US Open – Stocks fall as China hints at reneging on trade deal, ISM shows worst is over, US protests spread, Oil slips, Gold drops on Virus drug updates

US stocks declined after Chinese government officials advised major state-run agricultural companies to pause purchases of some American farm goods.  Equities quickly gave up earlier gains that stemmed from major European manufacturing PMI data that improved off record lows.

Protests following George Floyd’s death are spreading like wildfire across the US.  After the sixth night of protests, financial markets have been unperturbed, but the impact will be felt by state budgets of many of the big cities.  The fiscal hit from dealing with COVID-19 and the recent protests could lead to several government job losses as many states were already strapped for cash and have had difficulty secure federal aid.

The economic recovery is fragile and violent protest across major US cities will make thisi rebound longer and flatter.  For now, risky assets remain supported by the Fed put.

The dollar softened as financial markets remain optimistic that the global economic recovery remains in place and that the US-China tensions will fall off a cliff anytime soon.

ISM

US manufacturing showed an improvement in May according to the ISM survey. Still deep in contraction territory, the headline reading improved from an 11-year low, but fell shy of the consensus estimate. New orders improved significantly along with all the other components.

The ISM report confirms that economic recovery is taking hold. US stocks flickered positive after the improving outlook for manufacturing.

Oil

Oil prices fluctuated after OPEC + members signaled an earlier gathering was likely to take place as support grows for a short extension of the current production cuts.  WTI crude’s record rebound is losing steam as the US-China phase-one trade deal appears to be dying quickly and as skepticism remains high that Russia would only consider committing to an additional month of production cuts and not the lofty goal of three months.

The situation in the oil market is starting to show some exhaustion for bullish catalysts.  A lot of the pickup in demand from the reopening of the global economy from the coronavirus is already priced in.  Production cut efforts will also start to wane this summer.

The Saudis want to keep production cuts in place for the remainder of summer, but as the rest of the world reopens, someone is going to want to grab that demand.  It is hard to picture a scenario that has WTI crude back above the $40 level that does not include a surprise disruption at a key oil facility.

Gold

Gold prices are underperforming despite rising expectations that the US-China phase-one trade deal is about to get ripped up and as widespread protests across the US add to the concern a second wave of coronavirus could hit major US cities.  Trade frictions between the world’s two largest economies will start to put a dent in the global economic recovery trade and that should provide gold with further support.  The violent protests across the US are not yet moving financial markets, but as they continue for a seventh day it will disrupt many businesses reopening plans.

Gold’s kryptonite seems to be any progress towards finding a treatment and vaccine for the coronavirus.  Gold gave up earlier gains and turned negative after Moderna started a Phase 2 study of its experimental COVID-19 vaccine and Eli Lilly kicked off their Phase 1 study for a potential antibody treatment.

Gold’s outlook is still bullish and will remain supported by the Fed’s put.  Fresh stimulus prospects and rising uncertainties with the global economic outlook should drive gold prices higher in the short-term.

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