Risk aversion sentiment grows as shutdown continues and optimism fades on trade front

Stocks – Market pessimism grows after Intel disappoints

EUR- Draghi’s cautious tone and soft EZ data

SHUTDOWN VOTE – Senate rejects both plans; back to square one

OIL – Venezuelan leadership deadlock likely to lead to sanctions on crude exports

GOLD – Strong dollar sinks precious metal as political risks remain

In what was a choppy session, stocks battled their way higher only to see after hours earnings reports erase most of the gains.  The key reports after the close were mixed with both Intel and Western Digital sinking falling short on revenue, while Starbucks was the star performer with strong numbers and guidance.  On a day when technology stocks rode the momentum from Xilinx, Texas Instruments and STMicro, Intel a bellweather for the tech sector produced a beat on the earnings but the guidance was very soft for Q1 and the full year revenue forecast was lower than what the street was expecting.  CFO Bob Swan noted in an interview that they are more cautious because global economic growth is slowing amid the possible impact of geopolitical dynamics. Looking into Asia, we could see the dismal results from Intel and Western Digital erase most of the optimism we saw in New York.  The Nasdaq finished the session higher by 0.7% to 7,073, while the Dow was lower by 0.1%.

Earlier in New York, the financial markets did not like Commerce Secretary Ross’s comment that the US is “miles and miles away” from a China trade agreement.  Many failed to focus on the rest of his comments that there is a fair chance a deal will get done, just not this week.  The next major battle with the trade war is next week when Vice Premier Liu He arrives in the US at the end of the month.  Markets may not pay much attention to political posturing before then.

EUR

The cliff note version for today is that the euro zone is consistently showing softer data prints and the ECB will likely not hike rates this year.  In early trade, the euro fell against the majority of its trading partner following poor euro zone flash PMI readings that showed the slowest growth since 2013.  Even Germany’s manufacturing sector fell into contraction and had the worst print since November 2014.  The euro did recover losses following a surge in equity buying, but that ended once the ECB was centerstage.  The ECB finally caved and abandoned their position that risks are “broadly balanced” and switched it to that they are tilted to the downside.

Shutdown

The partial government shutdown is now in its 34^th day and as expected today’s Senate voting shot down both dueling bills.  The one interesting note is that the Democratic bill that would fund the government to February 8^th was 52-44 vote that did win over 6 Republican votes.  President Trump’s proposal was voted down 51-47.  Today’s political theater delivered many headlines, but we are nowhere closer in seeing an end to the shutdown.  The pressure intensifies on the President each week as 0.1 percentage points is taken off GDP growth.  The trade war is a separate issue, but the President needs a win, and he will need to decide soon whether he will move forward in resolving the shutdown or the trade war with China.  If he leaves both at their current states, he will see all the stock market gains and confidence in the economy evaporate.

OIL

Oil prices rallied over 1% as expectations grew for the US to deliver sanctions against Venezuela crude exports, also shrugging off news of a strong build from the weekly EIA petroleum report.  President Trump along with many other leaders has recognized opposition leader Juan Guiado as Venezuela’s interim president, while Venezuelan dictator Nicolas Maduro receives the support from the military.  The US is planning to unleash sanctions that include a crude export ban, with the possibility of increasing them to cover all goods, similar to the sanctions imposed on Iran.  Venezuelan oil production has been declining steadily, dropping over 600K barrels per day in 2018, with current output around 1.2 million bpd.  If we see the sanctions imposed and Maduro is giving no reasons why we should not, we could see several hundred thousands of barrels come off the market, providing a short-term boost for oil prices.

The weekly EIA petroleum report saw crude prices whipsaw following the surprise build of 8 million barrels, markets were expecting a draw of 500,000 barrels.  The initial drop was quickly erased and oil remains near the middle of its two-week trading range.

Gold

The yellow metal weakened today as a strong dollar kept pressure on most metals.  Gold’s recent bullish rally from $1,200 to $1,300 was primarily driven by global slowdown concerns, trade war uncertainty and a stronger dollar.  We may need to see a major risk off event, such as the shutdown going deep into February or no extension to the trade truce between the US and China, to see the precious metal break out above $1,300 an ounce.  Silver and palladium prices are lower, while platinum is the one standout trading almost a full percentage point higher and taking out the $800 level.

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