Tuesday’s risk-on rally saw US stocks recover roughly half of yesterday’s losses after President Trump attempted to calm markets and signaled it would be clear in “three or four weeks” if talks were successful. The US dollar’s best gains were to the British pound and safe-haven currencies, the Japanese yen and the Swiss franc. Cable keeps losing ground as PM may seems to be running out of ideas to get her deal pushed through Parliament.
Treasury yields also advance with the 10-year rising 1.1 basis points to 2.412%. Today’s price action shows markets are still pricing in a trade deal to get done by next month’s G-20 summit in Japan.
Stocks – Trump calms markets
EUR – German GDP on tap; temporary factors eyed for strong print
Oil – Geopolitical risks control the narrative
Gold – Trade optimism sinks safe-havens
Bitcoin – Interest reinvigorated on Wall Street
Asian markets are likely to see a positive open after global equities benefited from a positive tone on trade talks from President Trump. We are far away from a final deal being, markets are not even sure when both sides will meet again, but no escalation in tensions was good enough of a reason for investors to return to buying stocks. The Nasdaq outperformed rising 1.1% to 7,734, while the S&P 500 rose 0.8% to 2,834.
German GDP is expected to rebound Wednesday morning. Last month, the German Economy Ministry cut German GDP growth in half to 0.5%. If the first quarter reading comes in at the expected 0.4%, that would be close to the high end of year forecast. While we could see a strong rebound, the US – China trade war will likely overshadow any robust reading. Some analysts are saying the results will be skewed due to front-loading purchases ahead of Brexit, tax cuts, good weather, and a pickup in car manufacturing.
The euro may see limited upside on a strong beat, as trade war concerns linger and the German ZEW survey showed a deterioration of 7 points in the May survey.
Oil prices initially rose over 1% as Middle East tensions remained on high alert after Saudi Aramco’s pumping stations were attacked by two Iranian backed drones. Markets appear not ready to focus on this week’s news that IEA sees US crude oil production increasing by 1.49 million barrels per day (bpd) which would be an average of 12.45 million bpd in 2019. If accurate production would outpace global oil demand growth forecast of 1.4 million barrels.
The security of global oil supplies remains the dominant theme for crude and if we see continued threats from Iran and disruptions with production in Venezuela or Libya, oil prices could quickly march back towards the the 2019 highs.
Venezuelan oil production, which is still near a 16-year low, is expected to stabilize around 750,000 barrels a day. Electricity issues appear to be over, but that does not mean it is business as usual for Venezuela. Most of the Venezuelan crude that is on tankers is synthetic and Asian buyers have limited ability to process it and with US sanctions in place, that crude will have trouble finding a home. The Venezuela situation is likely to lead to an increased reduction of spare capacity from other OPEC members.
The banter between Iran and the US is intensifying along with attacks on vessels in the Persian Gulf. Tehran’s economy was weak to begin with and the US sanctions are having a crippling effect. Iran is now renouncing parts of the 2015 nuclear deal in hopes to pressure Europe into giving some sanction relief. While both the American and Iranians say we are not on a path to war, the risks are rising.
The weekly API report at the end of US session took away half of the gains after reporting a strong build of 8.63 million barrels last week. Current expectations for the EIA US crude inventories to only rise by 29,000 barrels, with a low estimate of -4.3 million barrels and a high estimate of 4.7 million barrels.
Gold prices naturally pulled back after a positive risk-on trading session saw appetite for safe-haven assets flee. While stocks saw a robust rebound, the overall optimism that we will likely see continued progressive steps in trade talks is unlikely. The unpredictability of Trump’s escalating comments and China’s response is likely to keep safe-haven appeal until a conclusive deal is outlined.
Bitcoin mania appears to be back. Bitcoin is up over 100% from the February low on further progress entering mainstream commerce and interest in offerings from Fidelity, Etrade and Robinhood.
This is not the first attempt to gain retail acceptance, but this time it appears to be attracting big name stores, such as Amazon-owned Whole Foods, Crate and Barrel and Nordstrom. While using Flexa, consumers can buy goods using their phones with digital scanners that are already in most retailers. The adoption of using Bitcoin for retail consumers will continue to grow if the processing times are fast and costs are cheaper than traditional credit cards. In order complete mainstream success, crypto volatility will need to ease.