Despite a world economic climate that is taking in more doom and gloom almost daily, stocks managed to record their best week in 11 years this week. They also added back-to-back gains for the first time in over a month. For perspective, it’s important to note that the S&P 500 remains about 25% below its high in February. The Federal Reserve announced open-ended asset purchases as well as other actions meant to aid the flow of credit to employers, consumers and businesses. Congress and the White House added significant backing as they reached a deal on a $2 trillion stimulus package to aid the economy and help Americans affected by COVID-19. Analysts contend that we need a flattening of the infections curve in new coronavirus cases globally before stocks will overcome the incoming decline in GDP and earnings. The general view is that policy support can help prevent this unprecedented health crisis from moving us into a prolonged, full-scale financial crisis and depression.
Finally, there appears to be some good economic news. The market rose a total of 10.3% from its devastating lows reached last week. So, we have seen a glimmer of hope – an encouraging rally that was mostly expected. Although most analysts say we shouldn’t expect this to be a new one-way direction upward. It appears that four main contributors will be needed for volatility to subside and a sustained rebound to look likely:
- The new COVID-19 cases in the U.S. must reach their apex
- The government must follow on an extraordinary monetary-policy stimulus
- There must be a sizable fiscal-aid package that preserves the labor market
- Business must absorb a downward revision to expected corporate earnings and provide some clear expectations about the path for profits later in 2020
So, it’s obvious from the progress this week that some of these items are advancing, but financial aid from the U.S. Treasury and unprecedented stimulus from the Fed are not going to resolve this situation alone. The magnitude of the policy response is good news that will help. The timeline for the market will end up being dictated by advances in new virus cases. So, we expect market volatility will continue as news on the developments progress. Markets will need time to get reinvigorated. Remember, strong rallies often occur within bear markets.
Metals and Mining
Thinks looked bright for gold this week as North American stimulus packages, multiple refinery closures and a positive investor attitude dominated the precious metals this week. Gold is on track for its best week since 2008, rising 6.6 percent. The safe haven metal broke past US$1,650 on Tuesday after following the US Federal Reserve massive emergency economic injection and then fell back from the its five-day high mid-week, but held above US$1,600 on renewed investor appetite for inflationary hedges. It appears that worries of a looming supply crunch are also helping gold to stay above US$1,600. Three of the world’s largest gold refineries in Switzerland were closed earlier this week as the country puts measures in place to combat the coronavirus spread. Together, they process roughly 30 to 40 percent (1,500 tonnes) of all gold annually. The situation worsened when South Africa’s Rand refinery announced it would shut down its smelter and scale back operations to comply with a nationwide lockdown that will last 21-days. This is relevant since Rand is the only refinery in Africa certified to deliver gold to major international banks. It produces about 250 -280 tonnes of refined gold annually. Silver made some good gains also getting on track for its largest weekly gain since 2008. It climbed 11.9 percent from its Monday value US$12.89 to US$14.39 Friday morning. The gold – silver ratio, which reached an all-time high of 125.89 this month, is also credited with helping to push the currency metal. Some silver producers have also begun reducing operations to comply and combat COVID-19. Platinum prices rallied 17 percent this week as global producers in South Africa prepared for the three-week country wide closure. Since it is the leading country for platinum production and number two for palladium output, the declaration of a national emergency is expected to help price growth for both metals. The unexpected gain this week was palladium’s significant 35 percent rally from US$1,588 on Monday to US$2,253 Friday. Supply issues have been key in the automotive metal sector for over a year and the South African shut down this week snapped its slide.
