US Open – Stock rollercoaster ride continues, UK/Japan trade deal, Oil steady, Gold softer

It seems the stock market rollercoaster ride is flattening off its first major dip, but that sinking feeling in your stomach is far from over.  The Nasdaq is leading the charge this morning, down 9.2% from its record high, but still up over 70% from the March low.  US stocks are trying to shrug off a disappointing jobless claims release that show over 29 million Americans are still receiving some benefits and widely expected failure in the Senate to pass a ‘skinny’ coronavirus aid bill. 

Investors are likely turning their attention to next week’s Fed meeting, which throughout the pandemic has offered consistent support for the economy and risky assets.  The upcoming meeting could reveal some hints as to what needs to happen before policymakers are ready to raise rates. 

While the nonfarm payroll report earlier this month showed a strong improvement with the unemployment rate, no one doubts that labor market recovery has hit a brick wall and needs more support, this time from Congress. 

Next week, the Fed might will have to take a backseat to the brewing problems with the technology sector.  First, we see how markets react to the ending of the buffer period and the start of sanctions on Huawei sanctions, forcing Taiwan Semiconducor Manufacturing to providing them with chips.  The next tech domino is the Bytdance deadline to sell their TikTok’ US business, which seems very unlikely at the moment.  The sale would require the satisfaction of both Chinese and American regulations. The tit-for-tat responses between the US and China will be critical for the coming weeks.

UK

The British pound is having its worse week since March as post-Brexit trade talks seem to be futile. Brexit negotiations with the EU have yielded no progress and the prospects of more stimulus from the BOE seem to be growing.  The pressure is also growing for Chancellor Sunak to consider extending parts of the furlough scheme that have been critical for providing stability in the labor market. 

The UK economy delivered its third straight month of expansion, but investors remain skeptical the recovery will continue until the no-deal Brexit risk is off the table. 

The news flow was not all negative as the UK reached an agreement with Japan to clinch its first major post-Brexit trade deal.  It’s big progress towards getting closer to Trans-Pacific Partnership and should provide some optimism Britain will eventually get something done with the EU.  While the first major deal is welcome news, it is only a broad agreement on a ministerial level and only boosts trade with Japan by 15.2 billion pounds. 

Oil

Crude prices are headed for another weekly decline as demand woes return, inventories rise, and the dollar stages a comeback.  Oil doesn’t know what it wants to do today, but it is confident it will deliver the first consecutive weekly slide since the April collapse. 

Much attention is falling on the lack of American road-fuel demand, but in the short-term that could change as some companies are starting to urge more people stop working from home.  The next few months will be extremely uncertain for the demand outlook as no one knows how the winter wave of the coronavirus will trigger scattered lockdowns throughout the country. 

WTI crude seems destined to trade around the mid-$30s for now as the market continues to work its way towards balance. 

Gold

Gold looks lost as it is stuck in the middle of its trading range that has been in place for the last month.  Consolidations normally are welcome news for gold bulls and this time should be no different.  It is pretty obvious that the stimulus trade is not going away anytime soon for gold.  In the US, Capitol Hill will likely need to see further deterioration in the labor market before they can agree upon the next coronavirus relief bill.  In Europe, Brexit and slowing momentum with the economic recovery will keep their central banks providing more stimulus.  While China is celebrating some virus success now, Southeast Asia is fighting a new wave of cases.  

Gold still looks bullish, but it will struggle to break the $2000 level again until the dollar resumes its downtrend.  Gold’s safe-haven appeal will struggle if all the risks to the outlook come crashing at once.  Presidential election uncertainty, Brexit woes, trade tensions, elevated jobless claims and a Fed policy mistake could trigger a short-term scramble for cash, which would be negative for gold.  Gold’s path back to record territory is still there, investors however need to prepare for a choppy ride. 

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