US stocks are continuing to inch higher toward record territory after China expanded their tariff exemption list and as investors begrudgingly expect the bull market to reassert itself on renewed stimulus measures by central banks.
Optimism is growing once again that we could see a US-China trade deal and that would deliver a rally heading into 2020 election. The Democratic debate last night showed that we could see the Chinese have a harder time negotiating a deal if we see a change in the White House. President Trump is starting to lose his grip in key states (Pennsylvania, Florida, Texas and Michigan to name a few) and we should not be surprised to see him consider an interim deal.
China’s latest concession paving the way for companies to buy US farm products is likely to keep the President Trump happy in the short-term. The continuing lowering of tensions will keep risk appetite flowing through financial markets. Equities want to rip higher and even if we see a band-aid of a solution with the US-China trade war, the prospects of fresh stimulus from all the major central banks will keep the bulls happy.
US retail sales was a little softer than expected, but the main takeaway is that the US consumer is still looking good. The mixed retail sales report supports the case for the Fed to deliver a couple more rate cuts this year. The dollar rallied following the data and Treasury yields popped to session highs.
The pound rose to highest levels since July after The Times reported that DUP would compromise on the backstop issue. Momentum traders let the rally get out of hand and even after this story was refuted, sterling remained near the session highs. Expectations are growing that we could either see a deal done, Boris Johnson fail to deliver a no-deal Brexit or second referendum that could kill Brexit.
Huge drawdowns or trade optimism can’t save crude from its worst weekly drop in months. Oil seems set for hard times on glut concerns and on expectations we won’t see any enhanced efforts by OPEC and allies. Some OPEC delegates hinted a larger cut could happen next year, but rising production from US and Norway will mitigate any increase to the current production cut agreement.
Gold is struggling to recapture last week’s high on trade optimism and after markets were disappointed with the ECB’s cut to its deposit rate and launching of a smaller than expected new bond buying program. It appears the bullish gold punchbowl argument that massive global stimulus should help propel prices is running into a wall of renewed trade optimism. An interim trade deal is likely to become the base case.
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