US Open – Trade Concerns, Retail Sales Miss, Oil, Gold

Stocks are softer on softer than expected US retail sales and fading trade optimism between the world’s two largest economies after the US gave support to pro-democracy protesters in Hong Kong.

US retail sales posted a surprise decline in September, the first drop in seven months, and a potential sign that we are seeing more signs that the US consumer is weakening.  If the consumer shows stronger signs of weakness, we could easily see the Fed commit to an easing cycle.  The situation with trade is likely to dictate whether Powell and company deliver a few more rate cuts by the summer.  Odds for the October 30th Fed meeting are now pricing in an 83.2% chance of a rate cut. Today’s retail sales miss pretty much seals a 25-basis point rate cut at the end of the month.

The House passed a few bills with the main one requiring an annual review of whether Hong Kong is autonomous enough to the mainland to legitimize their special trading status.  The proposed bills are damaging China-US relations at a critical time and we could see the situation in Hong Kong be the wildcard that could deliver a complete collapse in trade talk. The Senate has yet to signal when they would vote on the new bills.
Despite the negative retail sales print, trade worries and other geopolitical risk in the Middle East, stocks are still a stone’s throw from record high territory.  Central banks to the rescue is still the trade and for now markets are avoiding dumping equities.

Oil
Oil prices gave up most of their modest gains after the retail sales report showed the US consumer is showing signs of weakness.  A weaker US consumer is not good for domestic oil demand, but the prospects of easier monetary policy from the Fed and geopolitical risks abroad should keep crude supported in the short-term.  Trade worries are also weighing on oil prices and if the phase 1 trade deal falls apart, we could see the bullish case for oil thrown out the window.  While China has delivered tough rhetoric since the trade deal was announced Friday, the recent Chinese comments are seen as political posturing.  If West Texas Intermediate crude can hold above the $50.50 a barrel level this week, we could see price attempt to consolidate toward the $56 region.

Gold
Gold is taking its time recapturing the $1,500 an ounce level as US stocks seem well supported on what has been a solid second day of earnings.  The banks are still painting a healthy picture for the US consumer and while the today’s retail sales data told a different story, no one is questioning a softening trend in the data.  It seems hard for gold to breakout higher with stocks being so close to record high territory, but the prospects of greater stimulus from the Fed and never-ending trade worries  should keep the outlook bullish.

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