A Quiet Start

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The gold market is off to a quiet start as the new trading week gets underway. The yellow metal is up about $1.80 per ounce in early afternoon trade as stocks see renewed selling pressure while crude oil plunges. The oil market, in fact, traded for below $1.00 per barrel for the first time ever, and the May contract, which expires tomorrow, has moved to the lowest levels since the contract first began trading in 1983.

 

The hammering of crude oil is a mixed bag in the eyes of metals traders. The extremely low price, which is a result of a massive supply glut, is unnerving and fueling investor anxiety. The lower price, on the other hand, could be viewed as deflationary and could also cause worries, especially if prices were to maintain such low levels for a period of weeks or months.

 

Crude oil trading for less than $10 per barrel sems unlikely at this point, however, as the next contract for June delivery is still maintaining trade over $22 per barrel. If the COVID-19 crisis continues, however, demand for gasoline and oil could remain very low and crude oil could potentially sink further, keeping front month prices under $10 per barrel.

 

Unless there is a significant increase in demand for crude, supplies could continue to outweigh storage capacity. The current state of U.S. storage is full, and any subsequent oil could need to be disposed of by producers. May oil futures have turned negative in afternoon trade, moving lower to -$10 per barrel.

 

The onslaught in crude oil today has stock investors playing defense. The benchmark Dow Jones Industrial Average is down some 400 points for a decline approaching the two percent level. Another wave of significant selling in equity markets should not be surprising, however, as the market is now only about 15 percent below all-time highs made in February. The pace of the stock market’s recent rebound has puzzled many investors. Numerous analysts have warned against getting sucked into a market that will likely roll back over, and some have suggested that the lows have not yet been reached.

 

Heightened stock market volatility, heavy selling, zero percent interest rates and massive QE could all keep the gold market well supported in the weeks and months ahead. The bulls have a solid technical advantage currently, and gold prices are in the midst of a strong uptrend that could take prices back to previous all-time highs near $2000 per ounce or beyond. Support may be found in the $1675 region, while the bulls need to overcome resistance in the $1800 area.

 

In other news, recent data from the CFTC may bolster the bullish case for gold. A recent Commitment of Traders report showed that bullish positioning in the gold market by money managers has not changed much this month. The buying, the report showed, has been largely attributed to longer-term investment vehicles, such as ETFs, and could potentially point to rising long-term demand for the metal.

The Week Ahead in Gold

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The same stock market volatility that has been seen in recent weeks looks set to continue. Stocks lost ground on Monday but have thus far rebounded strongly on Tuesday. As stocks continue their back and forth price action, the gold market has maintained its steady climb higher.

The gold market is now approaching the $1800 level, a target cited by numerous analysts as the next potential stop for the yellow metal as it heads back towards previous all-time highs near $2000 per ounce. The metal is seeing benefit from several factors, including equity volatility, a weaker dollar and ongoing geopolitical as well as economic risk.

Although the infection rate for COVID-19 may be at or nearing a peak, it is still too early to tell just how much damage the virus has done economically. Current estimates by the International Monetary Fund, or IMF, put the damage to the global economy at a three percent annual economic contraction this year to be followed by a 5.8 percent gain next year. The U.S., according to the fund, is set to contract by 5.9 percent this year. Such an economic decline would represent the largest fall since the Financial Crisis of 2008/2009. The U.S. would then see a rebound of 4.7 percent next year, according to the IMF.

The worry over economic damage will be very difficult to quantify until the virus is brought under control. Although there are indications that current stay at home orders have significantly slowed the spread of the virus, there is no telling yet how long the virus may continue its rapid spread while keeping economies shut down. The U.S. appears to be getting ready to discuss the reopening of its economy, but already seems to have issues on who will make the call between President Trump and state governors. Many parts of the U.S. are to remain closed until the end of the month, and any reopening likely will not take place before that time.

Earnings season is now getting started, and many investors will be paying close attention for virus related declines. Current corporate earnings may show some of the beginning effects of the economic shutdown but will likely not show the full extent of the problem yet.

