US Open – Virus Optimism Grows, Powell Day 2, Feel the Bern, Oil claws back, Gold flutters

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It seems risk appetite is here to stay as optimism grows that the coronavirus, COVID-19 is showing signs of slowing down and that the Fed will deliver another rate cut this summer.  While scientists will clearly argue it is too early to say with confidence that the virus is nearing its peak; expectations are growing that spread of the virus is slowing and that China will be able to fulfill their goal of doubling GDP and incomes in the decade to 2020.  Chinese Academy of Social Sciences (CASS) vice head Cai Fang noted that a growth rate of 5.7% would be enough for Beijing to come through with their promises. 

Wall Street is banking on a strong rebound in China and that will be supported by the government’s use of every policy tool possible.  The global growth rebound story will be led by Chinese stimulus and that playbook will likely hold up if coronavirus impact on China is contained to mostly the first quarter.

Bernie

Wall Street seems convinced that if Bernie Sanders wins the Democratic nomination, President Trump will have an easy path towards getting re-elected.  Yes, it is way too early to call it for Bernie, as Iowa and New Hampshire represent a miniscule part of America, but these early results are eye-opening to how weak former-VP Joe Biden is performing.  The argument that America will not go socialist and support Bernie may be flawed as millennials have become largest living generation and the largest age group in the workforce.  If Bernie does get the nomination, Wall Street may need to start pricing in a small probability that he will somehow end up in the White House.  The bullish forecasts by most of the analysts on Wall Street will not likely be adjusted, but it could trigger some defensive posturing as we near the election. 

After Super Tuesday, democrats will have a clearer picture as who will be the nominee, but as it stands, Sanders and Buttigieg are off to great starts.  In this horse race that is the Democratic nomination, Amy Klobuchar is gaining strong momentum, while Biden and Warren seem to be “off the pace”.  The next primaries will become very interesting as former-New York city mayor Michael Bloomberg will participate.  Bloomberg is a wildcard and could gain fast interest as a solution for Democrats who are fearful that a Sanders nomination is nearing. 

Powell

Day two of Fed Chair Powell is unlikely to deliver any new bombshells.  Yesterday, Powell reiterated he is bullish on the US economy and that Fed is on high alert with regards to the economic impact the coronavirus may have on the US economic outlook.  Wall Street is convinced that Fed will be there for them.  If the outlook deteriorates or deflationary pressures emerge, the Fed will cut fast and aggressively.  Fed fund futures are showing just over a coin flip chance that the Fed will cut in July, with the odds fully pricing in a cut by the end of the year. 

Powell knows he will need fiscal policy support during the next downturn and is making sure Congress has been warned.  The Fed will do whatever it takes to avoid becoming Japan and suffering long-standing deflation and that is why much of Wall Street expect the Fed’s next move to be more rate cuts. 

Oil

Oil prices are surging as the daily number of cases of the coronavirus appears to be slowing down.  Crude got its mojo back as expectations grow that economic impact will be somewhat contained to the first quarter of the year.  Confidence in making the call for the return of normal travel and trade in China will take a few more weeks, but energy markets might not wait that long to price that in.  Expectations are pretty high the coronavirus will only be a temporary hit on global growth, but it will likely take a lot longer for a return of normal travel and shipments in and out of China. 

Excess global supplies might not get in the way of this crude rebound.  Energy traders shrugged off last night’s API oil report that showed another strong build.  Expectations are for the EIA weekly crude oil inventories to post another 3-million-barrel build. If oil prices remain resilient despite another build, oil could continue climbing higher.

The coronavirus crisis put triggered downward pressure that took oil prices deep into bear market territory.  If optimism continues that the coronavirus peak is near, WTI may eventually settle between the $55.00 to $60.00 range. 

Gold

Gold prices appear stuck in a very tight range as investors rush to stocks amid optimism that the pace of number of daily cases of the coronavirus is dropping.  Typically, during a strong risk-on move, gold prices would fall, but expectations are also high that global central bank stimulus will remain in place this year.  The PBOC is prepared to “throw the kitchen sink” and every stimulus measure possible to make sure they keep GDP growth to at least to 5.7% this year.  Beijing is determined to fulfill their goal of doubling GDP and incomes in the decade to 2020 and everyone will soon learn that you “don’t fight the PBOC.” More stimulus is also expected to come from the world’s largest economy as Fed fund futures are also pricing in another rate cut this year. 

The other key catalyst for gold could come if we see the global rebound story return and a stronger outlook for Europe leads the way for a stronger euro.  Europe’s recovery is key for the call for a weakening dollar and that should only help drive gold prices higher.