By Barani Krishnan
Investing.com - The U.S. may have some of the most sophisticated early detection systems in the world, but there's nothing in the entire arsenal that can warn you of an upcoming presidential tweet -- and how to deal with it when it lands.
President Donald Trump’s tweet on new U.S. tariffs on China had the market destructive impact of an intercontinental ballistic missile when it landed on Thursday. No one possibly -- except the president, of course -- knew of the 140-character projectile that was coming. And other than crash and burn their way through stocks and oil, investors had no other plausible reaction.
When the smog finally lifted, U.S. West Texas Intermediate crude lost 8%, marking its worst day since Feb 2015. U.K. Brent oil lost 7.2%, its most since Sept 2015.
But in the strangest of rebounds, the market leapt in the next session itself to recover at least a third of the previous day’s carnage. Therefore, net loss on the week was just under 1% for WTI and 2.5% for Brent. While the recovery left none the wiser, it reinforced what many suspected: that volatility would only get worse this summer.
Gold went in the opposite direction to its cousins in energy, although the rally in U.S. futures of the yellow metal only began after Thursday’s official session and during post-settlement trade, when Trump’s tweet landed. Consequently, Friday’s cumulative 1.8% gain was gold’s biggest since February.
Energy Review
What was so spectacularly different about Trump’s tweet on Thursday -- compared with his past threats and action on China -- that warranted such a market implosion?
In truth, it wasn’t as much substance or form as it was timing. It has been a while since the president raised the possibility of slapping the balance of China’s $300 billion of merchandise coming into the U.S. with a 10% tariff. And, really, you only need a few weeks for Trump not to tweet about something for it to be regarded “a while”.
What proved to be doom for the bulls -- and boom for the bears, of course -- was Trump’s timing of his latest missile on China trade. It came on the heels of the Federal Reserve’s now-deemed “widely disappointing” rate cut, accelerating oil’s slide.
Phil Flynn, senior market analyst at the Price Futures Group in Chicago, tried to decipher the trigger for the president’s tweet.
“President Donald Trump sent a bold message but it's not really clear who it was directed to,” Flynn said.
He added:
“Sure, you might think it was China. Yet it came just one day after the President criticized Fed Chairman Jerome Powell for not signaling a more aggressive rate cutting posture. And with more Chinese tariffs, that will help the President prove his point. The ten-year treasury yields plunged to the lowest since 2016.”
The Chinese vowed to fight back. “We won’t accept any maximum pressure, intimidation or blackmail,” Foreign Ministry spokeswoman Hua Chunying said.
China, once the top buyer of U.S. crude, had slashed its purchases last year as the trade war dragged on. However, U.S. crude oil exports surged 260,000 bpd in June to a monthly record of 3.16 million as South Korea bought record volumes and China resumed purchases, data from the U.S. Census Bureau showed.
Still, some questioned the direct impact of the new 10% tariff. “Given China has been taking very little U.S. crude year-to-date, we see little scope for the tariffs to directly impact market fundamentals,” RoboResearch Commodities Strategis Ryan Fitzmaurice said in a note.
The U.S. economy expanded by 2.1% in the second quarter, government data showed on July 26, beating economists’ expectations but lower than first-quarter growth.
Despite that, there is evidence that the 13-month old trade brawl was taking a toll.
China this week reported slowing manufacturing activity in July. U.S. data showed manufacturing activity also slipped last month to the lowest in nearly three years, while construction spending fell in June as investment in private projects tumbled to the lowest level in 1-1/2 years.
Prior to the Fed announcement, oil prices were on a tear, staging a five-day rally after a strong seventh straight weekly draw in U.S. crude stockpiles. After the Fed’s 25-basis point cut -- some were expecting a 50-bp reduction -- oil was dragged down kicking and screaming, particularly after Fed Chairman Powell described the cut as a “mid-cycle adjustment” that most likely wouldn’t be followed by more easing.
Adding to the Fed decision, the Wall Street Journal in a headline on Thursday declared that crude was in a bear market, exacerbating the selloff. The Journal cited some bearish predictions from Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) that projected supply growth of roughly one million barrels a day above demand in 2020, that could result in a surplus each quarter next year.
Energy Calendar Ahead
Tuesday, July 6
American Petroleum Institute weekly report on oil stockpiles
Wednesday, July 7
EIA weekly report on oil stockpiles
Thursday, July 8
EIA weekly report on natural gas stockpiles
Friday, July 9
Baker Hughes weekly rig count
Precious Metals Review
Gold slumped in Thursday’s official session in New York before a dramatic rebound in post-settlement trade that continued into Friday as President Donald Trump’s plan to hit China with additional tariffs triggered a strong safe-haven bid for the yellow metal.
Gold futures for December delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $25.30, or 1.8%, at $1,457.50 per ounce on the week.
On Thursday, gold prices hit 2-week lows on disappointment over what was deemed an inadequate U.S. rate cut. Analysts had expected the Federal Reserve to announced a series of rate cuts to shield the U.S. economy from slowdown. Such a Fed action would have also led to substantial weakening of the dollar. But the central bank announced just a 25-basis point cut for now and and did not indicate more to come.
“Stating ‘the labor market remains strong and economic activity has been rising at a moderate rate’ the Fed was clearly signaling to the market it should not overprice additional cuts,” Pinchas Cohen, analyst at Investing.com, said., referring to remarks by Fed Chair Jerome Powell.
The U.S. dollar spiked to two-year highs on the back of Powell’s remarks, denting demand for gold and other commodities which are priced in the greenback.
A report released from the World Gold Council on Thursday confirmed a bullish backdrop for gold during the first half of 2019, with demand for the precious metal hitting a three-year high, “largely due to record-breaking central bank purchases." It noted that the buying came from "a diverse range of - largely emerging - countries.
Precious Metals Calendar
Monday, Aug 5
U.K. services PMI
ISM Non-Manufacturing PMI
Tuesday, Aug 6
New Zealand employment report
Reserve Bank of Australia interest rate decision
FOMC Member James Bullard speaks
Wednesday, Aug 7
Reserve Bank of New Zealand interest rate decision
German industrial production
Thursday, Aug 8
China trade balance
U.S. initial jobless claims
Friday, Aug 9
Japan Prelim GDP data
RBA monetary policy statement
China Consumer price inflation
U.K. Prelim GDP
Canada employment report
U.S. PPI