The dollar is also having an impact on the yellow metal. After peaking around the 104 level in March, the dollar has been trending lower and is now trading in the 99 area. Further weakness in the greenback could send the price of gold higher and could act as a major, bullish catalyst for a run to previous all-time highs or beyond.

The U.S. currency may be declining as the Federal Reserve takes massive action and as rates were recently cut to zero again. The longer the economy is closed, the lower the dollar could potentially go.

The next couple of weeks should provide additional clues about the virus and its spread. As more information is provided, stocks could potentially take another run at their March lows while gold could stay on the offensive.

The Week Ahead in Gold

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Both stocks and gold are getting the week off to a strong start. In late morning trade, the benchmark Dow Jones Industrial Average is higher by nearly 1200 points. Spot gold traded higher by 3% at one point this morning and is still up significantly for the session.

Hope for a peek in coronavirus infections is driving some investor optimism today. Some banks have also suggested that now may be the time to buy stocks, with the worst behind the markets at this point. Although it is too early to tell, some optimism is not surprising as Americans and people elsewhere continue to struggle with stay at home orders and as public meeting spots remain closed. In fact, President Trump recently extended the closure of bars, restaurants and other locations until the end of April. Most employers will also remain closed until the end of the month and a resumption of professional sports is still an unknown.

The recent monetary stimulus provided by the U.S. Government is also a positive. The package is likely way too small, however, to ward off the depths of the coming recession. It is important to keep in mind that even as businesses start to reopen and things get back to normal, consumer habits will have changed. People may not spend the way they did just a couple months ago, and a lack of consumer spending could send the U.S. into a recession the likes of which has not been seen since the Great Depression.

In addition to the threat of coronavirus spreading further and the economic challenges it may pose, the markets are also still dealing with an oil price war. Saudi Arabia and Russia are reportedly close to a deal that would cut production and likely give prices a lift. An online meeting was set for today to discuss a cut, but that meeting has been rescheduled and will now take place Thursday. The benchmark U.S. 10-year yield has inched up from levels seen late last week and is currently sitting around .65%. The dollar index is seeing some upside today as well, as the currency looks to maintain trade above the 100 region. Although a challenge of the March dollar highs could weigh on the gold and silver markets, a higher dollar may not currently affect the yellow metal as much given the surrounding circumstances.

The notion of a deep and extended U.S. recession may keep the gold market moving higher in a slower, more sustainable fashion. The market is poised to challenge the $1700 level in the days ahead, and if it stages an upside breakout it could challenge previous all-time highs near $2000 in short order. The gold market has already seen a significant pullback from recent upside, and that decline was met with willing buyers. The bulls would seemingly have a green light to take prices higher and may do so in the days and weeks ahead.

Strong Start

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The trading week has gotten off to a strong start for equity investors. On Monday, the benchmark Dow Jones Industrial Average gained nearly 700 points for a gain of over 3% for the day. The question many investors may now be asking is whether recent gains might last.

 

As the world continues to deal with the coronavirus pandemic, the total amount of infections continues to rise. It is estimated by many analysts, in fact, that infections may not peek for several weeks still. U.S. President Trump even recently reversed course, ordering the shutdown to continue to April 30th. Trump had recently voiced his desire for the country to reopen by Easter.

 

Many companies announced employee furloughs today in a move that was not unexpected. How many of these companies might survive the pandemic remains a larger question, as many of them may not be able to last much longer.

 

On Friday, the U.S. Government passed legislation aimed at combatting the coronavirus crisis. The government passed a $2 trillion bill that would put money into the hands of most Americans. This is designed to keep people spending, as the transfer of money may keep the economy above water for a bit longer. Over $150 billion of the bill will go directly into healthcare, finding its way into drugs, equipment and other arenas that desperately need help. The massive stimulus package comes on the heels of the Federal Reserve’s latest action, as the central bank recently took its Fed Funds rate back to zero.

 

Despite recent actions, however, the stock market may still find a fresh low before a long-term bottom is found. On Monday, the benchmark 10-year treasury note yielded just .64 percent, suggesting that risk aversion is still quite prevalent in the marketplace. This degree of risk aversion could point to still higher gold prices in the weeks and months ahead. The gold market ended lower Monday as stocks roared higher, although the yellow metal was only down a few dollars per ounce, not straying far from recent highs.

