Trade – Risk appetite remains supported on trade and improving US expectations
USD – Emerging Market FX keeps gains on China optimism
Oil – Inventories fell for first time in a month
Beige Book – Evidence of strengthening in the economy
Gold – Trade optimism and improving economic data continues to sink safe-haven demand
The chessboard has been set, two meetings are expected to finalize negotiations and a final ceremony could take place in late May or early June. The trade war between China and US has been going on for over a year and optimism has been running high that a deal will go down this summer. A trade deal might provide an initial boost for risk assets, but we may not see a significant follow through until we see the Chinese deliver their next round of stimulus.
The next move in the trade war is for US trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to travel to Beijing the week of April 29th. Chinese Vice Premier Liu He will then likely come to Washington DC on the week of May 6th. We will likely see both sides drag out the final details, so we should not be surprised if a deal is not final till late June.
US stocks finished down on the session as a mixed bag of earnings and lingering concerns over the future of health care dragged the sector down. Stocks have heavily priced in a trade deal and a slight beat on China GDP was not enough to trigger a major rally.
Expectations for the US first quarter GDP are also being revised higher as optimism grows. The Atlanta Fed raised their Q1 estimate to 2.4% from 2.3%. Economists from JP Morgan raised their forecast to from 2.0% to 2.5% while Goldman Sachs increased theirs from 1.7% to 2.1%.
The US dollar fell against most of its trading partners early in NY on solid Chinese economic data. Emerging markets continue to provide some of the bigger swings in FX as a broad China-based rally saw the lira, rand and peso all rally against the greenback. Commodity currencies however gave up their gains as FX volatility falls to the lowest level in 5 years. The inability for currencies to breakout is frustrating some traders, but they could be in for a nice surprise if we see an improvement with European data.
Yields also climbed higher with the 10-year Treasury note rising 0.4 basis points to 2.594%, while the German bund rose 1.4 points to 0.078%.
Crude prices showed little reaction to government data that showed a surprise draw of 1.4 million barrels, expectations were for a build of 1.6 million barrels. The release implies a slight improvement with demand, but today’s price action indicates traders are more focused on key resistance levels being reached on an exhausted 40% rally that was stemmed from the OPEC + cuts and US sanctions on Iran and Venezuelan oil.
Oil is likely to become a rollercoaster of a trade in the coming months. Risks to the upside could see disruptions from Mexico or Libya, prompt a move for WTI towards $70 a barrel and Brent to $80 a barrel. While, US production is expected to continue to rise, we have seen some headwinds from major chemical accidents and cuts in Capex spending possibly signal a pause in higher production levels.
The Fed’s Beige Book showed growth continued at a similar pace since the last report and that a few Districts reported some strengthening. Consumer spending and loan demand were mixed, while home sales were strong as was the outlook for tourism. The remarks were mostly positive as economic activity expanded at a slight-to-moderate pace.
The next FOMC rate decision will occur on May 1st and no change in policy is widely expected. Despite the optimism that has grown over that past couple weeks, expectations are still for the Fed’s next move to be a rate cut. Fed fund futures currently have a near 50% chance of a rate cut at the January 29th 2020 meeting.
Gold prices continue to sag as better economic data broadly and trade optimism appears poised to finally deliver a deal by early June at the latest. The yellow metal is also weaker from momentum on China’s surprising better-than-expected GDP, retails sales and industrial production data. While the PBOC is likely to increase stimulus in the coming months, a softer landing here could see a strong risk-on rally once we finally see a trade deal finalized.
Investors are also abandoning their gold ETF holdings, as SPDR Gold Shares sunk to the lowest level since October. A mixed bag of earnings results has so far not painted a worse picture on the economy than what was expected. Gold has now breached the key $1,280 support level and if we see further pressure, $1,260 could provide support.