The collapse in Treasury yields is historic, but this last decline was pretty easy as bond traders drove the 10-year down to match economists’ expectations that the Fed will deliver another 50-basis point cut at the March 18th meeting. The rise in Treasuries will keep the selling pressure on for stocks for now. The big question on every trader’s mind is when will yields stabilize. The race to zero seems inevitable, but the Treasury trade should show signs of fatigue. For the 10-year Treasury yield to fall to zero, deflationary pressures will need to drag down US inflation at least to 1%. The coronavirus fears are surging in the US and it seems volatility will remain high until hysteria eases.
It is hard to be offensive during a consecutive stretch of volatile trading sessions, but the longer-term outlook should support higher stock prices over the next 12-months. Wall Street will not get a V-shaped recovery, perhaps it will look closer to a W-shaped one.
Jobs
This is probably the least cared about nonfarm payroll report in this record long economic cycle. The February report shows the US labor market was still very strong before the coronavirus impact started to unfold in the world’s largest economy. A robust 273,000 jobs were created in February, while January reading had a 48,000 upward revision. The unemployment rate fell back to 3.5%, the lowest reading since 1969.
A strong labor market could provide some support that surge in bonds needs to slow down, but it won’t be the primary driver. Markets remain primarily focused on the coronavirus and plunge in yields will likely only slow down once we see the virus hysteria ease in the US or the rest of the G7 delivers massive fiscal and monetary stimulus.
Oil
Russia was content in being the Bond villain in what appears to be the last movie in the three-years series called OPEC +. The Russian’s can live with $40 a barrel oil and it seems they are willing to stomach even lower prices in the short-term to see the industry consolidate. Russia’s endgame could be to gain market share in 2021 when global demand returns to normal. Russia might be willing to see some US shale drillers go out of business and if OPEC eventually capitulates without them.
Oil pared some losses after Iran’s oil minister said Russia is ready to agree upon something, but skepticism was high that it all could fall apart. The meeting got off to a rocky start after both starting late and Russia stayed with their hard line on not wanting to support the deepening of production cuts. Crude was down as much as 5% before the fireworks started. This OPEC meeting had a lot of pushback and resistance.
No-deal OPEC + means the three-year experiment is over. OPEC + is dead. The Saudis are all-in on stabling oil prices and they may need to do something extraordinary.
WTI crude could collapse to $35 over the next couple of sessions if the Saudis don’t clean up this mess.
Gold
Gold prices are surging after risk aversion takes over financial markets. Gold hit a seven-year high as coronavirus fears intensify in the world’s largest economy. A stellar jobs number saw gold tentatively pare gains but that move was short-lived. Portfolio managers are loving gold right now and this trade will only become more attractive when the 10-year yield moves closer to zero and the majority of the curve trades negative.
Calls for gold to hit fresh record highs will grow as long as global fiscal and monetary stimulus bets remain intact.
