Following a tumultuous start to the trading week, US stocks will open higher ahead of a key reading on the service sector. European indexes were mostly positive after another round of data confirmed the euro-area economy is weakening at a faster pace. The German composite posted its second consecutive contraction and lowest reading since October 2012.
Wall Street is closely watching every US data point and continued softness will push the Fed into committing to an easing cycle. Fed fund futures now see a 72.9% chance of a rate cut at the October 30th Fed policy decision meeting. It will be hard for the Fed to maintain the stance that three consecutive rate cuts is only part of mid-cycle adjustment. The data-dependent Fed will be able to justify the switch to an easing cycle if we see tomorrow’s nonfarm payroll report post a sub 100,000 print. Current expectations for the September payroll number is 148,000.
Earnings season will see a few key reports today. Early this morning, Pepsi reported a strong beat with earnings, organic sales growth, Frito-Lay and Beverage North America organic revenue. The soda giant was also optimistic with 2019 organic revenue forecast, now possibly exceeding their target of +4%.
The world appears to be falling apart and that is not doing any favors for the demand side of the equation for energy traders. Oil’s recent slump is struggling to find support and could be very vulnerable if at the end of the week we also start to see weakness in the strongest part of the US economy, the labor market. In addition to demand adversity, American oil inventories also jumped the most since May.
Nothing major has also stemmed from the Russian Energy Week in Moscow. Russian energy minister reiterated the view that 2020 will see a rebound in demand but he also reminded us that the oil production cuts are not permanent. If Brent crude breaks below $50 a barrel, it will be hard to believe OPEC + will deliver more production cuts. Once the cuts stop working, you will see both the Saudi and Russians abandon the pledge.
You only need to look at falling bond yields to know that gold prices should be supported here. After a tumultuous tumble of roughly a $100 from the early September high of $1,566.20, gold has now once again tentatively recaptured both the psychological $1,500 an ounce level and the 50-day simple moving average (SMA).
Gold should be supported until we get to Friday’s employment number. If we get a disappointing payroll number, gold should rally toward $1,545 and possibly test the September high if we also see negative US-Chinese trade comments ahead of the September 10th high-level meeting.
Bitcoin appears to have found some around the $8,000 level. There has not been much news in the crypto space and it seems everyone has come to accept the lackluster debut of Bakkt futures trading platform. Bakkt is having embarrassing trading volumes since its debut, but its been rationalized that institutional flows will eventually make its way to the platform. Any big player is already trading bitcoin so it will take time for them to see their trading switch to the Bakkt platform.
Bitcoin could see a key catalyst back above $10,000 if we see trade talks stall at the October 10th high-level meetings. Bitcoin could see increased Chinese demand as a freefalling yuan in the past has supported crypto space.