US and China inch closer to a deal

US stocks opened higher as expectations are overly optimistic that a trade deal will be done After many ups and downs in this trade war rollercoaster, it appears both sides have made many concessions, with the most recent being the US will end their tariffs in exchange for Chinese concessions.  With all signs pointing to a mid-March meeting between President Xi and Trump. Stocks gave up most of the overnight rally as continued concerns with the housing market in the US was reemphasized after December construction came in much lower than expected.

The US dollar started the week initially higher after President Trump went on the attack and accused Fed Chair Powell of being someone who likes raising interest rates, loves quantitative tightening and likes a very strong dollar.   The dollar recovered all of its losses on optimism on the trade front.

USD – Trade Deal inches closer

STOCKS – Headwinds from last year are almost all gone

GOLD – Remains vulnerable as geopolitical risks ease and dollar refuses to break

OIL – Crude became overbought by hedge funds

USD

Normally, when we see expectations for a big risk event to be taken off the table, high-beta currencies deliver stronger rallies.  The optimism for a final deal is fairly priced in now and the next big move in currencies may need to come from China’s National People’s Congress summit.  The annual policy address will unveil China’s economic growth target, policy priorities, plans for reform and stimulus measures.  For risk appetite to remain in play, China will need to confirm that their deleveraging initiatives are on hold and they will continue to deliver stimulus via monetary and fiscal policies.

Stocks

Global equities last year sold off mainly because of the trade war, Fed was overly hawkish and China began to deleverage.  The Fed in January successfully delivered a dovish pivot that has the market convinced rate hikes are on hold for the first half of the year.  The trade war appears to be nearing a deal that could be finalized in the middle of the month.

The key focus this week, may fall on the China’s NPC summit and the confirmation that they are not changing course and will continue to stimulate the economy and keep deleverage on hold.  If China clearly sends this message, we could see the risk off catalysts from last year taken off the table.

Gold

Gold prices are accelerating lower as optimism remains high the US-China trade war is nearing its end and expectations are priced in that China will confirm they will continue to support their domestic economy with increases in fiscal and monetary stimulus.

Oil

Crude prices are seeing a positive start to the week as trade optimism points to a possible strong rebound in Asia, which would make the energy sector be the big winner.  The oversupply argument took a break late last week as US rig data showed a steep decline of 10 rigs to 843.  If OPEC compliance remains high, US production stabilizes, and a conclusive trade deal is reached that starts immediately, we could see the case for higher prices improve.

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