Despite yesterday’s weakness, the bull story remains in place after Fed Chair Powell reiterated the rate cut case, as the downside risks to the U.S. economy have increased recently. Powell started his interview yesterday at the Council on Foreign Relations in New York with the notion that the message was intended to be consistent with last week’s post-rate decision press conference. Powell for the most part stayed on message and did not make any promises for a rate cut in July. He did note that policy space exists for QE to be used if needed.
The most impactful comment of the day came from Fed’s Bullard, who said an insurance cut of 25-basis points would be enough to protect against a sharper than expected slowdown in economic growth. Markets fell to session lows when he said that a 50-basis point would be overdone.
Bullard, the lone dissenter at the last meeting dashed the hopes of many investors who were expecting the Fed to kickstart this easing cycle with a bang. With the most dovish member taking a 50-basis point cut off the table, the dollar surged as equities tumbled.
G20
Markets are anxious to see how the G20 events will unfold. The two-day summit is likely to see President Trump and his Chinese counterpart meet on Saturday. Both sides are likely to deliver some posturing ahead of the meeting, but nothing is expected to be too harsh that would jeopardize the meeting. A senior Trump administration official noted:
“The U.S. won’t accept conditions on tariffs as part of reopening negotiations and no trade deal is expected from the summit, where the two leaders are scheduled to meet.”
With equities remaining a stone's throw away from record highs, it appears markets are pricing in reset to talks because both sides should be incentivized to not drag out talks. China should be motivated to deliver a trade deal before the 70th anniversary of the founding of the People’s Republic of China (PRC) this fall and to begin delivering structural reform that is needed to transition their economy, while Trump will want to disrupt the stock market gains that have occurred during his administration, derail the U.S. economy, and to move onto trade negotiations with the EU and Japan.
Oil
Crude prices popped after the weekly API inventory report which showed a surprise draw of 7.55 million barrels last week. Current expectations for today’s EIA weekly oil inventory report is for a 2.8 million draw. If we see another bullish report from the EIA today, we could see further upside for crude prices. Last week’s report saw record demand for gasoline and disruptions from effects from Midwest flooding appear to be over with.
Oil prices should remain supported in the short-term on G20 optimism, geopolitical risks and if we continue to see larger than expected draws in crude stocks.
Gold
Gold is having a very constructive move, but prices appear to be approaching overbought territory. Gold could be ripe for a pullback if we see a reset to trade talks, an easing on tariffs and a timeline put in place to secure a deal. The yellow metal’s six-day rally was threatened after Fed’s Bullard dashed the hopes that the Fed could possibly begin the easing cycle with a 50-basis point cut. Trade uncertainty, heightened Middle East tensions along with expectations that Fed will begin an easing cycle, have all been key catalyst for gold’s recent rally. Gold prices could be vulnerable here if we see trade progress this week and expectations for slower Fed easing path.
Bitcoin
Bitcoin's’s rally appears to be slowing down after an amazing June has seen cryptocurrency traders reinvigorated by Facebook’s (NASDAQ:FB) launch of their stablecoin, Libra and as safe-haven flows have found their way into the crypto space. The last 10-days of pure bullishness have seen price start to find formidable resistance at the $11,500 to $11,700 zone. If the upward trend resumes, the next key barrier will be the $15,000 level. Currently at $11,390, Bitcoin has made fresh 15-month highs and volatility should see wild swings in both directions.