The big story to start the trading week was not the makings of another $500 billion coronavirus bill and definitely not that both Europe and the New York appear past the plateau of virus cases, but with the collapse in oil prices and how the lack of testing supplies will delay reopening of many regions.
The V-shapes recover appears set to become a W-shaped one as this earnings season will continue to deliver a flow of steady suspensions of guidance, dividends and buybacks. Enhance fiscal and monetary stimulus will likely prevent a stock market crash but will not be good enough of a reason to go overweight US equities.
Oil
The complexity of this oil price crash is providing some difficulty for swing traders. The crude demand fallout has put a permanent distaste for anyone to hold oil in the short-term. The WTI crude May contract(expiring on Tuesday) fell over 40% to under $11 a barrel, the lowest levels since 1986. The WTI crude June contract, which is seeing almost 7x the trading volume to the May contract is down over 9%, but still holding onto $22 a barrel level. While other US crude oil instruments are down 7% to $18.40 a barrel level.
The collapse however is mostly a reflection of traders rolling contracts to June as no one wants to take delivery because storage capacity is getting close to being reached. An eye dropping discount of $12 between the May and June contracts reflect all the bearish supply and demand drivers that remain permanently in place.
The outlook for WTI crude beyond the summer has Wall Street eyeing the $30 a barrel level, but this expiration trade issue could happen again next month if we see inventories and pipelines near capacity. US shut-ins are growing and that could be the only thing that prevents the most active crude contracts from crashing.
FX
Oil currencies were battered to start the trading week after the most immediate crude contract had the largest drop on record, a 40% decline below the $11 a barrel level. With oil prices plunging to the lowest levels since 1986, the Canadian dollar, Russian ruble and Norwegian krone all tumbled, but failed to take out last week’s respective lows.
The initial shock to the Canadian dollar and other oil currencies however was short-lived as investors realize today’s crash was more about no one wanting to take delivery of WTI crude contracts and less of any major fresh news on the supply and demand side for crude.
The main trade in FX remains whether safe-havens strengthen if the recent global rebound with risky assets is faded this week.
Gold
Gold prices are rising again as investors begin to question the smoothness in the reopening of key parts of the global economy. Health experts are reminding everyone that reopening too soon could cause more harm and that will probably mean the economic activity rebound will be pushed back toward the end of summer. The amount of stimulus that is getting pumped into the global economy will continue to grow and that should be enough to help gold break above the $1800 an ounce level.
Stocks
Stocks reversed the earlier oil crash driven selloff as investors continue to gravitate to mega-cap stocks. In order US stocks to continue the V-shaped recovery, small caps will need to rally and that seems has little chance of happening. The small-business initiatives are helping but the economy will not return to normal anytime soon as the federal government has failed to embrace the securing of testing supplies.
For US stocks to continue to rally, the Trump administration needs to deliver a 180 in helping states get coronavirus testing.