US-China Phase 1 Wild Card

11/05/2019 12:34 pm EST


Bill Baruch

President and Founder, Blue Line Futures

While markets are soaring, questions over the US-China trade deal and weak manufacturing data could disrupt the rally, notes Bill Baruch.

E-mini S&P (ESZ)

Yesterday’s close: Settled at 3075.75, up 12.50

Fundamentals: U.S benchmarks are holding at record highs and the risk-environment remains very healthy amid fresh U.S and China trade anecdotes. Expectations are mounting for President Trump and President Xi to sign an interim “Phase One” deal this month. Listen, we have been bullish to cautiously bullish this market and continue to be, but we cannot ignore this Kansas City Shuffle taking place before our eyes (a bait and switch confidence game). Last night, President Xi lauded the county’s newfound commitment to global trade and their plans to open the border, level the playing field to foreign competition and reduce import tariffs. Sounds great right? Whatever happened to those Oct. 7 comments that intellectual property (leading us to believe other substance) will never be on the table. Last night, President Xi never referred to the country’s dealings with the U.S but referred to working towards the “common good of humanity”; well put, keeping your eyes on the prize. While both sides jawbone the “Phase One” deal in the headlines, there is reason to believe things aren’t so smooth behind closed doors. In fact, when have they been? The equity market is queuing off headlines that point to the United States rolling back the new tariffs implemented in September for additional commitments involving intellectual property rights. If one simply takes a step back, the only clarity we truly have is that there is no clarity at all. This does not mean the market is bearish, but it is an ever-present reminder to stay vigilant.

Nonfarm payroll drowned out the poor ISM Manufacturing read that followed and worse than expected Factory Orders yesterday. Goldman Sachs (GS) revised Q4 GDP expectations from 2.2% to 2.1% following Factory Orders. Manufacturing has been trending lower, it’s not secret, but services has held ground at reasonable levels. Final October Services PMI is due at 8:45 am CST and followed by the more closely watched ISM Non-Manufacturing at 9:00. It is widely believed that at the onset of a recession, the services sector is the last shoe to drop. Expectations are for it to improve to 53.5 from last month’s 52.6.

Technicals: Price action is firm and holding well out above the pivots for each the S&P 500 and Nasdaq 100. These levels combine yesterday’s settlement with where our momentum indicator is this morning; holding out above here is bullish.

Crude Oil (CLZ)

Yesterday’s close: Settled at $56.54, up 34¢

Fundamentals: Crude oil melted higher yesterday ahead of U.S hours but was stagnant for much of the session before slipping into settlement. OPEC released their World Oil Outlook early this morning and it was highlighted by revisions lower for demand growth. One might say, why did Crude jump at 3:00 am CST if this was the case. First, there is an argument here that OPEC is setting the table to cut production in December. We find this unlikely and nearly impossible to for OPEC+ to agree on given that January Brent is trading above $62. Secondly, OPEC Secretary General Barkindo emphasized deceleration of supply growth in the United States and the many headwinds faced by the sector in that region. Additionally, there is the slowly (or quickly, given your previous expectations) escalating situation with Iran’s centrifuges. The country didn’t expand this capacity to leave it dormant, President Rouhani announced today they will start injecting uranium gas and thus take strides in nuclear capabilities.

Technicals: The line in the sand support now comes in at $56.20 and given yesterday’s range it aligns with the .382 Fibonacci retracement at $56.01. We are not turning bullish as price action is still below the 200-day moving average and this does not align with our intermediate to longer-term fundamental bias at these price levels but bulls could have clearly leaned on this line in the sand support as a buy opportunity overnight, aggressive order would have been filled for a swing. Listen, momentum coming on the heels of Friday’s surge is strong, this is undeniable. For the most part, price action has held out above our rising momentum indicator.

Gold (GCZ)

Yesterday’s close: Settled at $1,511.1, down 0.3

Fundamentals: Gold is taking it on the chin this morning and back to a one-week low. The metal held ground tremendously well yesterday given equities, the U.S. Dollar Index and Treasury yields all had a strong start to the week. Gains in each of those assets have continued into today and ahead of ISM Non-Manufacturing, and gold simply could not stave it off any longer. Maybe someone has a hunch on this crucial Services sector read at 9:00 am CST. Furthermore, the odds of a cut next month have dissipated to a mere 5%. Lastly, it is important to remember this is typically a seasonally weaker time of year for gold and patience opens the door for the late December buy opportunity, our favorite seasonal trade across the board and one that has worked like clockwork through January.

Technicals: Gold could not gain out above major three-star resistance at $1,511.6-$1,515.6 and failed. When it began reversing this morning, once it took out first key support at $1,505 the selling picked up.

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

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