 

Also having a negative impact on gold Monday were a dollar index rally and weaker crude oil. The oil market, which has been on a sharp trajectory lower in recent weeks, sank below the psychologically important $20 per barrel level. Crude is now trading at levels not seen since 2002, and the world is rapidly running out of storage areas for the commodity.

 

In other news, the Russian Central Bank said it plans to put its gold purchases on hold starting April 1st. The Russians have been a major buyer of gold in recent years, adding to their holdings every month for the last three years. Despite their not purchasing gold, the Russian Central Bank is unlikely to become a seller any time soon. The country is currently engaged in a crude oil price war with Saudi Arabia and in a world of ultra-low interest rates may look to maintain its gold holdings to support the value of its currency.

 

The next several weeks may see ongoing or even increasing market volatility across asset classes, and the gold market could potentially be en route to a fresh high and even a test of previous all-time highs near $2000 per ounce.

Cluelessness

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A reporter on Bloomberg earlier in the week commented that fear was not yet present in the markets. Global stocks have seen enormous selling pressure, but it is not until the hedges and safe-haven assets also trade lower simultaneously that fear is then present. In other words, everything is red. Certainly there may be a degree of subjectivity to that call, but I like the premise.

In this selloff/correction/decline, we witnessed that for the first time on Wednesday the Dow Jones Industrial Average and the TSX officially entered bear market territory (which is a 20% decline from their most recent high). The S&P500 joined them Thursday. On Wednesday, the price of the US 10 Year Treasury was also lower. Whether that’s anomalous or warning it could get worse is to be seen. The most challenging angle to this entire market action though, which is exemplified by the quick and drastic price moves, is deciphering this as a transitory shock or a recession incurring serious economic damage to consumer confidence and employment.

In just a week, consensus shifted to the latter.

I had written a blog last Sunday morning to be sent out at the beginning of the week, but for the above reason the piece was rendered irrelevant by the time the markets opened. The topic was on distinguishing the signals the markets were telling us. Particularly whether the bond market was pricing in rates cuts or a more extreme scenario including recession. The second point was on then being careful with the parallels that were being drawn to 2008. Beyond analyzing the virus impact, there is now an oil supply-shock entering the equation.

Numerous unknowns remain. Front and centre are the potential spread of this virus and the associated impact to economic activity. Trying to determine this almost seems like a rogue’s game at this point. Many of the more opportunistic analysts suggested that this health scare was no less manageable than previous pandemics (from an economic perspective) and the markets would see past it. But, the probabilistic scenarios still seem wide ranging, as illustrated by stock markets struggling to maintain a bid. Factoring in the destabilising effect of the energy shock to the credit markets and the effect on the real economy is whats driving the increasing concerns with recession.

To add to my obsolete (and unpublished) content, one key distinction worth making to 2008 and the Global Financial Crisis is the abandonment of multilateralism. Beyond whatever one’s preferred politics, it seems President Trump’s global led shift to a more unilateral approach seems less effective, or alternatively an audience less receptive. In 2008, it was a coordinated effort between monetary and fiscal stimulus to support the global economy. This last couple weeks has seen a communique from G7 nations that saw central banks follow in an uncoordinated fashion that is yet to see any effect.

The concern is that this deglobalization affect will create more dislocations and more market fragility. Without Western Powers acting in sync, there is the opportunity for more frictions and much more volatility. To illustrate this, Goldman Sachs Wednesday morning suggested the S&P500 could fall another 15%, but then rebound into year end by 30%. Buckle up.

A Long Week Ahead

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If market action on Monday is any indication, the trading week could be a long one. As global markets grapple with the rapid spread of the coronavirus, the markets are now being hit with an oil market sell-off the likes of which has not been seen since the Gulf War. After an OPEC deal failure over the weekend, the price of crude oil plunged by up to 30 percent on Monday as nervous investors hit the sell button.

