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Market Brief – Thursday 2/21/19

U.S. futures and Treasury yields moved higher in overnight trading as news broke of a potential outline to end the trade war between the United States and China. While the computer algorithms were busying driving equity prices higher, the actual news is there are six memoranda of understandings being drafted.

Memoranda of Understandings (MOUs) are non-binding, non-contractual, and are not agreements. They are in the truest form, outlines between two parties that state the requirements and responsibilities of each party. They are the foundation of a contract, but lack specifics, by design. An MOU is a letter of intent by both parties to understand and work on the issues with the hope of creating an agreement in the future.

By creating MOUs, both sides will be able to show they are working towards an agreement without having an agreement or a timetable to establish an agreement. In the meantime, the tariffs are causing additional economic damage on top of the Fed’s monetary tightening.

This morning news hit the wires that the MOUs will also include China buying $30 billion more agricultural commodities than they normally do, which is in the mid-twenty billion per year. The commodity sector shrugged off this news, but if it happens, it is big news for U.S. farmers in the short run. President Trump wants China to buy our crops and as long as China agrees, with the intent to work on the other issues, this trade war can come to an end.

Equities pared their overnight ramp as stocks headed lower in early trading. Bloomberg reported this morning that the largest 7-10-year Treasury bond fund, symbol IEF, has the largest short interest in the history of the fund. More investors are betting on higher interest rates than ever, which is great news for bond owners, as interest rates are headed lower. As these short sellers are forced to exit, interest rates and liquidity will plummet. Treasury yields were higher in early trading as these short sellers are forced to play defense.

In overnight trading, Japan’s flash factory PMI gauge showed a further contraction in the Japanese manufacturing sector.

Durable Goods orders for November and December were reported today with non-defense aircraft spending leading the charge. Combining both months, Durable Goods were up +1.2% versus expectations of a +1.7% print.

The Philly Fed business index collapsed from +17.0 to -4.1, signaling a contraction in the Philadelphia region. Since the Philly Fed index leads the broad stock market, expect stocks to fall in the months to come.

To make matters worse, existing home sales fell -1.2% in January against expectations of a +0.2% gain. Affordability was cited for the reason existing home sales fell.

The EIA reported crude inventories as Crude: 3.672M Cushing: 3.413M Gasoline: -1.454M Distillates: -1.517M. Crude oil fell following the report.

Stocks closed lower, but saw some last-minute buying, while Treasury yields moved higher as short sellers are forced to defend against a huge short squeeze. Tomorrow should mark the end of the recent U.S.-China trade negotiations and not to be outdone, the Federal Reserve will have various members of the FOMC making public appearances throughout the day.

Physical gold traded lower, as the price is divergent from its RSI, which suggests gold should pull back a little from its current price. Gold mining stocks made a similar move lower and are staring down at several daily and weekly moving averages that could confirm the recent upward trend and the beginning of a Bull market for the miners.