European update – Trade war, gold, oil, bitcoin

Markets bounce but sentiment still weak 

We’re seeing a bit of a rebound in early European trade on Wednesday, with US futures also a little higher as markets take a breather from the recent sell-off.

Source – Thomson Reuters Eikon

It’s too early to even try and associate this with any form of optimism given the events of the last week, while the size of the rebound compared to the days before gives it more an appearance of a dead cat bounce than anything else. There’s been a lot to digest and I wonder whether investors are simply taking a step back and doing just that.

We’ve seen rate cuts overnight from the RBNZ, RBI and BoT that have all exceeded market expectations which may be helping the rebound, given investors craving for more and more monetary stimulus. It may not yet be coming from the central banks they demand it from most but the mood is clearly shifting.

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Ideal environment for gold

The environment continues to look very favourable for gold, which is up 1% on the day again and still pushing for a breach of $1,500. It’s so far found some resistance around $1,490 but doesn’t appear to be lacking any support. The dollar has rebounded a little which may provide a headwind but three central banks cutting rates does it no harm.

The evolution of the trade war into a currency war has so far been largely symbolic, with China firing a warning shot with the higher currency fix and the US labeling it a currency manipulator. This could of course escalate further and encourage more aggressive tariff action and another breakdown in talks, prompting more risk-aversion in markets and adding to the bull-case for gold.

Gold Daily Chart

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Oil crushed by trade war fears

Oil has been crushed by recent events and the risks posed to the global economy and therefore the demand outlook. While much of the focus in recent years has been on the supply side of the equation, there’s been a very clear shift in 2019 and central banks are further fueling the slowdown narrative. Numerous inventory drawdowns recently are not providing much of a cushion for prices and if the API data on Tuesday is anything to go by, we may see a similar response today.

Brent Daily Chart

Bitcoin is no safe haven

Bitcoin has been on a good run this month so far, recovering well from its lows as scrutiny of the cryptocurrency space has eased up. There are those that want to apply safe haven status to bitcoin to explain the recent rally but these explanations are always very selective as there’s numerous examples of markets being risk-off, safe havens doing well and bitcoin not. Cryptocurrencies may have many appealing qualities but their role as a safe haven given their volatility and unpredictability is certainly not one of them.

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