The risk-on rally is taking a time-out as trade promise fatigue kicks in. US stocks are pausing here as investors wait to see if the Trump administration will get enough purchases from the Chinese to remove the existing additional tariffs. China’s stance is somewhat hardening, but Wall Street remains confident that the phase-one deal will get wrapped up this month. It is unlikely we will see a repeat of what happened in May when talks completely fell apart, as the phase-one deal is saving the dicey structural issues for the next round of talks.
It will be hard for investors to not want to buy into this rally with an accommodative Fed, growing optimism the downturn in Europe might not be prolonged, and with a strong US consumer ahead of holiday spending time. The playbook for the rest of the month might be to continue to buy the trade optimism rumors but sell the news of when the deal gets done.
German factory order data impressed earlier in the session, but the euro failed to rally. Next week, Germany could fall into a technical recession, but today’s factory data could suggest the deterioration could be bottoming out. Economic growth in Germany will rely on a positive outcome with the Trump administration’s decision on US tariffs on European autos and if the German government can deliver some fiscal stimulus.
Oil prices are shrugging off yesterday’s bearish API report that saw crude inventories rise 4.26 million barrels last week. The build was almost triple analysts’ forecast and delivered a brief reminder that oversupply concerns are not going away anytime soon.
Oil’s initial pullback from the six-week high was short-lived as better than expected German factory data and euro zone service PMI readings suggested the downturn in Europe might be shallow. Oil is also getting a boost from Iran’s decision to expand nuclear activities at their Fordow research plant. This will test world leaders that are trying to salvage the 2015 nuclear deal.
Middle East tensions along with trade optimism should help oil overcome continued rises with US stockpiles.
Gold took a left hook to the chin yesterday, plummeting 1.7%, the worst decline since September. Demand for safe-havens fell out of style as investors continue to see fresh record highs with US stocks, continued trade optimism, better-than-expected earnings, and rebounding data from Europe. Gold should still be supported by a plethora of geopolitical risks that include tensions in the Middle East, Brexit, and the inevitable conclusion that a phase-two deal will be much harder to achieve.
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