Markets Rally as Dollar Remains King; Oil and Bitcoin Rise, while Gold Pullbacks

Risky assets remained bid during the New York session after the Trump administration granted trade concessions on Huawei, China effectively delivered a rate cut by reforming and improving the formation of the Loan Prime Rate and on expectations for Germany to begin fiscal stimulus measures.  All the major world equity indexes are in the green, with the Nasdaq leading the way higher.  The dollar is higher modestly against all of its major trading partners.  

The bullish case for higher US equities appears to be intact as the Fed will reluctantly be forced into an easing cycle and to use unconventional measures, all while the PBOC, ECB and other central banks deliver additional stimulus.  While the Fed is widely expected to deliver a 25-basis point rate cut at the September 18th meeting, many investors are expecting the Fed to disappoint President Trump and his call for them to signal 100-basis points in cuts over a short period of time. 

Fed Chair Powell’s speech at the Jackson Hole Symposium on Friday may not signal an easing cycle, but could tell what would need to happen for the Fed to consider resuming quantitative easing.  The Fed’s job is complicated with some recent resilient data points and a slight rise with inflation, but they will still need to go full dove.  The risks stemming from US trade war with China and the brewing one in Europe will derail longer-term investments for business and that will force the Fed’s hand if they want to keep the record long expansion going. 

Beijing appears to have won the latest round in the US-China trade war as President Trump continues to soften his trade stance as the US economy continues to show weakness.  Trump will continue his pressure on the Fed, but ultimately the fate of the economy lies in his hands and how much further he wants to escalate the trade wars with China and Europe.  Incremental updates on the trade will take place in the coming weeks and we should not be surprised to see no major de-escalations until after the Fed’s September policy meeting.  If the trade war takes a pivotal turn for the worst that could drive the economy into a recession right when voters will be casting their votes next November.  Trump will likely try to win both the 2020 election and trade war, but he will not let the latter cost him re-election. 

Oil

Geopolitical risks and trade war concessions are likely to keep oil supported this week.  The oil market is completely focused on the demand side and we could see little impact from the crude oil inventory reports this week, which are expected to see a slight draw.  Progress on trade, rising expectations central banks and governments will also use unconventional measures to stimulate the global economy should keep oil prices supported this week. 

Gold

A barrage of positive stimulus measures from China and Germany put a bid with risky assets and warranted a slight pullback with gold prices, but the bullish trend is still firmly intact.  Too much of the world bond market is in negative territory and with the rising expectations of global easing and extraordinary measures from governments, gold is going to shine bright even if we see a strong dollar. 

Bitcoin

Bitcoin’s safe-haven appeal may be a thing of the past.  Recently, the largest cryptocurrency saw strong correlations with gold and other flight-to-safety currencies, but the upcoming G7 meeting is likely see harsher rhetoric globally which will make life a lot harder for digital assets.  We could see government authorities show unity in preventing terrorist financing use of cryptocurrencies.  Bitcoin seems stuck in consolidation pattern as the number of bearish catalysts starting to grow.   If Bitcoin has a clean break of the $10,000 level, the next major support level would come the May high of $8,750.   

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