Three global central banks cut rates and Fed Funds traders are pricing in additional cuts, writes Bill Baruch.
E-mini S&P (ESU)
Yesterday’s close: Settled at 2876, up 46.00
Fundamentals: Equity markets are off to their best levels of the session and U.S Treasury yields are in the spotlight. Recession fears are being echoed loud and clear after three central banks representing New Zealand, India and Thailand, cut rates and German Industrial Production fell sharply. There is no major U.S data on today’s economic calendar but Chicago Fed President Evans speaks at 11:00 am CDT and there is a 10-year Treasury note auction at noon CDT. Yesterday, St. Louis Fed President Bullard said at least another 25 basis point cut by the Fed may be necessary but reiterated the committee should not react to daily trade war headlines by coming to the rescue with additional cuts. The odds for a 50-basis point cut in September have risen to near 30% this morning and there is more than a 50% probability the Fed cuts an additional 75-basis points in 2019. The 10-year Treasury note yield is at the lowest level since October 2016 and trying to keep pace with those mounting expectations. Yesterday’s three-year note auction showed strong demand, if money is going into Treasuries it is coming for somewhere and ultimately brings a ceiling to stocks.
Price action turned lower after the People’s Bank of China denied rumors that it will cut borrowing and lending rates on Aug. 10. A stable fix to the Chinese yuan overnight helped lift sentiment early in the session.
Technicals: Price action early yesterday in the S&P 500 fought pullbacks that ultimately held our pivot of 2845.75-2849.50 before ramping out above major three-star resistance at 2871.50-2872.75. The overnight action gyrated back below here again holding the pivot before trading to a new swing high of 2889.25.
Crude Oil (CLU)
Yesterday’s close: Settled at $53.63, down $1.06
Fundamentals: Crude oil traded back below the $54.82 pivot yesterday after again stalling at major three-star resistance and the rest is history. Yes, there is a fundamental backdrop of slowing global growth and heightened volatility in broader equity markets but make no mistake, the technical landscape is fueling this immediate weakness as are headlines pointing to Brent crude in a bear market as it reaches the lowest levels since Jan. 8. The escalating U.S.-China trade war is roiling the demand outlook while U.S production mounts. The private API survey reported a draw of 3.4 million barrels in crude after the close yesterday and this could not lift the tape. Today’s expectations for EIA are -2.845 million barrels of crude, -0.722 million barrels of gasoline and +0.482 million barrels of distillates. We must see a much larger draw than expected to stabilize this technical breakdown.
Technicals: Crude failed at major three-star resistance at $55.59 yesterday and began slipping. Yesterday’s low clung to major three-star support at $53.20 to $53.59, which aligns multiple technical indicators.
Gold (CCZ)
Yesterday’s close: Settled at $1,484.2, up 7.7
Fundamentals: Gold has achieved $1,500 for the first time since April 2013, trading to a session high of $1,511.6. Even the closer-in October contract traded to a high of $1,505.2. With central banks around the world slashing rates overnight and German Industrial Production reaching decade-low levels, the landscape for gold remains extremely favorable. What is concerning though is expectations for the Fed’s path of future rate cuts have mounted to levels that are tough to imagine. For instance, the odds for a 50-basis point cut in September are above 30%. Chicago Fed President Evans speaks at 11:00 am CDT. Over the intermediate term if the panic calms and the Fed’s rhetoric does not support such a path, the dollar will strengthen, and rates will rise which does not support gold.
Technicals: Gold has crossed out above our immediate upside target of $1,484.5 and the this keeps the tape immediate-term bullish while trading out above here. Although, at this point a failure to settle above $1,500 would be a bit of a disappointment.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.
