US Open – Brexit drama, PM Conte to remain, Huge Oil Draw, and Gold’s bright outlook

With no major developments with the US -China trade war, US equities are set for a lackluster open as the focus shifts to Brexit and Italian politics.  The key chart investors’ eyes are glued to is the spread between the 2-year Treasury yield and 10-year note, which is accelerating its inversion to the lowest levels since the financial crisis.  The deeper the inversion and the longer we stay inverted, the greater the calls will be for a sustained recession. 

Brexit

The British pound continues to be driven by Brexit and the latest selloff stemmed from news that PM Johnson has asked the Queen to agree to prorogue Parliament.  Prorogation means Parliament cannot formally debate government policy and legislation would have little time to push through anything that could prevent a no-deal Brexit. 

PM Johnson’s letter shows he is set on running down the clock in hopes to force both concession from the EU and not allow Parliament in preventing Brexit.  With summer recess ending, the soap opera that is Brexit will see the debates pick up steam next week.  While, we inch closer to the October 31st deadline, pound options suggest a no-deal Brexit could already be priced in.  Longer-term positions on the British pound are less bearish.  If Johnson does deliver a no-deal Brexit, sterling will tank 5% easily to 1.16 initially and we could see momentum keep the pressure on all the way to 1.10.    

Italy

Italian yields on 10-year old debt is falling to record lows as political optimism in Rome is growing as coalition talks between the Five Star and the Democratic Party.  Democrats (PD) chief Zingaretti is set to tell President Mattarella the party supports Conte remaining PM.  The euro was unfazed by another round of softer German data, import price data, and seems to remain steady on the optimistic Italian political headlines. 

Oil

Energy prices remained bid after the API weekly crude inventory data posted the largest decline since June, a 11.1 million barrel draw, suggesting demand is not falling off a cliff.  If the EIA report confirms the strong drop with stockpiles, we will some recession fears ease. 

Oil could remain bullish as US stockpiles have been consistently declining and we could see Hurricane season provide some disruptions over the next couple weeks.  The wildcard for energy traders could be if we see any de-escalation with the US-China trade war, any scaling back or delays in tariffs could help West Texas Intermediate crude make an attempt at the $60 a barrel level.

Gold

Gold’s rally could continue as no-deal Brexit risks surge and as US equities appear to have run out of steam as the yield curve inversion with the 10-year and 2-year continues to deepen further.  Gold’s path higher will remain supported on global negative interest rates, increased central bank demand, prospects of additional monetary and fiscal stimulus, escalations with trade wars, and global recession concerns. 

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, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street 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 CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya