Market Brief – Monday 7/1/19

President Trump agreed to restart the complex trade talks with President Xi by holding off on further tariffs. President Trump is also going to allow U.S. firms to resume selling goods to Huawei, who already have resumed shipments by finding ways to skirt the Trump Administration’s ban on selling to Huawei. President Trump also mentioned China would start buying large amounts of U.S. agricultural products in exchange for lifting the Huawei ban, but this has not been confirmed by China.

President Trump was forced to avoid escalating the trade talks out of fear of sparking a major sell-off in stocks. President Xi said China is in no hurry to get the trade deal done, especially with the 2020 U.S. Presidential elections coming. The outcome of the meeting was that nothing really changed.

President Trump was scheduled to meet with Prime Minister Modi of India on Friday to discuss trade and the removal of tariffs on U.S. goods being imported into India. There has been no mention of the outcome of this meeting.

France, Germany and the United Kingdom announced on Friday that Instex (Instrument in Support of Trade Exchanges) was going online. Instex is a Special Purpose Vehicle that allows companies in the European Union to conduct business with Iran without having to deal with U.S. sanctions. Both Russian and China have expressed interest in participating with Instex. Iran will presumably be able to export oil and conduct trade outside the prevue of the U.S. sanctions with members of Instex.

Hedge-fund managers have taken a huge speculative position in gold going into the G-20 summit in Osaka Japan. Gold prices tend to rise during periods where U.S. Treasury yields are flat or falling while consumer prices are rising. Absent of further tariffs, consumer prices are unlikely to rise significantly, meaning the bullish case for gold is premature.

Computer algorithms drove U.S. equity futures higher Sunday afternoon when the futures market opened, which sent the S&P 500 to new all-time highs, even though nothing really changed regarding the trade war. The same algorithms pushed Treasury yields up slightly and drove gold under $1,400 per ounce.

In overnight trading, the economic data coming out of Asia was disappointing. South Korean chip exports fell -25.5% and exports fell -13.5% on an annualized basis. China’s factory PMI remains in contraction territory, coming in at 49.4. Japan’s factory PMI is also in contraction, posting a 49.3 print. Taiwan’s factory PMI continues to slide further into contraction at 45.5. South Korean Markit PMI is in contraction at 47.5. The Caixin China PMI entered contraction territory by posting a 49.4 print along with China’s New Orders sub-index which also contracted to 48.8.

The S&P 500 opened at a new all-time high as Wall Street is now pricing in a full 1% rate cut by the Fed later this month. U.S. Construction Spending fell -0.8% in May and -2.3% on an annualized basis. Construction spending leads payrolls, so look for a weak payroll report on Friday. The ISM Manufacturing survey for June came in at 50.6, showing a slight expansion in the manufacturing sector, while Prices Paid and New Orders both fell.

After watching stock prices slide after the S&P 500 opened at new all-time highs, investors came in during the last hour of trading to make sure the index closed at a new all-time high. Treasury yields rose in early trading, but buyers came in during late trading to bring yields back down a bit.

Physical gold was rejected at resistance and fell, along with the gold and silver miners. This next move down should confirm where support is and set up a nice buying opportunity unless prices break through support. The dollar held its 200-week moving average as buyers stepped in to push it over its 200-day moving average, which is bearish for gold in the short term.