Markets are finally pricing in no immediate trade deal

The S&P 500 fell 0.9% to 2,805 as trade war angst grows and recession concerns rise.  The S&P 500 is now 5% from the record highs and probably still has room to the downside as markets have barely priced the effects of China’s potential response in the trade war.  The China Global Times editor-in-chief noted China is seriously considering restricting rare earth exports to the US, a move that hurt many US manufacturers, since China holds roughly 71% of the global market share.  The trade war appears to have no end in sight, after President Trump state the US is not ready to reach a deal with China.  The effects of the lack progress in trade talks are seeing investors flee to bonds, while trimming their equity positions.

Much focus is falling on the spread between the 10-year yield and 3-month bill, which widened to 8.75 basis points, deepening the inversion that started last week.  The dollar remains king for now and if we see German employment figures take a queue from the PMIs, we could see softer readings that accelerate the euro’s decline.

USD – Consumer Confidence support strong labor and ISM next week

German Politics – AKK to stay despite Merkel’s abandonment  

EUR – Uncertainty remains for EU Commission top spot Draghi’s replacement at ECB

CAD – BOC to hold rates while being less hawkish

Oil – Crude rises on US Consumer Confidence and disruption concerns from flooding across storm-ravaged central US  

Gold – Death by strong dollar  

USD

The Conference Board consumer confidence readings surprisingly popped up in May, to a 7-month high, as the strength in labor market continues to outweigh trade concerns.  Ahead of next week’s crucial non-farm payroll report and ISM manufacturing/services readings, we could see US growth forecasts upgraded for the second quarter as the strength of the US consumer appears firmly supported by an expected continuing strengthening with hiring. The present situation index is at the highest level since 2000 and today’s sentiment readings included the period up to May 16th, which included a portion of the latest escalation in the trade war.

The broad-based increase in consumer confidence supports the argument that the first quarter slowdown was transitory and could explain the resilience with the US stock market.  If we see a return of trade optimism, sentiment will likely see an attempt at taking out the record high of 137.9 set in October.  Next week, expectations are for the ISM manufacturing to improve from 528.8 to 53.3, while the non-farm payroll reading is expected to continue to show the labor market remains strong.

Germany

Five months ago, German Chancellor Merkel selected Annegret Kramp Karrenbauer (AKK) as the heir apparent and leader of the CDU, but that was then, and after the CDU’s worst performance in a national election, she has is abandoning support for her.  Right now, the CDU appears set on keeping AKK in place and focus on the regional elections in the fall.  Merkel’s term ends in 2021 and she will lose influence closing out it out as confidence is fleeing the party.

EUR

European Parliamentary election aftermath shows the future direction for the bloc remains uncertain.  While the populists in the EU increased their hand from 20% to 25%, they will likely see most of their influence felt in France and Italy.  President Macron’s defeat to Marine Le Pen’s far-right National Rally party exemplifies the momentum gained by the anit-Macron Yellow Jacket movement.  While the defeat was roughly 24% to 22.5%, the margin of defeat was slightly better than the 2014 European Parliament election.  Italy’s deputy prime minister Salvini is also determined to ride his election momentum in standing up to the EU and pushing back on austerity requirements.  Populism is here to stay and will make future integration and budgetary decisions difficult to be agreed upon.

The focus on European politics is to first choose the next European Commission President, then they can select the next ECB chief to replace Draghi when his term end in the Fall.  It appears this will be dragged out for weeks and due to the election fallout, candidates will need to be replaced and we could see the EU have trouble filling the position.  German MEP Manfred Weber was the front-runner but he is losing momentum to become the next EU commission president and that might be fine by Germany because they may prefer a German head the ECB.  The German’s may want a Southern-European take the head spot at the EU Commission, but we could see this debated for months.

CAD

Ahead of the Bank of Canada (BOC) rate decision, the Canadian dollar is approaching the weakest levels in a month.  Analysts are unanimous the BOC will hold rates for a fifth consecutive meeting.  The employment, manufacturing and housing data have been strong, but trade uncertainty, a possible cut by the Fed, falling oil price vulnerability, and rising debt for Canadian households, will cement the wait-and-see approach by the bank.

Despite the most recent hawkish banter from the BOC, expectations are at 44.4% for the BOC to cut rates at the October 30th meeting, with an 80% chance of a cut over the next 12 months.   It appears, that if trade talks do not fall apart globally, the bank will wait until after the federal elections in October before acting.  The data does not warrant any loosening in policy so we could see rate cutting bets slightly diminish following BOC decision.

Oil

Crude prices are rising for a second consecutive after better than expected consumer confidence data provided optimism for the US demand and flooding in central US raised the risk for possible supply disruptions. Last week, the Pony Express crude pipeline system was shutdown due to flooding in the areas of Arkansas and Oklahoma.  While Delek’s Lousinana refinery is unaffected by the high waters.

Oil is coming off the worst loss of the year last week as global demand will be hurt from the never-ending US -China trade war and consecutive multi-million barrel builds with US crude inventories.  The weekly EIA inventories are expected to see a small draw of 633,000 barrels, which should see some impact from the flooding across the central US.  However, if we see another multi-million-barrel build, that could easily erase this week’s early gains and see WTI attempt to test the $55 level.

Gold

Gold prices failed to behave like a safe-haven because the US dollar’s reign remains in place.  The yellow metal could see further pressure if demand for Treasuries remain high and as ETF gold holdings appear poised for their fourth monthly drop.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya