Covid jitters weighing on equity markets
Risk aversion is firmly in place as the Delta Covid variant spread is triggering a flight to safety as global economic concerns intensify. Global investors are growing anxious and selling stocks, commodities, and even cryptocurrencies to buy US Treasuries. With coronavirus surging across both advanced and developing nations, the bond market is delivering a one-way trade, lower global bond yields. Equities were ripe for a pullback given Wall Street was in agreement that this is ‘as good as it gets’ for peak earnings, economic growth, monetary stimulus, and shortly fiscal support. It is hard to hold risky assets over the short term now that we have past-peak everything.
US stocks pushed even lower after reports that the US and allies are blaming individuals tied to the Chinese government over the Microsoft Exchange hack. The laundry list of issues between the world’s two largest economies continues to grow and likely suggests we won’t see calm waters anytime soon. US-China tensions saw telecom and cybersecurity issues jumped ahead of both trade tariffs and living up to the phase-one trade deal. Human rights issues, China’s tech crackdown, and handling of Hong Kong are also contributing to US-China tensions. Panic selling of risky assets could happen if a back-and-forth of harsh tones becomes a recurring theme between the US and China.
Bitcoin
Bitcoin tumbled as Wall Street grows nervous, as the Delta variant impact to global growth for the rest of the year could lead to a massive stock market correction. Bitcoin is the ultimate risky asset right now and it could see intense selling pressure if Wall Street enters into panic selling mode.
Bitcoin’s fundamentals still remain intact for much higher prices later this year, but the short-term outlook looks dicey. If bitcoin falls below the USD 30,000 level, momentum selling could look for an easy test of the USD 28,900 level. That could be the line in the sand for defending a deeper plunge toward the USD 25,000 which at that point would lead to many sellers eyeing the psychological USD 30,000 level.
Oil
Crude prices declined after OPEC+ delivered a very much expected deal. The oil market wasn’t sure on exactly when OPEC+ would deliver a deal, but they weren’t too worried that they would let this market run excessively tight. Energy traders were unfazed by the OPEC+ decision to allow UAE and others have higher production quotas from May 2022. Despite more barrels coming to the market next month, nothing really can derail the short-term belief that prices are heading higher. The OPEC deal will allow for 400,000 bpd in increased output, a drop in the bucket given the robust demand that occurs despite the delta variant surge. The commodity rally isn’t over just yet, but it will probably take a big break here. WTI crude’s fundamentals still support another massive move higher, it will just take another month or so to shake off the growing risk aversion theme.
Travel and hotel stocks are getting crushed today as concerns grow that crude demand outlook might have overly priced in a normal summer abroad. Jet fuel demand will struggle as international travel is not happening anytime soon, especially given how several Americans are struggling to get their passports renewed even with expedited services. Even domestic travel to Hawaii is losing appeal given the limited availability for car rentals, lack of hospitality workers, and extreme price hikes for lodging and dining.
The oil market is still very tight even despite all the short-term Delta variant drivers and modest easing of oil output cuts, so WTI crude’s tumble will eventually attract buyers, possibly around the USD 65 region.
Gold has room to rise
Normally plummeting Treasury yields is great news for gold, but a broad selloff on Wall Street has some investors scrambling for cash. If the selloff accelerates on Wall Street, gold should eventually attract safe-haven flows. The bullish case for gold includes rising US deficits, an intensifying inflation debate, and economic uncertainty for many developing nations.
Gold caught a bid before the open after the EU real yields fell to a fresh record low. Global bond yields falling deeper into negative territory will lead to a fresh wave of flows into gold. Gold has massive resistance at the USD 1,835 level, but if that can be breached early this week, technical buying could easily support a rally towards USD 1,850 and potentially the USD 1,880 level.
