US Open – Hong Kong, Mini-Recession, Stocks, Oil, Gold

US stocks will open down after a wave of global growth concerns is driving global equities sharply lower.  In Europe, both the German Economic Institutes and Swiss KOF cut their respective growth forecasts, another confirmation that further interest rate cuts and stimulus is warranted. 

Bearish momentum seems to be firmly in place following yesterday’s ISM US manufacturing purchasing managers index, which posted the lowest reading since June 2009 and marked the second consecutive month of contraction.  Concerns are growing that manufacturing weakness could be the domino that takes the US economy into a recession, but that is unlikely to be the case as long as the US consumer remains relatively strong.  The current environment is more like a mini-recession.  A few decades, ago manufacturing weakness could tip the US into a recession, but probably not so much now. 

Recent data shows the US consumers’ personal income has been rebounding since July, while personal spending has steadily declined since March.  If we did not have a cloud of uncertainty over trade tariffs being passed onto the US consumer, US equities would be sharply higher, as the stimulative effects of the latest two Fed rate cuts have yet to trickle into the economy and the credit markets are still borrowing money to the US consumer. The October 10th high-level trade talks are key to the next major move in stocks and we should start to see some range trading leading up to the event.  

Stocks may have a messy fourth quarter, but the outlook is certainly bright for 2020.  The trade war should see some relief in the coming weeks, earnings might be flat or slightly negative, and with a wrath of global stimulus, US stocks should become one of the most attractive spots to park money.

This morning’s key US economic releases is expected to show the private employers added 140,000 jobs in September, a significant decline prior month’s 195,000 reading.  Weakness in the labor market is what is needed to tilt expectations into fully expecting the Fed to deliver a third consecutive rate cut at the October meeting. 

Hong Kong

The situation in Hong Kong remains tense as we could see Beijing step up punitive actions against protesters now that we are beyond the 70th anniversary of the Communist Party rule in China.  China is ramping up the military might and clashes with protesters will likely intensify.  Yesterday, one demonstrator was show with a live round.  Hong Kong protesters are seeking more democracy which would suggest the end of ‘One Country, Two Systems’, something Beijing will not accept. It it were not for the trade war, the situation in Hong Kong would be dominating the headlines. Hong Kong remains a key risk event that could one day rattle Asian markets, but for now it seems the steady escalation is tolerable.

Oil

Oil prices are attempting to stabilize following another strong selloff that stemmed from plummeting demand outlooks and shrugging off tightness in supplies.  Oil did not see a summer spike in oil demand and the job for OPEC and allies seems to be to try to promise more cuts.  Energy ministers are meeting in Russia, but we should not see any substantial promises stem from there. By the time we get to the December production cut debate, the oil market will we be even more oversupplied as the US production regains its uncharted trajectory.

Geopolitical risks are probably the only thing keeping West Texas Intermediate crude above the $50 a barrel level and that should be the case for a while a longer. 

Gold

Gold prices remain vulnerable following the break of the key $1,480 an ounce support level, but should see key support as we start to see a continue trend of soft US labor data points.  The greatest safe-haven trade on earth is likely to regain its groove once we start to see further softness with US data.

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