US Open – Trade War, Powell, Oil, Gold

Stocks are set to open higher following yesterday’s selloff as markets start to become slightly more optimistic that this week’s high-level trade talks will yield a partial US-China trade deal.  This morning’s key headlines delivered optimistic tones as China said they are open to a partial deal despite the tech blacklist and that they will buy an extra $10 billion in agricultural goods.  In the short-term, a temporary trade truce will give a boost to global growth concerns.  Stock markets however will not go into full-on rally as a temporary solution will likely see risks remain for further blacklistings, visa restrictions, compliance on delivering agricultural purchases.  Until a broader deal is reach, the risks of fresh tariffs will remain as long President Trump is in office.
Markets delivered a limited reaction following Fed Chair Powell’s measured response that the Fed will resume Treasury purchases, stressing the buying should not be confused as QE, also refraining from firmly committing to another 25-basis point rate cut at the October 30th meeting.  The Fed will likely address the very short-term funding market stress at the next policy meeting.  In what is being considered more of a technical program, the Fed is expected to add between $200-400 billion to the Fed’s balance sheet. We however should not be surprised to see a complete return of QE once the US is much closer to a recession.  Powell probably has a few more rate cuts in the bag and as the global outlook remains vulnerable to major geopolitical risks and as inflation remains firmly anchored.

Oil
Geopolitical risks and an interim trade deal could give oil prices a much-needed boost.  Later this morning, the EIA weekly inventory report is expected to show another small rise in stockpiles.  Energy markets seem more fixated on the demand side of the equation and on geopolitical risks.  Crude prices (WTI) seem to have major support at the $52.00 a barrel level.  If oil prices continue to stabilize here, price may not find major resistance until the $55.50 region.

Gold
Gold’s bullish trend remains vulnerable to any confirmation of an interim trade-deal between the world’s two largest economies.  Volatility for gold will remain high, but the bullish outlook for gold should remain intact even if we see a trade truce.  Gold should still be firmly supported on central bank demand, geopolitical risks in the Middle East, and a global wave of stimulus.  If risk appetite comes back strongly following the next two days of high-level trade talks, buyers should return if we see the $1,465-1,480 an ounce region tested.

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