Equity markets in Asia and Europe have been trading higher after U.S. stock indices closed in positive territory yesterday as investor sentiment received a boost on optimism that the Covid-19 global pandemic is nearing its peak and that oil producers will agree to cut production to support prices later in the day.
Moreover, the current rebound in stocks has been supported by high yield bonds rising and a narrowing credit spreads, which helped boost valuations.
Ishares iBoxx High Yield corporate bond ETF
Source: Bloomberg
Oil, which has been a key driver of volatility during the early stages of the outbreak, was higher today as traders are waiting for the outcome of a video meeting of the Organisation of the Petroleum Exporting Countries and some other major producers, including Russia, a group referred to as OPEC+.
Reports that Russia is willing to agree to a cut in production has given rise to hopes that an agreement will be reached to support prices that have collapsed in recent weeks. Expectations are for an output cut of 10 million to 15 million barrels per day. The question is whether shale producers come on board to curb their output.
Oil prices will probably be volatile today. An output cut of 10 million to 15 million barrels a day is already in the price and it would keep West Texas Intermediate (WTI) crude prices in a range of between $28 and $32 per barrel. No agreement today would push WTI to below the $25 mark.
Since 2016, Shale production offsets OPEC+ cut
Source: Bloomberg
Gold, the traditional safe haven, is trading at around the $1,650 per ounce level. With the U.S. dollar little changed today and with the extremely accommodative monetary policies from major central banks, gold still has a potential to rise further toward the $1,680 level. Any retracement will be seen as an opportunity to buy the bullion. In contrast, this bullish scenario will be in play as long as the price stays above $1,618.
Investors are waiting for the weekly U.S. unemployment claims number, which is used as a leading indicator to quantify the cost of the outbreak. The median forecast by analysts is 5.5 million new applications for jobless benefits.
In general, we believe the recent market rally is justified as a bear market rally, while it’s not a back to bull trend. Sellers will appear at major resistance levels on U.S. indices. So, we are eying the 25,000 level on the Dow Jones Industrial Average, as we consider this to be the crucial level between a bull and a bear market.
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