Monday, February 11, 2019
Stocks up at start of week. U.S. and European equities were up at the start of trading on Monday on hopes that U.S.-China trade talks would make some progress. The U.S. dollar strengthened for an eight-consecutive day. However, plenty of major risks loom. The UK just reported that its GDP grew at the slowest rate since 2012 last year. Meanwhile, the trade talks may run into trouble as soon as this week while the U.S. government is facing another funding deadline on Friday.
Chart Of The Week
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- Commodity prices have tracked the slowdown in global manufacturing activity, which turned negative at the end of last year.
- The correlation is logical – weaker manufacturing activity depressed demand for commodities.
- However, both copper and crude oil – bellwethers for commodity prices – have started the year in positive territory. Still, according to Barclays, economic activity in China in the first quarter is expected to be weak, calling into question the upward swing in oil and copper.
Trump to sign order banning Chinese telecom equipment. President Trump is expected to sign an executive order that would ban Chinese telecom equipment from U.S. wireless networks. The administration argues the order is needed to ensure cybersecurity, but it could complicate the already tense U.S.-China trade talks. The order could come as soon as this week. Meanwhile, the U.S. also warned allies in Europe not to allow Huawei Technologies to be used in critical infrastructure.
Stock market turns bullish. A series of technical signals in U.S. equities have suddenly turned strongly bullish, after flashing red for several months. The positive signals are partly just an outgrowth of stock gains over the past six weeks, but the recovery in January has the market yearning for more. The WSJ notes that U.S. indexes are near their 200-day moving averages and a series of stocks have hit 52-week highs. The shocking dovish turn by the U.S. Federal Reserve is widely seen as a pivotal turning point.
Another U.S. government shutdown possible. The congressional efforts to negotiate a border security solution broke down over the weekend, raising the prospect of another government shutdown. Funding for the government will run out by midnight Friday. The previous 35-day government shutdown that ended only a few weeks ago is expected to shave off about 0.4 percentage points from first quarter GDP.
Investor sentiment soured on commodities. In the final months of 2018, investors soured on commodities, withdrawing funds in an array of metals and other commodities. Barclays said that the historic correlation between many commodities “reverted to their norms,” in that they fell along with deteriorating macro sentiment. Only were iron ore and natural gas still trading on “idiosyncratic” factors rather than the broader macro environment. Why is this important? The macro economy in 2019 looks worse than last year, so commodities are not set up well for 2019.
Gold in check on stronger dollar, but uncertainty provides a lift. Gold prices ran out of room on the upside because the U.S. dollar firmed up, but a series of geopolitical events in the short run could put a floor beneath gold. “[M]arket participants will be following the trade talks in Beijing with interest. Then another UK parliament vote on the Brexit deal – Theresa May’s “plan C”, as it were – is scheduled for Thursday,” Commerzbank wrote in a note. “Like the previous two votes, there is not much prospect of success this time, either. And at the end of the week it will become clear whether government agencies in the US will be shut down again, as this is when the budget’s transitional funding runs out.”
Dr. Copper sending confusing signals. Copper is often seen as such a strong barometer for the global economy that it is referred to as “Dr. Copper,” for its diagnostic properties. However, as Reuters notes, the signals from the metal are mixed right now. Prices are down over the past year, but up a bit over the past few weeks. Much hinges on the U.S.-China trade talks since China is the largest source of copper demand in the world. Weak manufacturing data in the form of PMIs have not been encouraging as of late.
Standard Chartered: Brent to average $74. Standard Chartered released an oil market forecast through 2020, predicting an average Brent price of $74 this year and $83 for 2020. The investment bank says that the supply/demand balance is “benign” this year – as long as OPEC+ does not produce more than it produced in January, inventories may only rise by 0.1 mb/d. U.S. shale output is expected to slow, the bank says, so by 2020 OPEC+ will be able to add 0.5 mb/d back onto the market without upsetting the supply balance.
Russian oil titan warns against OPEC+. Igor Sechin, head of Russia’s Rosneft, has warned Russian President Vladimir Putin that officially joining OPEC+ would be a strategic mistake. He said that the deal would benefit the United States, according to Reuters. He also made clear that he wanted the production cuts to come to an end. Sechin is a close confidant of Putin, but it’s not clear how the Russian President might respond. “The letter is a threat to the deal extension. But anyway, Putin is the ultimate decision maker,” one of the sources told Reuters.
Rig count rises, but from lower level. The rig count has seesawed over the past few weeks, and the most recent increase of 7 rigs depressed oil prices. However, investors should not read too much into that figure since it was an increase from a nine-month low the week before. “Activity has been up and down for four weeks now, the decreases being noticeably steeper than the increases. Drilling activity is currently on a downward trend, which argues against any pronounced rise in US oil production,” Commerzbank wrote in a note.
New Hampshire moves forward on crypto tax bill. A bill in the New Hampshire legislature inched forward that would allow residents to pay their taxes in cryptocurrencies. The legislation could allow tax payments to commence as soon as July 2020. The bill comes after Ohio already signed into law a similar provision and could signal broader acceptance of cryptocurrencies as a payment vehicle.
Minor Bitcoin rally. After wallowing in the doldrums lately, Bitcoin staged a minor rally in recent days, jumping above $3,700. Other currencies didn’t enjoy the same upwelling in price movements, but investors are eagerly hoping the long bear market could be turning a corner.
Bitcoin troubles because of Venezuela? A Forbes column speculates whether the Bitcoin troubles are related to the crisis in Venezuela, with the beleaguered Maduro government selling off Bitcoin as it desperately scrambled to liquidate assets around the world. The column connects the dots between other geopolitical events and major price collapses for cryptocurrencies.
By Josh Owens for Safehaven.com