Disappointing news flow ahead of the Asia open includes Gilead's anti-viral drug remdesivir failing at the first clinical trial, according to the FT [paywall]. E-minis are down ~2% from the overnight highs – an ugly open for US E-minis which tanked again on that first Gilead headline read.
Much hope was pinned on therapeutics accelerators and an eventual vaccine that would tame secondary spread fears. Optimism around a health care breakthrough allowed investors to look through some of the more horrific economic prints taking a more temporal view towards the virus. With paper falling off cracks at the edges, markets have pivoted to the glooming where there's an abundance of soul-crushing to be had, Eurozone PMI and US employment notwithstanding.
Beyond extraordinary policy support, the main reason for the strong recovery in risk sentiment is the unambiguous clarity of this recession's driver, compared to previous downturns that were more multi-branched and ostensibly more difficult to unwind. The removal of a single recessionary input (the virus) via a vaccine or more effective treatment can pave the way for fast recovery in output. There's a lot of hope riding on a cure, and with optimism around Remdesivir as top view on the healthcare section, it's a bit of a blow for the market at week’s end. And considering it's Friday where traders have tended to be more risk-off than on in weeks past, it could be a bit of struggle today to make hay as no one likes to be greeted with sour cream headlines in their Friday morning coffee(s)
Oil prices initially climbed higher as geopolitical risk continued to ripple across Middle East oil producers, while early signs of Russia compliance commitment provided an ounce of good measure. And all of this was enveloped by optimism that US congress would come to the aid of US shale by compensating producers to shut down wells until prices rise.
But it’s probably rational to temper expectations as it's going to take more than a celestial alignment to get WTI to stick above $15 per barrel this month, let alone super tack to $20.
The WTI benchmark, so beaten down earlier in the week, rose a further 28.3% to $15.75 per barrel while the Brent international benchmark rose 4.7%. But the rally gave way to the running storage saturation narrative after hope for a healthcare breakthrough flopped.
But the feel-good story of the week has to be that oil prices are stabilizing after Monday’s meltdown as localized physical settlement and restricted storage issues at Cushing came to the fore. At the end of the cataclysmic week for oil market scrim, I think that's a win.
And with front-month positions likely to pare, there's still enough in the tank to support prices, if not push them higher with economies reopening and China doing its all to stoke the economic engines – even more so while considering the immense importance of the oil industry in the US market, credit risk notwithstanding. It's illogical to think Congress won't come through after US Treasury Secretary Mnuchin’s "spend what it takes" comments. Congress's support for the energy sector has to be at the top of a to-do list, as are prorations to incentivize producers to stop drilling until oil prices recover.
A positive outcome is in the best interests of everyone, not just in the US but to virtually every price taker of oil around the globe. That's a ton of US goodwill to spread around the world at a time when leadership is crucial.
A couple of critical technical supports were breached overnight – $1603 XAUEUR and $1725 XAUUSD – as the current leg higher came on the back of the gloomy EU and US data, which is bound to get worse. And the bounce was exacerbated by the situation in Europe; the talk of potential further government spending under a common EU budget seems to be driving XAUEUR back to the all-time highs around 1600.
As far as the primary benchmark XAUUSD, all the bullish reasons to stay long gold in the medium term still apply – notably, the considerable amount of money being printed by central banks and fiscal spending by governments to offset the economic impact of the coronavirus outbreak. Temporary deflationary concerns like the one triggered by the selloff in oil are one of the few things to worry about apart from positioning along the way to $1800.
Supported by China stimulus and the expected commodity price rebound in Q3, the Ringgit could close the week on a more favorable note provided oil price remains the feel-good story of the week and closes out on a more promising note than how WTI opened the week.
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In this edition of “Charts of the Week”, we will have a look at precious metals where the short-term outlook has turned brighter, as well as Bitcoin which is going through a major sell-off right now, followed by Oil – which is finally on the move after days of consolidation – and two major currency pairs.