The U.S. stock markets closed at fresh highs Monday, lengthening last week's record-breaking dash as investors indulged in robust economic data, crackerjack earnings and trade optimism as a rising tide lifts all boats.
The question is whether the market has now priced the fortuitous conclusion of phase one of the US-China trade deal. For the time being it appears risk markets are in benefit of the doubt mode, preferring to look through any fragility in macro data while applying a higher weight to comments on trade.
But even the latest U.S. economic snapshot saw a hardy US ISM and robust payroll data reinvigorate the global equity markets rally while reinforcing the October basing for global PMI, and the resilience of the U.S. consumer should never be underestimated.
Crude prices were up sharply overnight, helped by Friday's better macro data (China Caixin PMI, U.S. payrolls and ISM) and a healthy dose of trade optimism. Also, underpinning prices was confirmation that drillers cut five oil rigs in the week to November 1, bringing the total count down to 691 – the lowest since April 2017.
However, prices have since given back some ground as the constant haziness around the trade talks and questions about what actual benefits a tariff detente will provide the global economy saw traders quick to book profits on any sign of uncertainty.
There could also be some possible position recalibration around the December OPEC+ meeting. There’s a suggestion of doubt leaking into the equation in regards to OPEC falling short of consensus to act in January, given signs of disharmony in the ranks and output being at a record low while not wanting to preclude the slow down in U.S. oil production as the US production slowdown is a critical supply correcting mechanism in its own right.
While risk markets are in benefit of the doubt mode, so long as that continues gold prices could struggle to push higher – even more so as the change in the Fed outlook could also push U.S. yields higher as local government and corporation are racing to sell debt while the going is cheap.
Arguably, however, it may be far too early to suggest that the Fed is done with rate cuts. And while the market has priced in a pass for a December rate cut, a broader section of U.S. economic data may need to dramatically improve for the Fed to move away from an easing bias. Ultimately it appears we're still caught in the tug of war between improving US-Sino trade sentiment and anticipation of weaker economic data. On the later, it will eventually boil down to perception vs reality as the next set of macro data rolls in.
The yellow metal is showing a bit less reactiveness than usual to US-China trade talks, compared to the Yen, suggesting that gold traders may continue to assess gold’s position against U.S. bond yields which remains the primary gauge of overall investor sentiment.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll