US stocks declined as virus angst suggests the rest of the year is going to get very ugly for economic activity and as Congress appears nowhere close in restarting fiscal stimulus negotiations. Wall Street pessimism was today’s theme after a steady flow of cautious COVID comments came from Southwest Airlines, Fed Chair Powell, and NYC Mayor Bill de Blasio. With new US coronavirus cases and the death toll heading towards levels seen during the scarier part of the pandemic, expectations are rising that partial lockdowns and some school closings will happen before the holidays. Even as coronavirus vaccine hopes drive optimism for next year’s second quarter, risk appetite will have trouble coming back since the labor market recovery has lost its momentum and will unlikely be greeted with fiscal support until President-elect Biden takes office. Wall Street wants to buy value stocks but they can’t get too excited as outbreaks across Europe and the US will cripple economic activity for the next two quarters.
Jobless Claims
The weekly jobless claims figure came in better-than-expected but remains over triple the pre-pandemic average. A surge in COVID cases throughout the winter will trigger restrictive measures that will certainly produce a spike in jobless claims. The US consumer will start to look a lot weaker with no fiscal support happening for the rest of the year. Investors should prepare to see initial claims rise back above the million level by early December.
Inflation remained steady and will likely not be much of a risk as the pandemic worsens. Until the US economy is comfortably beyond the pandemic, inflation is not a concern.
Treasuries
The Treasury’s record $27 billion in 30-year bonds was nothing to brag about. As fixed income traders buy up the recent rally, demand for these auctions remains fairly steady. Treasury yields will likely remain heavy on the short-end of the curve, but hopes for a return to a pre-pandemic world will eventually mean a much steeper yield curve next year.
Oil
Oil prices weakened following a risk-off trading session, a surprise draw with US stockpiles, and as the US braces for partial lockdowns that will damage an already vulnerable crude demand outlook.
Wall Street hit the sell button, dragging down commodities, as lockdown fears intensify and there are very little chances many Americans in need will see any fiscal support until after President-elect Biden takes office.
The EIA crude oil inventory delivered a surprise build and signaled economic activity is slowing down. Oil prices tumbled after the headline read of a 4.3-million-barrel build, the consensus estimate was a draw of 872,000 barrels. Crude demand will suffer as many Americans will voluntarily restrict their movements. Jet fuel demand has been improving and stockpiles have decreased for a sixth straight week, but that trend can’t last if lockdowns are imminent.
The IEA monthly oil report was rather depressing for the short-term, with another cut to the 2020 global oil demand and downbeat vaccine expectations to the demand outlook in the first half of 2021.
To the surprise of no one, OPEC+ hinted that oil output hikes may not occur for another three to six months. It is getting ugly very fast and OPEC+ needs to be signaling they may deepen production cuts at the November 30th meeting.
WTI crude will continue to play tug-of-war here as the short-term price pressures are countered with strong optimism for a strong pickup in demand as the COVID-19 vaccines become readily available.
Gold
Gold prices rallied as safe-haven flows rushed in after Chicago advised residents to stay home, NYC prepared for school closures, France set a new hospitalization record, and the UK had its highest total of daily infections. Gold pared some gains as the likelihood of a new stimulus package before President Trump’s term ends seems very unlikely since the White House is focusing solely on overturning the election outcome. For a deal to happen, Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi need the situation deteriorate further before either one can blink.
The ECB forum gave good reason to be optimistic of higher gold prices as the stimulus trade will only benefit from further support from the Fed, ECB and BOE over the next couple of quarters. Fed Chair Powell reminded investors that the vaccine news is good for the medium-term, but that the next few months will be challenging. The labor market recovery will struggle as the pandemic accelerated automation and large parts of the economy will change fundamentally.
Now that the vaccine news from earlier in the week has fully been priced in, gold prices should continue to consolidate with the next move likely being higher. The $1900 to $1920 region will remain short-term resistance for gold, but should not pose much difficulty as investors once again become fixated with the coronavirus impact across the US and Europe.
Mexico
The Mexican peso went on a wild ride after the Banxico delivered a surprise hold with the overnight rate. The vote was four to one, with the lone dissenter calling for a 25-basis point cut. The peso initially strengthened but that was temporary as the prospects of a rate cut in early 2021 remain very likely. The Banxico believes they are close to the end of their easing cycle, but they should have one or two more cuts left before they are done. Inflation remains above their target range and while the country emerged from its technical recession, further accommodation will be needed as their major trading partners struggle.