QUARTERLY INVESTMENT OUTLOOK: APRIL 2020
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The sharp correction in equities featured nine 90% downside volume days within eighteen trading days. This intense capitulation selling is indicative of a bottoming process.
The Fed should remain accommodative, and is starting a new form of liquidity expansion deemed QE infinity. This is positive for risk assets including equities and commodities, notwithstanding the current equity meltdown. It is confirmed by a steepening of the yield curve.
Industrial commodities have historically followed gold prices higher. Having lagged in the current cycle due to the China trade dispute and coronavirus, a period of catch up is overdue.
An inflation warning signal is flashing. The ratio of gold to treasury prices is favoring inflation.
The global economy is stable and should survive the COVID-19 episode with one perhaps two quarters of negative growth. We would not rule out the use of fiscal stimulus to offset demand weakness created by the COVID-19. This could include direct money transfers and relief for small businesses.
We view a peak oil price of $80/bbl. as our target despite the recent Saudi move to increase output by 2 million bbl./day. Our research indicates the Saudis have a present capability to increase their oil output by perhaps 200K-300K bbl./day to 10.3 million bbl./day. According to Ghoering & Rozencwajg they don't have the capability of producing 12 million bbl./day.
Dollar weakness is the missing link to the reflation trade. The dollar is forming a major top.
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