US stocks extended gains after the ADP private payroll report beat expectations, confirming the narrative that the worst of the economic data is behind us. Two big stories that are taking a backseat with financial markets is the emergence of new coronavirus hotspots and mostly peaceful large-scale protests across the US. Time will tell if the protests will trigger another wave of new COVID-19 cases, but early signs of new cases in Minnesota have some investors concerned. If the mass gatherings continue, some states may see some delays in reaching requirements to continue moving forward with their reopening phases and that will hurt forecasts for the economic recovery.
FX
The recent wave of risk appetite has the dollar falling as hopes are growing that the global economic recovery will continue. The euro has been rallying on hopes that more stimulus from the ECB this week and a fiscal response next month will help drive the economic rebound. The bar is set high for tomorrow’s ECB policy decision and investors should be prepared to be disappointed.
Oil
Oil prices gave up earlier gains after OPEC+ members signaled an early meeting on June 4th won’t happen. The hard talk on compliance could also put the scheduled June 9-10 meeting at risk, which could open the floodgates for production after July 1st.
In May, Saudi Arabia, UAE, and Algeria have delivered their share of production cuts, but Iraq and Nigeria fell short of delivering their part, with 42% and 34% compliance respectively. Iraq and Nigeria, Russia too, are the usual suspects when it comes to cheating with oil production cuts and energy markets should remain optimistic this won’t prevent the producer group to extend cuts another month.
Oil prices will continue to be supported on reopening momentum, but the battle for market share should keep prices rangebound for some time now. The US shale industry is ready to drill more wells if WTI crude stays above the $30 level so it seems unlikely that the Saudis and Russians will throw them a bone by keeping the oil price rebound going.
Looking at the curve, WTI does not seem like it will not trade at the $40 level anytime soon, so that makes the case that big oil will likely be where investors are most comfortable getting their oil exposure.
The outlook for oil over the next several months is complicated because fears of a second wave of infections make predictions of a recovery perilous, expectations are high this could be a bad hurricane season, and if Wall Street starts positioning for the possibility of a Biden presidency, climate friendly policies could make US producers’ life harder, which would drive up oil prices. The big unknown for crude demand is when the coronavirus comes back in the fall, will we see air travel take a big hit again. While the race for treatments and a vaccine could yield something by the end of the year, it seems the medical community is really counting on a solution coming later in 2021.
Oil prices did not get much of boost following the EIA crude oil inventory report. A surprise headline draw and steady decline with US crude production could not take the focus away from falling gasoline demand, a sign the recovery may not be as strong as initially expected.
Crude prices seem vulnerable here as production hopes are falling as Saudi Arabia contemplates pushing back the proposed meeting to mid-June.
Gold
Gold is getting punished as global equities continue to rally as reopening momentum continues. Gold will remain supported by the stimulus trade but this round of weakness could continue a little longer as global economic recovery seems it will be much faster than anyone expected.
After breaking below the $1700 level, gold could soften another couple percentage points, but should see buyers not wait too long to get back in. Gold’s short-term outlook should be supported by the weakening dollar, expectations trillions more dollars of stimulus are likely around the corner, and as too many trade and virus risks remain to the outlook. Steady safe-haven demand will remain as no one has a handle of the risks to the outlook, with most forecasts beyond the summer being written in pencil.
Bitcoin
Bitcoin’s rally above $10,000 lasted just as long as my diet did during this pandemic. Bitcoin had sentiment and improving fundamentals on its side as the coveted $10,000 level was breached, but a key outage with Coinbase, a major exchange did not help keep confidence high that the rally was here to stay. Bitcoin’s earlier growing pains were constant outages and it seems, despite all the recent volatility, major exchanges continue to struggle with major moves.
Bitcoin still has a lot going for it regarding growing interest and falling demand for modern government-backed currencies. The bullish outlook still remains, but the world’s largest cryptocurrency may struggle to significantly break out much beyond $10,000 in the short-term.