Active investors feel like they are walking a tight rope without a circus net. The public is a nervous wreck as the virus worry seems to have reach DEFCON 2. Wall Street is now in a fourth week of heightened volatility. After a wrath of central bank stimulus, rising fiscal response hopes, and many wannabe epidemiologists hopes for an April plateau of the virus in the US being dashed, risk aversion appears here to stay. Financial markets were far too optimistic on the economic impact of the virus and with the earnings outlook for the remainder of the year. A US recession seems unavoidable and markets seem poised to remain panicked and that means US stocks may not be near rock bottom.
FX
The king of FX is once again the Japanese yen with the Swiss franc next in line for the throne. Risk aversion is seeing the two favored safe-haven trades remain firmly in place. The dollar has destroyed the interest rate differential and will now see itself become a funding currency. Central bank action will provide some whipsaws, but we will likely see FX remain a virus trade.
Oil
Oil’s worst-case scenario seems to be coming true. The coronavirus is paralyzing economies across the world and no-one has any clue how much worse it will get. The virus spread across Europe and the US is a gamechanger for oil demand prospects. You can basically start pricing a complete collapse in crude demand for much of the world. West Texas Intermediate crude seems set to make a run to the mid-$20s this week, with another crash possibly finding support at the psychological $20 level.
The collapse of OPEC + suggest that over the medium term that the supply side alone could warrant further selling pressure for Brent crude to test $20 level. Today, Brent crude fell below $30 for the first time since 2016 and is likely to see further pressure.
Saudi Aramco’s earnings call suggests oversupply concerns are here to stay. Aramco will take a huge hit on revenue due to this price war and could possibly lose up to $100 billion in revenue. Aramco will likely be forced to cut capital expenditures to reach their 12.3 million bpd production target, which means they will tap their reserves. The Aramco dividend will survive for now, but if Brent crude falls towards the $15 level, that may be the line in the sand for the Saudis. Currently, Aramco’s pre-breakeven before dividend is oil at the $15 level and if prices crash to around there, Saudis may be more willing to see a return of production cut talks with OPEC members, possibly without the Russians.
Gold
Calling a stock market bottom seems impossible right now with the unknown trajectory of the coronavirus spread, but that might not be the case for gold. Following two disastrous weeks, the scramble for cash made gold fall from the $1,700 level to $1,450, a typical reaction during heightened stock market selloffs (such as in 2006, 2008 and 2011). If gold is nearing a bottom, the line in the sand for this rebound trade would be the $1,400 an ounce level. If $1,400 is taken out, all bets are off and the downturn could selloff another 5%.
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