 

The situation in oil began to develop last week. As OPEC looked to its allies to strike a deal on production cuts, Russia declined to accept a deal. This, in turn, likely caused Saudi Arabia to slash the price it charges for its oil as it looks to increase production. On Saturday, the Kingdom announced significant discounts on April selling prices. The Kingdom also is reportedly looking to ramp up production to over 10 million barrels per day, from its current production level of 9.7 million barrels per day. Some analysts have suggested that the Saudi Arabian/Russian price war began this weekend as Saudi Arabia initiated the largest price cut in over two decades.

 

The oil price war does not come at a good time for the market. Crude oil has already been under selling pressure as the coronavirus spreads and becomes an increasingly significant focal point for global markets. Adding insult to injury, not only was a production cut agreement not reached going forward, but current cuts are set to expire at the end of the month with no direction going forward. Exporters may, therefore, be able to decide how much oil they pump.

 

The oil price war, combined with concerns over coronavirus, has sent stocks sharply lower Monday. The benchmark Dow Jones Industrial Average has been down over 2000 points at the lows of the day, while all U.S. Treasury yield are now below 1 percent.

 

After trading over $30 per ounce higher in action last night following the market’s open, the price of gold has settled back down. The yellow metal is trading $1.70 higher in early afternoon action. The rise and subsequent decline of gold in recent hours may be attributed to concerns over the health of the Chinese economy, the globe’s second largest. The yellow metal may also find willing sellers as the need to raise cash increases due to market volatility and margin calls.

 

The decline in global equity markets could have a way to go. Although central banks stand ready to cut rates further or to implement other measures such as QE, the risks of an oil price war and the coronavirus cannot be overstated. U.S. equity markets are in correction territory already, and a rapid move towards bear market territory could be seen in the days and weeks ahead. Monday marks the 11th anniversary of the U.S. stock bull market, yet many are now questioning whether the run higher is over.

 

The gold market, on the other hand, could be at the beginning stages of a bull market that could last for years. Despite the metal’s reversal from overnight highs, gold could stand to benefit if stocks move lower and risk aversion rises further.

A Fed Suprise

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The global coronavirus has continued to spread, and to spread rapidly. New cases in Italy, Iran and the U.S. have recently fueled a large degree of risk aversion that drove stocks to their worst weekly performance last week since the 2008 financial crisis. This week got off to a much better start, however, as the benchmark Dow Jones Industrial Average rose by over 1200 points Monday.

 

On Tuesday, the U.S. Fed took markets by surprise, cutting the key interest rate by a half percentage point in between policy meetings. The Fed cut comes on the heels of a cut by the Central Bank of Australia, which took its key interest rate to an all-time low of .5 percent. The Aussie central bank took the step in order to combat the increasing global economic slowdown from the coronavirus, with more central banks likely to follow suit in the days and weeks ahead.

 

The U.S. Fed acted aggressively by cutting rates a full half-point rather than a quarter-point. This move initially fueled higher stock prices. Those highs didn’t last long, however, and equity markets are now sharply lower in mid-day trade. The benchmark Dow Jones is now down nearly 450 points on the session for a decline of 1.67 percent. The Fed’s actions, while intended to boost the economy and to soothe investors, could end up having the opposite effect. The fact that the central bank felt the need to act, and to do so now, could give investors the sense that the Fed felt it couldn’t afford to wait. The stock market reaction is thus far bearish, and more selling could be seen before a bottom for stocks is finally found.

 

The gold market, on the other hand, is taking the news with a bullish sense of optimism. The yellow metal is now up over $55 per ounce on the day as the market has effectively erased all of Friday’s declines. The metal is now approaching the $1700 level, and if reached, the next major move higher could see a test of previous all-time highs around $2000 per ounce.

 

In another potential sign of economic distress, the benchmark 10-year note yield hit a fresh all-time low today of 1.023 percent. The extremely low yield would seem to suggest that investors are more concerned about safety than returns and are willing to park cash for a very paltry return in order to keep it safe.

