US Open – China Strikes Back, Yuan breaks 7, Oil slumps, and Gold shines

The US-China trade war seems to have entered the 10th round and China has come out swinging to start the trading week.  The US economy has been immune to most of the trade war but right now it appears China has them against the ropes.  China’s decision to halt crop imports was expected by some but the aggressive depreciation with the Chinese yuan will likely warrant a fresh retaliation from the US. 

The Chinese offshore yuan fell to a record low, while the onshore yuan breached the critical 7 level, a threshold policymaker have defended for over a decade.  The trade war needed to get uglier before we saw both sides be heavily motivated to reach an agreement, and we are likely to see risk assets take a beating a little while longer. 

Despite increased bets the Fed will address the policy miscommunication from last week’s policy decision, equities could continue to selloff hard on mounting trade escalations. Investors are not looking to pile into defensive plays and we could see the pullback on the S&P 500 test the $2,800 area.

Oil

Oil resumed its slide as the US-China trade war shows no signs of easing.  The general risk off theme is could get very dangerous for crude if we see the $50 a barrel level breached for WTI.  Right now, it seems we could see a number of oil tankers get seized in the Persian Gulf and that will do little to stabilize oil prices here.  The waning effects of a string of large drawdowns with US stockpiles and little hurricane activity is likely to keep energy traders remain skeptical for a bullish bounce. 

Gold

What summer doldrums!  The best trades for the summer are turning out to be going long gold, the VIX, and Treasuries.  The trade war, negative interest rate global environment and weak corporate earnings are all positive catalysts for the remainder of the summer for gold.  The yellow metal is on the verge of a making for a run towards the $1,500 an ounce level and after that there is not much resistance until the $1,650 region.   

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