Weekly Memorandum 3/30/2020
Updated: Apr 6, 2020
Stocks rebounded nicely last week, although it is still unlikely that we have seen the final lows. The rally was likely due to short-covering, which is when short-sellers have to close out their positions. The result is what's called a short-squeeze, which is when stocks rise rapidly in a short amount of time.
Bonds remain in a solid uptrend, but the spread between corporate bond yields and treasury yields remain a concern. This may be remedied in the short-term, due to the Federal Reserve stating they will begin to buy corporate bond ETFs. Believe it or not, this was the initial structure of the Federal Reserve-- to provide liquidity to private corporations. This changed in the lead up to World War I, where Congress passed a law mandating they must buy government debt only. At the time, it was supposed to support the war effort, but like many other government-imposed measures in times of crisis, they are not removed upon a return to "normalcy."
Crude Oil prices are down again and trading at multi-year lows. We are monitoring the very high likelihood of widespread defaults in the energy space. This has the potential to eventually lead to a supply shock, whereby a final bottom could be made in this sector. Beware of the domino-effect energy defaults could cause in the broader capital market.
Precious metals are down slightly as well after performing nicely last week. However, still no confirmation from price that the uptrend has resumed. The U.S. Dollar is up slightly this morning too. No asset class has been spared from the volatility in recent weeks.
The coronavirus continues to cause havoc on markets and everyday life. This week will likely tell us whether or not further precautions are warranted, or if we can begin to reopen the economy. The key is to stay nimble, and adapt one's position based off the new data coming in. As we say in trading, "Don't marry your position." We need to approach the virus the same way, because clearly, it has affected countries differently.
A new Mercator Letter was sent out to subscribers on March 29. Tomorrow, on March 31, we will also debut our Mercator Crypto Report, which will analyze Bitcoin, Ethereum, and Litecoin.