Trade War Selling Takes a Breather

The S&P 500 stayed near its 12-week low as it appears markets are bracing for another major round of selling.  Trade concerns received no help from VP Pence’s comments in Canada and growth concerns remain in place after the US GDP revisions show consumers are leading the way on less income.  The pace of growth in the US is expected slow down dramatically as trade worries grow and will weigh on the American consumer.  At the close Lipper reported US high-grade bond funds posted the largest outflow since 2015, a potential sign that we could see further risk aversion.  As the Treasury markets continue to reprice growth prospects for the rest of the year, risk assets appear to remain vulnerable.

The global bond rally saw the 10-year Treasury yield fall 4.7 basis points to 2.213%, while 3-month yield stabilized around the 2.3634% level.  The yield curve inversion between 3-month Treasury bill and the 10-year note fell deeper into inverted territory, with investors now wanting a 15.8 basis point premium for holding the shorter-term note.  The dollar was little changed to its major trading partners, while gold prices rose half a percentage point.  Both the Dow Jones Industrial Average and S&P 500 finished 0.2% higher, while the Nasdaq rose 0.3%.  Asian markets are not likely to see much momentum from the US session.

USMCA – Pence and Trudeau deliver constructive comments

Fed Speak – Clarida hints at a more accommodative policy

Oil – Crude sinks on bearish EIA report

Gold – Slowly grinding higher

Bitcoin – Spikes above $9,000

USMCA

Vice President Pence delivered assurances to Prime Minister Trudeau that the US will move forward with the USMCA, while many still question whether the Trump administration will be able to gain Democratic support.  The new NAFTA will now try to gain approval through all three respective governments.

Pence did deliver some inflammatory comments to China, noting that the US can more than double tariffs on China if necessary.  It seems markets are getting nervous that we may not seeing anything constructive on the trade front until the June 28-29^th G20 summit, where President Trump and his Chinese counterpart will meet on the sidelines.  The longer the trade war last, the greater the global growth deterioration.

Fed

Markets paid little attention to comments from both the Fed’s Clarida, who was at the New York Economics Club and the Fed’s main man on bank regulation, Quarles who spoke at a conference in DC.  Quarles reiterated interest rates should be used for the Fed’s mandate of inflation and employment goals rather than to address concerns about financial stability. Vice Chairman Clarida stated, “If we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy.”

Markets are eagerly waiting for that key moment when the Fed capitulates and signals rate cuts are coming.  Fed speak will be plentiful over the next several days, but markets may focus in on Fed Chairman Jerome Powell’s June 4th remarks at the start of a two-day Fed conference in Chicago.  While Powell may be unlikely to deliver a clear message that rates will be coming down, he should address the concerns to growth that are stemming from the US-China trade war, and that may give markets enough of a reason to price in a rate cut before the summer is over.  Currently markets now see a 61.2% chance that the Federal Reserve will cut interest rates at the September 18th meeting.

Oil

Crude prices plummeted immediately following a very bearish EIA report.  Weekly stockpiles showed a small draw of 282,000 barrels, less than the expected decline of 1.1 million barrel eyed by analysts.  US production appears to be ramping up too quickly to allow inventories to come down much.  Refinery utilization remains subdued this season, despite today’s rise.  Exports have yet to increase and that just adds to the bearish argument for lower prices.  Gasoline inventories also posted a strong rise for a second consecutive week, despite the beginning of the summer driving season.

West Texas Intermediate crude could remain under pressure in the short-term, especially if we see global growth concerns accelerate on continued trade tensions between the US and China.  Oil is also breaking below some key technical indicators that could support a move back towards the low- to mid-50s.

Gold

With stocks stuck in limbo, gold prices are making another attempt at breaking out above the tight range that has been in place for the past 7-weeks.  In the middle of the day, Billionaire, Thomas Kaplan, The Electrum Group founder in a Bloomberg interview said he believes gold could increase to $3,000 to $5,000 in his longer-term view that could take decades.

Bitcoin

In the middle of the NY session, Bitcoin spiked over the $9,000 level in what was a flash crash move that saw quickly come back down towards the $8,640 area.  No news was attributed to the sudden pop, but wild moves have been no stranger to the crypto world.  The bullish trend appears to be firmly supported by growing interest from large institutional firms and the high-tech community.

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