Dollar recovers as markets await trade tariff outcome

The dollar was little changed and US stocks ended mixed, paring earlier gains that stemmed from President Trump’s tweet that signaled China wants to make a deal.  The tweet temporarily alleviated the recent batch of escalating trade tension headlines.  Much is on the line for the Thursday talks in DC and many investors are skeptical that enough progress will occur to avoid seeing Trump slap on higher tariffs on Friday.  Trade talks have been going on for over a year and tactical negotiating moves from both sides are likely to see heightened tensions before we see a deal finalized over the next several weeks.

Trump already let China off the hook with the March 1^st deadline and we should not be surprised if he ends up coming through on his tariff threat this week.  A deal is still expected, but the final issues will likely need more time than one day, so we could see the US impose higher tariffs with a later start date, allowing talks to continue with a new deadline.

Treasuries – Lowest bid to cover since March 2008

Brexit – Talks on verge of collapse

Iran – 2015 Nuclear Accord in danger

Oil – Big Drop drives crude higher

Gold – Rally fizzles on trade worry pause

Treasuries

US Treasury yields rose sharply following a weak 10-year auction that produced the lowest bid-to-cover ratio in a decade.  It is unclear if the results stemmed from a lack of buying from China.  Indirect allotment, which usually comes from foreign central banks and financial institutions came in at 53.3%, well below the 64% recent average.

Brexit

The British pound can’t’ seem to muster up a sustained rally as a Brexit deal seems to be too evasive.  PM May appears busy trying to get her deal pushed while avoiding constant calls for her to quit.  The Tory party kept rules on leadership unchanged, probably giving her time until the EU elections that take place on May 23^rd.  If she is unable to push her deal by then, the writing should be on the wall for the PM.

Iran

Iran’s partial withdrawal from a landmark nuclear deal is putting pressure on European and Asian nations to ease restrictions on their Iranian banking and oil sectors. Iran is giving Britain, France, Germany, China and Russia a 60- day deadline, otherwise they will remove caps on uranium enrichment levels and resuming work on its Arak nuclear facility. The US sanctions are having a strong impact to the Iranian economy which is expected to see their recession deepen.European officials have been critical against President Trump’s decision to reimpose sanctions and ultimately end the accord that was reached under President Obama.  If we see some support given to Iran, Trump may answer back with sanctions to countries who help Iran.

Over the next 60 days, we can see the Iran story either lead to further economic weakness to the Gulf Cooperation Council (GCC) or it could lead to a military clash.  A growing risk could be Iran’s closing of the Strait of Hormuz, which handles about two-thirds of the world’s seaborne cargoes of crude oil and other petroleum liquids.

Oil

West Texas Intermediate crude surged higher after crude inventories declined by almost 4 million barrels, indicating we could be seeing a tighter oil market.  Crude prices are stabilizing after making a 5-week low and could see further upside if trade talks do not completely fall apart this week.  Oil could see buyers return on spare capacity concerns.  Geopolitical risks such as Russia’s oil contamination issues, Venezuelan and Iranian sanctions, along with fighting in Libya, should keep crude supported.

Gold

Gold’s rally, which made a 3 ½ week high was short-lived as trade worries took a break after Trump’s optimistic tweet that China wants a deal done.  Safe-haven demand has been fleeing to the Japanese yen and greenback, and not so much to gold.  The yellow metal will likely need a broader commodity market rally to seen sustained gains and we might not see that until we see global growth concerns alleviated.

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