Wall Street’s motto is “Just give me any reason to buy please!” Yesterday, US equities roared higher after the Fed delivered on their promise to buy corporate debt. Today’s stock market surge started with the news that the Trump administration is readying a $1 trillion infrastructure proposal to propel the economy. Traders may have forgotten that earlier this month, Trump administration officials were already discussing a infrastructure package to be included in a $1 trillion stimulus bill. Risk-on was capped off by a shockingly strong retail sales recovery in May. The control group subset of retail sales which excludes food services, car dealers, building-materials stores and gas stations, roared back and is now back to pre-pandemic levels. Haters of this economic rebound were left scratching their heads following this retail sales beat. Skepticism slowly creeped back after industrial data showed the recovery in both production and manufacturing may be lagging.
Powell
Fed Chair Powell’s testimony was the same old story financial markets have come to love. Powell reiterated rates are on hold near zero until economy is on track and that there is significant uncertainty about timing and strength of the recovery. Investors focused on his comments with recent data points that showed stabilization and signs of modest rebound. He remained downbeat and noted that a full recovery is unlikely until health confidence is restored.
The Powell put remains confidently in place and will only come to doubt if we see a stronger broader recovery. The S&P 500 has already erased roughly 70% of last week’s precipitous drop but is starting to shed some gains after global updates show the coronavirus is still intensifying. In Florida COVID-19 cases jumped 3.6%, much higher than the 7-day average of 2.5%. Texas virus hospitalizations jumped 8.3%, the biggest surge in two weeks. Global equities pared gains after Beijing raised their COVID-19 emergency response one notch to Level II. A Beijing city official advised people to not leave Beijing unless necessary, also shutting down schools, however stopped short of asking factories to stop work.
Risk appetite can’t survive another lockdown in China, because that likely means both Europe and the US are nowhere near the end with their battles with the coronavirus. The stimulus trade is intact, but virus uncertainty seeping back to China will prevent US equities from recovering all of last week’s losses.
Oil
Oil prices are quickly giving back growth optimism gains after Beijing raised their COVID-19 emergency response one notch to Level II. If China goes back to lockdown mode, the crude demand recovery could see oil prices fall 10%. Travel restrictions seem like they are just around the corner for Beijing and that will cast doubt that air travel demand will return strongly anytime soon.
Oil prices are very vulnerable here as a potential lockdown in China would mean the crude demand recovery story was thrown out the window. Europe and the US will see lackluster economic recoveries if second wave concerns remain elevated. The oil demand contraction for 2020 is about to get worse if Beijing was not successful with their emergency response to the virus. A second wave in Beijing was not on anyone’s radar and that will disrupt crude demand recovery outlook for the second half of the year.
Gold
Gold prices are turning positive after coronavirus cases data from Beijing to Florida showed the path to recovery will be much choppier than anyone expected. Gold prices were initially down on optimism the recovery was already accelerating following a strong retail sales rebound and after the Trump administration laid out more details of the next $1 trillion stimulus proposal.
Gold traders remain frustrated that despite significant fundamental shifts to the outlook, prices remain stuck in the $1680-$1750 range. The China second wave risk however could be a gamechanger that allows gold to finally break above $1750. The stimulus trade remains intact for gold and if the outlook deteriorates a little, prices should not struggle for the $1800 level.