 

Also assisting gold today is higher crude oil prices and a weaker dollar index. Crude oil has moved up towards the $47 region, while the dollar index is now trading at a multi-week low. Weaker stocks, along with a declining dollar, could hold the keys to fresh all-time highs in gold in the weeks and months ahead. The ongoing string of easing central banks may also provide some additional lift for the yellow metal as well and increasing risk aversion could keep a strong bid in the gold market for the foreseeable future.

Perspective Adds More Clarity

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Perspective adds more clarity to market action instead of looking at events in isolation. A very telling example this past week was US equity markets had their worst week since financial crisis and the quickest decline of more than 10% from their most recent high, in technical terms referred to as a correction, in the US market history.

Through to Friday, 5 trillion dollars in value was erased from global stocks. The MSCI Global Equity Index is down over 10%. One troubling indicator is that the similar fear trade concurrently taking place in sectors of the credit markets, sending treasury bond yields to records lows, indicate that we haven’t yet seen the worst of the selling action in stocks. This has prompted the debate of whether the US Federal Reserve and other central bankers will step up and cut interest rates as investors question whether a response from monetary policy officials can calm selling fears. Alternatively, some have raised the question that with central bankers limited firepower, whether markets would look instead for a response from public health officials that the virus is contained before showing signs of a bottom.

Where financial shocks based on liquidity issues or debt fears may be more simply reasoned and understood, the uncertainties around the extent of a virus are less clear, hence the wide-ranging opinions and outlooks.

It’s noteworthy that the US Federal Reserve, despite speaking engagements this past week, has remained tight lighted on their policy path. Even recently appointed European Central Bank President Christine Lagarde did an interview with the Financial Times this week on businesses needs to address climate change. However, policy direction has not been addressed and no guidance has been given to reassure markets.

As the financial markets are pricing in odds of four interest rate cuts from the US Fed by January of 2021, one analyst on Bloomberg Radio Friday morning warned that if the Fed fails to cut interest rates they are essentially tightening in this environment. He drew parallels (like the equity markets have) to the 2008 Financial Crisis where the US Fed was slow to react and consequently prompted further selling and lower prices in the stock market.

The merits of them not reacting is rooted in an academic approach on the efficacy of the Fed cutting rates in an economic slowdown that emanated from a supply shock. As supply chains backup and orders go on hold with factories being stalled, lower interest rates won’t transmit stimulus in that scenario. Still, the uncertainty is over the potential longevity of this economic slowdown. Easing of financial conditions for small businesses may provide a layer of relief for the time being, as many try to digest and determine the extent of the economic damage. Two points stand out.

First, since the financial crisis many have referred to a third or shadow mandate of the US Federal Reserve. The first and second mandates by congress task the Fed with targeting stable inflation and full employment. The third has been the Fed’s support for financial markets acting as a source of liquidity and creating a wealth affect through the economic recovery that benefitted those invested in the stock markets.

The second point speaks to the degree at which the most recent tightening policy, beginning with their taper program in trimming their balance sheet, followed by raising their policy interest rates. In some instances, they were anticipating the economic data and acting as proactive versus being reactive. If that were the case, instead of waiting for evidence of an economic slowdown in the US and global economy that might not be evident in the current data until mid-year, we might expect the fed to act sooner.

To recirculate to an earlier point, this raises the question when the Fed does ease, whether it gives equity markets and investors the necessary confidence. Without question supply chains have been disrupted, demand has been shocked, and markets seem to be pricing in a dire scenario. A question for the Fed that is yet to be tested, is whether anybody will listen.

The Week Ahead in Gold

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Stocks are set to open the new trading week Monday lower, sharply lower. The benchmark S&P 500 futures contract is down over 100 points, while the Dow Jones Industrial Average has declined by nearly 1000 points. It is going to be a rough open as stock trading gets going, and there is one primary area of concern for investors that may be behind today’s lower open: The coronavirus epidemic.

 

Over the weekend, the virus reportedly spread into Italy and South Korea. European stocks got hammered as worries over the spread of the disease increase. The Italian stock market, for example, declined by a whopping four percent. The equity losses were not limited to Italy, however, as German and French markets also felt the pinch of rising worries and fear.

