Stocks sink as geopolitical anxiety grows; Big gains for Bitcoin & Oil (WTI only)

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The Japanese yen and Swiss franc rallied against their major trading partners in early trade as anxiety from the latest escalation in the trade war saw the prospects of the trade deal fall deeper into the summer.  Safe-havens gave back most of their gains and commodity currencies recovered some of their losses after lunch.  The latest decision from White House to block US companies from buying foreign-made telecommunications equipment from Huawei will likely see strong retaliation from China.  Google, Intel, Qualcomm, Xilinx, Broadcom, and Infineon all froze supplies of critical software and components to the giant Chinese telco and tech stocks are down sharply today.  The potential response from China could be an Apple ban and that would reverberate across all technology stocks.  US Stocks closed lower with the Nasdaq leading the way with a 1.46% decline.

Fed Speak – Standard comments from Clarida, Bullard, Harker, Bostic and Williams; Powell tonight

Brexit – One last stab for May    

Oil – Higher on expected continuation of OPEC + cuts

Gold – Limited gains despite strong safe-haven session

Bitcoin – $8,000 remains key

Fed

Fed watchers heard from five members of the Federal Reserve but gain little insight to what would be the next move with interest rates.  Many market participants are waiting to see the Fed deliver a big shift that will have them join the bond markets in signaling a rate cut will be in the near future.  Federal Reserve Vice Chairman Richard Clarida noted that unemployment in the US may be able to decline further without triggering excessive inflation.  The unemployment rate in April dropped to 3.6%, a 49-year low and the strength of the labor market has made it difficult for the Fed to offer further accommodation.

The Fed’s Bullard, a dove and voter, stated he would consider pushing for a rate cut if core inflation were persistently low.  The Fed’s preferred index for inflation was at 1.6% for the year ending in March, just below the Fed’s 2% target.

Federal Reserve Bank of Atlanta President Raphael Bostic provided no new insights, noting that the scales for the next move, a hike or a cut, are equally likely.  He added there are a lot of risks out there and if the economy weakens, a rate cut might be appropriate.

Federal Reserve Bank of Philadelphia President Patrick Harker advocated against policy rules being followed robotically.  He is not a voter this year and did not have much to say on the economy or outlook on policy.

The Fed’s Williams, a voter, spoke at an event in New York.  He added the Fed wants to sustain this expansion.

The bond markets are still pricing in a rate cut as the next move and as this trade war drags on the data-dependent Fed will have an easy choice in cutting rates.  The question is not will they deliver a shift, but when.  Fed Powell speaks tonight and on Wednesday we will get the release of the FOMC meeting minutes.

Brexit

Prime Minister May is revising her latest Brexit deal to appease Labour, which would have new proposals to uphold EU standards of workers’ rights and environmental protection.  A tighter customs relationship will do little to win over members who are requiring a confirmatory referendum.

While May has been extremely resilient throughout the entire Brexit period, it appears her time is coming to an end.  Brexit will most likely have a new face and current bookmaker’s favorite is Boris Johnson  Regardless of who wins, it appears Brexit will go on much longer and that is why the British pound will struggle to muster up any significant gains.

Oil

Crude prices rose as constructive production cut talk from OPEC nations and allies outweighed global growth concern fallout from the intensification of the trade war.   Over the weekend talks from Jeddah showed OPEC + members, excluding Russia, who did their best not give any clear signal, are on board to continuing production cuts throughout the rest of year, albeit if conditions warrant it.

Geopolitical risks remain plentiful and for the time being that will provide support on any trade war selloffs we see.  Until we see spare capacity exceed output at risk, crude should be supported.

The OPEC + meeting over the weekend did not yield any surprises, with the most important comments coming from Russia, the most important non-OPEC partner in the coalition, hinting they could reduce production cuts if the market needs more crude oil.

The base case is for OPEC and its partners to announce an extension of production cuts, especially if global growth concerns grow.  Russian could decide to argue they do not want to take part with further cuts, or they might just say they will cut production, but just no comply.

Gold

Gold prices rose slightly as the US-China trade war dealt another blow to global economy.  The Huawei story is reverberating across many markets and this could be the beginning of talks deteriorating further. The next step is likely to be the China’s response, which could deliver a major risk-off move for equities and other risk assets.  Gold bulls are trying to stabilize their market, but if gold can’t recapture $1,300 in the short-run, especially with all the demand for safey,  we could see downside momentum target last year’s lows.

Bitcoin

Bitcoin’s wild ride continues as bullish momentum returned and nearly tested the $8,300 level.  Monday’s 10% gain recovered most of the Friday selloff which bottomed out at $6,331 level.  The largest cryptocurrency by market value is up almost 50% in May, mainly on progress entering mainstream commerce.  The $8,000 mark is proving to be key for the Bitcoin and if we see consecutive daily closes above there, we could see the $10,000 level eyed.  To the downside, $6,500 is major support.

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