting. Expectations are growing for the OPEC ++ meeting to be a “buy the rumor, sell the news” event. Russian might talk a big game, but they desperately want production cuts to be shared across the board. Russia oil is pipelined constrained, roughly thousands of miles, and they run the risk of their tight reservoirs getting shutdown and never coming back. Russia should not be the difficult player in tomorrow’s meeting, that role will fall on the US. The US has dominated production over the last decade, more than doubling production while the Russians and Saudis have posted modest gains. The last three years of OPEC + production cuts pretty much saw the US take almost 5 million barrels of market share. The base case is still that a deal will get done or that talks will be extended, and that is pretty much only thing keeping oil prices supported.
Gold prices appear to be consolidating as investors ponder how much longer can the stimulus trade keep risky assets supported. Some optimism is brewing on that many countries have started flattening their coronavirus curves, but it will be a couple more weeks before we can see if any plateaus are short-lived.
Gold is still the preferred metal of choice, but that will start to change once confidence grows that the economy will reopen. Gold in the short-term could outperform against silver and copper but that should change if the coronavirus outbreak in the US begins to turn around after a terrible week for deaths.