 

Of course, the worry now is that the spread of the virus may put a major dent into global economic activity. The notion of a slowdown is not unrealistic, either, as the virus continues to spread rapidly. On Saturday, the International Monetary Fund (IMF) reportedly suggested that the virus could dent global economic growth by .1 percent and growth in China by .4 percent compared to estimates made just several weeks ago.

 

The effects of the virus are clearly being felt by manufacturing companies. Negative effects from the covid-19 outbreak are being seen in manufacturing indexes all over the globe, and many companies are now mentioning the potential impact from the virus when reporting earnings. With Chinese markets seeing major disruptions, the global supply chain is hampered, and those effects could continue if the virus spreads further.

 

U.S. stock markets remain firmly in uptrend mode, although that could change quickly with a few more days like today. Just how far equity markets may fall depends on several factors. The most important factor right now, however, may be how quickly or how slowly the virus spreads further. If the spread is slowed significantly, it may become easier for authorities to obtain a handle on it and control it. If it accelerates, however, the bottom could fall out from under global equity markets and a new downtrend could be seen.

 

The news of the spread has pressured stocks lower while boosting some safe haven asset classes. Yields on the benchmark 10-year note have fallen by several basis points, while the price of gold has climbed by nearly $40 per ounce. The rise in gold puts prices at seven-year high, and previous all-time highs are well within reach. In a sign of strength, the yellow metal is sharply higher today even as the dollar index also catches a bid higher and crude oil prices sink. In fact, most raw commodity markets are under selling pressure and could see sharp declines as the day progresses.

 

The gold bulls next target is to take out the overnight highs at $1691.70 and to then close above the $1700 level. The bears will want to see a breakdown below the $1620 region before getting too excited.

The Week Ahead in Gold

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As the holiday-shortened trading week gets going Tuesday, investors will be on the lookout for any new developments in the ongoing spread of coronavirus. The weekend has brought few, if any, fresh headlines about the disease. An increase in the rate of infections could, however, be enough to fuel widespread risk aversion and selling in stocks and risk assets.

 

A further spread of the virus could potentially act as a black swan event that could have significant effects on the Chinese and global economies. The virus may impact key areas of the Chinese economy that could already be considered fragile. The property sector in the country, for example, could send shockwaves throughout the global economy. With very high debt levels and sales having already come to a halt, an ongoing lack of activity could start a wave of defaults. A large amount of defaults in China would not only affect China but could also cause a significant decline in demand for commodity producing countries such as Australia and Brazil. A wave of defaults could also fuel a general sense of risk aversion in the global marketplace that could send stocks and risk assets sharply lower.

 

The coronavirus epidemic could also drive central banks to ease at a more expeditious pace. This week, markets will pay close attention to the latest FOMC meeting minutes due for release on Wednesday afternoon. The latest meeting minutes come on the heels of testimony by Fed Chairman Jerome Powell to a Congressional committee last week. It no longer appears to be a given that the Fed will hold on rates for the year, and further action could potentially come in the weeks ahead at the central bank’s March meeting. The FedWatch tool, as of Friday afternoon, was estimating only about a 10 percent chance the Fed would lower rates at the March meeting. The chances of action from the central bank jump for September, however, as the tool is showing over a 40 percent chance of a rate cut from the Fed.

 

With interest rates in the U.S. already at low levels, the U.S. Fed could be forced to look at alternative methods of boosting the economy. These could include fresh QE or even fiscal spending by the government. Whatever the case may be, lower rates and/or QE or other easing measures should be another positive for the gold market and could send the metal back to previous all-time highs or better in a hurry.

 

The last several weeks have seen the gold market build a large triangle pattern. The recent trading range has been tight, and the market could be on the verge of a significant breakout up or down. The bulls are looking for a sustained breakout above the $1600 region. The bears are looking for a breakdown below the $1550 and $1500 levels.

 

A lack of any fresh bullish or bearish inputs could keep the gold market in its recent trading range for the next several weeks or longer. The next major market move will likely be driven by the coronavirus epidemic or changes in monetary policies.