US Close – Stocks remain fixated on trade, World’s Biggest IPO, OPEC New Deal, Gold Demand

US stocks continue to seesaw over trade headlines.  Earlier in the session equities were climbing higher on expectations the Trump administration will not hike tariffs on December 15th and that the Fed will avoid giving any hints of a hike in the near future. 

President Trump maintained his coyness with regard to the December 15th tariff deadline but stuck to his positive script that talks are going well.  The December 15th tariffs will punish the US consumer as prices of children toys, laptops, and other electronics will jump higher.  It could be political suicide in some battleground states if Trump went forward with these next rounds of tariffs.  Stocks did come off their session highs after a report that the US and China were still battling out how much of agricultural goods the Chinese will commit to purchasing. Markets don’t expect the next round of tariffs, but are skeptical we will see a phase-one deal this side of the Christmas holiday.

Aramco

Saudi Aramco will be the world’s largest firm.  The heavily anticipated IPO saw a final price set at 32 riyals ($8.53), thus making the valuation come in at $1.7 trillion.  This is being somewhat viewed as a positive start for the Saudis and keeps their longer-term vision intact.  Aramco’s share sale offered 1.5% of its shares and raised $25.5 billion.  While the kingdom initially hoped to see a valuation over $2 trillion, the current listing could thrive as they are entering the market at a time when energy shares globally are undervalued. 

Oil

Oil prices are holding onto most of this week’s gains after OPEC agreed on deepening their oil production cut agreement.  The additional reduction of 500,000 barrels a day will see limited changes to OPEC + supply as current overcompliance by the Saudis will cover for a good chunk of the today’s new agreed upon quota.  Oil didn’t break out much higher as the today’s decision seems to be more of a housekeeping move that will narrow the gap between their current target and the overcompliance we have seen from the alliance. 

In order for oil prices to continue to rally, we will need to see the Russians, Iraqis and Nigerians, the production cut cheaters to follow through with their share of promised cuts.  If an agreement is reached, this will be quickly revisited in March and likely only be successful if we see the cheaters start to show some compliance.   Many energy traders are looking to fade this oil price rally and they may succeed as markets will be skeptical for Russians, Iraqis and Nigerians to live up to their end of production cut deal.  The problem for oil bulls to is that demand growth is still falling and the first half of the year will also see stronger oil output from Norway, Brazil and Guyana. 

Gold

Conflicting trade headlines have gold prices stuck in the middle of its two-month trading range.  Gold has weathered a plethora of trade optimism that seems to be running out of steam.  The outlook for gold is starting to look bright again as it appears we will continue to see strong central bank demand and only a band-aid solution with the US-China trade war in the coming weeks.  The Trump administration is widely expected to pass on moving forward with the December 15th tariff deadline and we could see investors turn defensive immediately following any announcement.  The prospects of broader trade deal seem unlikely this side of the 2020 election and we will likely see business confidence remain weak. 

The backbone of a longer-term bullish outlook for gold remains central bank diversification away from the US dollar.  Central banks are driving their net purchases close to a 50-year high and that will deliver strong underlying support for miners. 

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