The United States and China will soon run out of ways to positively spin the trade talks, writes Bill Baruch, president of Blue Line Futures.

E-mini S&P (ESH)

Yesterday’s close: Settled at 2787. Up 8.50

Fundamentals: The United States and China will soon run out of ways to positively spin the trade talks. Last night it was reported the two sides agreed to draft up-to six ‘memorandums of understanding’. Equity markets responded, the S&P ripped to a new swing high of 2798 before paring back into this morning. Let’s be clear, this is an agreement to formally understand what the two sides want from a deal. In no way is this a deal or does it signal the two sides are any closer together.

Remember, there will be no deal without a face to face meeting between the two leaders and Chinese President Xi, as far as we know, is not in Washington. President Trump does plan to meet with Chinese Vice Premier Liu He tomorrow. Ultimately, if the deadline gets formally kicked down the road, multiple ‘memorandums of understanding’ are a conceivably good way to paint lipstick on this pig.

China has again promised to buy more U.S agriculture and energy products, narrowing the trade balance but this has nothing to do with the structural issues. We do not seem to be the only ones that see this glass as half-full, Morgan Stanley (MS) put out a note yesterday saying markets were too optimistic on the U.S and China trade front. Furthermore, as we mentioned yesterday there are budding differences between the U.S and the EU and we could see fresh tariffs on autos next week. Not to mention, the Brexit deadline is now one month away, and markets will soon wake up to this dysfunction.

Throughout last year we ran with our narrative that the Federal Reserve is in the driver’s seat. And they certainly still are. The Fed’s stroll down dovish lane has been a steadfast bullish catalyst accompanying an over-exuberated sentiment around trade. Although the headlines wouldn’t tell you this, we did not find yesterday’s Minutes nearly as dovish as anticipated. Yes, we can all walk away understanding that patience was a theme but in no way are they committing to stopping the unwind of their balance sheet this year. Here is the caveat, if they do stop this unwind and they hike once or not at all, there will be true recessionary substance behind such a decision. This is not bullish for risk-sentiment, this is a worst-case scenario. Last week, the thought of the ECB bringing back Targeted longer-term refinancing operations (TLTROs) to combat recessionary-like growth boosted risk-sentiment. Today, German Manufacturing Purchasing Managers Index contracted more than expected and dragged down the Eurozone into a contraction. Stimulus may sound fun at first, but the true reason such may be needed does not favor a risk-on sentiment and the last thing we want to wonder is what reason the Federal Reserve foresees for them to completely end their tightening cycle.

Today’s calendar boasts Durable Goods from December at 7:30 am CT along with weekly Initial Jobless Claims and Philly Fed Manufacturing. Flash PMIs are at 8:45 am CT and Existing Home Sales are at 9:00 am CT.

Technicals: Last night’s rip higher has faded into this morning. The S&P ran into a brick wall of resistance.

Crude Oil (CLJ)

Yesterday’s close: Settled at $57.16, up 71¢

Fundamentals: A strong technical breakout coupled with diminishing supply from abroad have fueled crude oil to the highest level since Nov. 16 as it flirts with the continuous 100-day moving average. Inventory data comes into focus today with the official EIA data due at 10:00 am CT. The largest thing that stood out from last night’s API survey was a build at Cushing in the tune of 3.24 million barrels. We find this a significant amount and if confirmed by EIA something that could sour the breakout party. The expectations for EIA are +3.08 mb Crude, -0.35 mb Gasoline and -1.69 mb Distillates.

Technicals: We finished last week bullish and have held such in a minor way through today. However, we are now outright Neural. Price action achieved major three-star resistance.

Gold (GCJ)

Yesterday’s close: Settled at 1347.9 up 3.1

Fundamentals: Gold has done exactly what we warned yesterday, a healthy consolidation lower. Headlines will tell you how the Fed confirmed their dovish switch in January as they plan to finish the balance sheet unwind this year. Ultimately, those headlines are exacerbating the facts and the Fed more than anything exuded patience. However, markets such as gold, Treasuries and the dollar all priced this in and instead are now seeing a consolidation instead of continuing to move directionally as if the Minutes were truly as dovish. We remain unequivocally bullish gold because the dollar is overvalued and if the dollar holds its value here because the rest of the world finds itself closer and closer to a recession than Gold will strongly outpace the dollar’s strength as interest rates hover just above zero for years to come. Today, February Philly Fed Manufacturing was the lowest since 2016 and Durable Goods from December was stable. Weekly Initial Jobless Claims posted their first beat in four weeks. Lastly, the euro is holding strong despite a contraction in Manufacturing PMI and ECB Minutes that exuded a bit of panic. All in all, this could signal a sentimental bottom for the euro without fresh bad news which would be extremely favorable for Gold in the coming weeks.

Technicals: Gold stalled right at the landmark $1,350 resistance mark and is now consolidating. We remain Bullish Gold.

For a full view of our technical outlook on these market and more, including specific support/resistance levels go to Blue Line Futures.