Increased fear of a trade war with China jolts major markets, says Bill Baruch, President of BlueLineFutures.com.

E-mini S&P (ESM)

Yesterday’s close: Settled at 2890.75, down 41.75

Fundamentals: U.S benchmarks turned sharply lower yesterday on trade war fears. We discussed in our Midday Market Minute yesterday that in hindsight the failure to hold a rally overnight ahead of Tuesday that pared the closing losses was a telltale weakness would spread. Especially so once the tape still went south after it was confirmed lead Chinese negotiator Vice Premier Liu would in fact be traveling to Washington for trade talks later this week. Developments have worsened and Reuters reported early this morning that a Chinese envoy arrived in Washington late Friday on the heels of talks in Beijing with a completely edited trade deal. A source told Reuters, “The document was riddled with reversals by China that undermined core U.S. demands.” They added that, “China reneged on a dozen things, if not more. The talks were so bad that the real surprise is that it took Trump until Sunday to blow up.” Overall, this is a real gut check for the portion of the market rally that priced-in a trade deal. Still, last night Bloomberg reported JPMorgan CEO Jamie Dimon remains optimistic and sees the odds of a trade deal at 80%. The only thing we are sure of, the market moving headlines will continue. With the immediacy of a trade deal seemingly in shambles, this puts further emphasis on the Fed’s rhetoric. Yesterday, Fed Governor Quarles did not do the market any favors by signaling slow inflation just below 2% is essentially 2% and there is no need for “heroic” measures such as a rate cut to bolster inflation. Fed Governor Brainard speaks this morning at 7:30 am CT.

Last night, Chinese Trade Balance data underwhelmed with Exports contracting year-over-year in April after a robust recovery in March. However, the Balance itself was tighter than expected. German Industrial Production this morning was solid and helped offset a poor read on Factory Orders yesterday. Geopolitically, traders want to keep an ear to the ground on developments in both Iran and North Korea. There is reason to believe if the trade war worsens, North Korea could launch additional missile tests. As for Iran, there are reports this morning that Tehran is looking to increase uranium enrichment in retaliation to the inability to piece a nuclear deal back together.

Technicals: Yesterday’s bloodbath broke through major three-star support levels that held Sunday night. A strong close yesterday, one that lifted the S&P 1.3% from the low, has begun to dissipate into this morning.

Crude Oil (CLM)

Yesterday’s close: Settled at $61.40, down 85¢

Fundamentals: Crude is consolidating within yesterday’s range ahead of inventory data as a number of conflicting geopolitical factors are tugging on either side; ranging from Iran to U.S-China trade tensions. Broader risk-sentiment came in sharply yesterday with reports that a deal between the world’s two largest economies is becoming elusive. However, President Trump fired a tweet off this morning saying China is coming to Washington to make a deal and this spiked crude and other risk-assets briefly. Last night’s API survey was more or less neutral. Although crude oil inventories came in higher than expected at 2.8 million barrels, it was offset by a drop of the same amount in gasoline inventories. Expectations for the official EIA report are for an increase of 1.215 million barrels of crude, a 0.434 million barrel drop in gasoline and a 1.096 million barrel drop in distillates. Other data around the world was stable. China Trade Balance was underwhelming last night.

Technicals: Price action is flirting around the $61.45 pivot level after settling there yesterday with very well-defined resistance and support levels above and below ahead of this more fundamental session. 

Gold (GCM)

Yesterday’s close: Settled at $1,285.6, 1.8

Fundamentals: Gold is holding ground, but strong overhead resistance has capped this rally attempt. The dollar is slightly lower with stronger than expected German Industrial Production firming the euro. The European Central Bank released the minutes from their most recent meeting and there was no fresh groundbreaking news. There is no major U.S data but U.S and China trade headlines will be pivotal to how the day unfolds; a weaker yuan will weigh on gold. Other geopolitical disturbances such as Iran and North Korea are keeping buyers interested. Keep an eye on the Treasury complex for these reasons and that there is a 10-year Treasury note auction at noon CT. Today, Fed Governor Brainard discussed targeting longer rates in the next economic downturn. Yesterday, Fed Governor Quarles did not do the market any favors by signaling slow inflation just below 2% is essentially 2% and there is no need for “heroic” measures such as a rate cut to bolster inflation.

Technicals: We remain longer-term upbeat on gold but major three-star resistance at $1,291.30 to $-1,291.70 has kept a lid on rallies. While Gold is attempting a clear bottoming pattern, we must see a close above here.

Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com