US Open – Trade War U-Turn, Oil and Gold remain volatile

This trade war is having more plot twists than a Quentin Tarantino movie.  The early morning risk-on reversal that stemmed from President Trump’s signal that China wants to restart trade talks is being refuted by the Chinese Global Times editor-in-chief.  Whether or not the phone calls were primarily technical, it seems Trump is concerned the precipitous drop we saw with US equities was dangerously approaching the price gains that came from the biggest rally in his presidency in early 2018. 

Trump’s biggest escalation in the tariff war is a risky move, random and too quick that will punish the US consumer and possibly send the US economy closer to a recession by the 2020 election. The mandate to get out of China will not be accepted by the business community and because they are such a large and fast-growing economy.

Economists are expecting Trump to reverse course as he will hear more comparison’s that this latest move could rival the mistake from the Smoot-Hawley Tariff Act of 1930, which eventually took the US economy into Great Depression. Trump’s poll numbers will take a hit and if we don’t see any trade progress in September, an economic slowdown will quickly become a deep recession. While, President Trump appears determined to assert a dominant negotiation position as we were expecting to enter the possible final rounds of talks, he may have overplayed his hand. The potential is still there for him to de-escalate the situation, but no-one can predict his behavior. Last week, he was in a position for a win-win with the trade war and his re-election bid. The last few days have raised the possibility for a lose-lose outcome.

Oil

Oil is rallying on optimism we will not see the doomsday scenario unfold with the US-China trade war.  The trade war for energy markets reached its most tense moment after China announced a new 5% levy on oil and when Trump retaliated so harshly hopes on any deal seem farfetched.  It seems trade talks are now becoming constructive according to President Trump and if we do see continued progress, demand concerns should be alleviated.  Growing bets for QE and much lower rates from both the Fed and ECB should be icing on the cake for the demand-side of the oil equation. 

Gold

Over the weekend, the two world’s largest economies took the trade war to Defcon 2 and gold prices rose to a six-year high.  Since then, President Trump has signaled that China requested a re-start of trade talks, even though the Chinese Foreign Ministry noted they were not aware of such a phone call.  The latest escalation over the weekend seemed to have kept gold’s climb toward $1,600 intact but has since seen much of the rally reversed after Trump claimed both sides had two “very productive” calls. 

A complete collapse with trade talks could have easily sent gold to $1,650, but it seems Trump is realizing his weekend move was getting ugly for the US consumer and seeing much resistance from American companies.  If we see continued progress with trade talks over the coming weeks, gold may pullback some more, but should still be supported by a plethora of fresh stimulus that will be flowing from the Fed, ECB and PBOC.   

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