Energy and Oil
Oil was the sore spot (again) for most economies even as markets rallied. Despite the rally for equities, oil prices did not withstand the pressure, with WTI back down close to $20 per barrel as the historic glut continues to worsen. It was not helped when the U.S. Department of Energy withdrew its plan to buy 77 million barrels of oil for the strategic petroleum reserve (SPR) after funding for the plan was removed from the $2 trillion stimulus plan. Investors have put pressure on the majors to cut dividends. The top five oil majors added $25 billion in debt last year, even while continuing to hike dividends. As oil now falls in the mid-$20s, debt will start to accumulate much more quickly. That has led to many investors calling for a cut to dividends. “Long term, it is appropriate to cut the dividend. We are not in favor of raising debt to support the dividend,” Jeffrey Germain, a director at Brandes Investment Partners, told the media. In a globally worsening climate, it was reported that nearly half of all Latin American oil is currently uneconomic. “Latin America’s flowing production is over 7 million barrels per day. At current prices, we estimate that half is non-economic, taking into account all costs, including transportation and taxes,” Ruaraidh Montgomery from oil research firm Welligence, reported. That news was followed by new estimates from a series of oil market analysts that put the drop in demand from the pandemic at about 20 mb/d. That figure is much larger than estimates from as soon as last week. Goldman put it at 18.7 mb/d. This drop is the single largest decline in history. It is reportedly so large that a return of OPEC+ cuts will not affect it. Natural gas spot prices rose at most locations this week. The Henry Hub spot price rose from $1.65 per million British thermal units (MMBtu) last week to $1.71/MMBtu this week. At the New York Mercantile Exchange (Nymex), the price of the April 2020 contract increased 6¢, from $1.604/MMBtu last week to $1.659/MMBtu this week. The price of the 12-month strip averaging April 2020 through March 2021 futures contracts climbed 10¢/MMBtu to $2.179/MMBtu.
In Europe, stocks rose over the week, snapping four consecutive weeks of losses. That followed unprecedented economic stimulus measures in Europe and the U.S. that helped calm markets and triggered some bottom-picking. However, stock markets were well below their record highs. After a bumpy week of wild swings, the STOXX Europe 600 Index and the German, French, and Italian benchmarks rebounded between 5% and 8%. The UK’s FTSE 100 Index rose 5.95%, partly helped by the weaker British pound, which favors exporters.
Italy, Spain, and the UK have been forced to impose severe restrictions on population movement and gatherings. That comes after the confirmed cases of coronavirus infections and deaths from COVID-19 surged beyond all expectations. Spanish Prime Minister Pedro Sanchez extended the state of emergency in that country for another 15 days. The UK approved severe emergency legislation, requisitioned large conference centers to set up critical care centers for patients, and put a financial support package in place for the self-employed. At week’s end, British Prime Minister Boris Johnson confirmed that he had tested positive for the coronavirus. In a unique situation, he said his symptoms were mild, but he plans to continue leading the government while self-isolating. Germany stepped up its efforts by banning meetings of more than two people. Chancellor Merkel entered self-isolation for two weeks after a doctor who gave her a vaccine tested positive. She has passed two tests and will soon take a third.
China’s major indices rose until midweek before flattening off. From Monday to Friday, the Shanghai Composite rose 4.2%, and the CSI 300 large-cap index gained 5.2%. Since China was the country to originate the coronavirus, it is the first country to bring the outbreak under control. Only two new local cases were reported between March 17 and March 24. A small number of new imported cases continue to be reported—around 40 per day—as Chinese citizens return from overseas. China reports that tightened immigration controls are proving effective at screening and detecting imported cases. The global media and health science communities remain skeptical about the numbers and reports emanating from China.
It does appear that the coronavirus deep freeze in China is beginning to thaw, with signs of spring appearing. Schools in areas deemed “free” of the coronavirus have begun to reopen under close supervision. They will begin with Qinghai, Guizhou, and Xinjiang. The economically important coastal province of Jiangsu is aiming for the full opening of all schools and colleges by April 13. Museums and some national restaurant chains that have been closed since late January are also reopening.
The Week Ahead
A number of telling economic data points will come out this week which will begin to show the impact of the economic shutdown caused by coronavirus. Items for release include consumer confidence, the Chase-Shiller home index, the manufacturing Purchasing Managers’ Index, the ISM manufacturing index and the anticipated March jobs report put out on Friday.
Key Topics to Watch
- Pending home sales index
- Case-Shiller home price index
- Chicago PMI
- Consumer confidence index
- ADP employment report
- Markit manufacturing PMI
- ISM manufacturing index
- Construction spending
- Motor vehicle sales
- Weekly jobless claims
- Trade deficit
- Factory orders
- Nonfarm payrolls
- Unemployment rate
- Average hourly earnings
- Markit services PMI
- ISM nonmanufacturing index
Markets Index Wrap Up