US Open – Trade War optimism, ECB disappoints, Oil’s supply headache, Gold’s bright future

US and China are showing signs of generosity as we approach a critical stage in the trade war, which could be President Trump’s last attempt to get a deal done before the 2020 election.  Trump’s decision to push back a 5% tariff bump from October 1st to October 15th excited markets that we could see steps to a major de-escalation at the next face-to-face meetings in early October.   

ECB

The ECB delivered a 10-basis point cut to the deposit facility rate and restarted QE by 20 billion euro, less than what many expected.  The ECB also announced a two-tier system for negative rate policy and tweaked the TLTRO conditions. 

Overall, markets are disappointed with the ECB’s action, but that could be changed if the ECB commits to buying corporate bonds.  The return of QE helped take all the European yields sharply lower as the euro pared its initial gain.  Draghi managed to deliver a somewhat hawkish rate cut and restart of QE, which when the dust settles could keep the euro remaining heavy until we get to next week’s Fed rate decision. 

Perhaps Draghi is saving the bazooka for Lagarde, as it seems the stage has been set for European government officials.  Low deficit limits have refrained governments in delivering a strong fiscal push over the past decade and markets are convinced the ECB can’t do it alone in getting the eurozone back to prosperous times.  Lagarde will have the option to go more aggressive with monetary stimulus and try to coordinate fiscal policies when she takes over for Draghi. 

Oil

Oil prices struggled in early trade after being reminded by the IEA that OPEC faces an uphill battle as another significant surplus will see non-OPEC production continue to surge in the US and Norway.  With energy traders remaining cautious on any global demand concern reprieve, oil could struggle in the coming months.  Recent trade optimism seems like a familiar story, but even if we see another major de-escalation in trade talks, expectations are high we will see a resumption of relentless stock builds and that will likely cap any significant rallies.  If we also see the US engage in talks with Iran, that could be another geopolitical event that could way on prices. 

Energy ministers did a good job in telegraphing that the OPEC+ meeting in Abu Dhabi will not be discussing deeper cuts and only focusing on compliance with the current agreement that is set to last till March.  It seems that non-OPEC production strong outlook will make any extension in cuts even less effective.  The December OPEC and allies meeting will be huge and a possible turning point that will see some oil producing abandon the ineffective production cuts. 

Oil is all sudden looking very bearish as surplus concerns will be the main theme for 2020 and we could see Persian Gulf tensions ease, while the US-China trade war continues to linger into the 2020 election.  Oil markets for the most part have not been too focused with the IMO 2020, but that could see some refiners be forced to shutdown as the cost rise for making ships use fuel containing less sulfur.  IMO 2020 will provide some support for crude prices, but it is unlikely to derail the growing bearish case.   

Gold

It seems gold is ready to rock ‘n’ roll despite US stocks march back to record territory.  The floodgates of easy money are likely to be the main catalyst for the next major rally.  The ECB extension of TLTRO, basically money printing, is music to gold bulls.  The ECB is committed to monetary stimulus and we will see calls for fiscal policies grow.  Next week, the Fed will deliver the next batch of news that should support gold’s bullish case. 

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