Chinese comments on a possible Phase One trade deal can be taken two ways as it assumes a reduction of Sept. 1 tariffs not yet confirmed, reports Bill Baruch.
E-mini S&P (ESZ)
Yesterday’s close: Settled at 3075.50, up 3.50
Fundamentals: The word of the day is de-escalation. We are seeing major U.S benchmarks trek towards fresh records after China’s Foreign Ministry announced both sides plan to cancel existing tariffs in phases proportionally and at the same time sign an interim “Phase One” trade deal. The U.S has yet to confirm such steps and this leads us to believe there are two ways to look at it. First, for face value and in that case, we would expect the S&P 500 to reach our next upside target of 3115 today or tomorrow. In such a scenario, the U.S would have to directly exude some sense of cooperation.
The other scenario would be to digest this as more or less a threat from China, and in that case, this is fairly negative. In such a direction, China is attempting to back the U.S into a corner, now, only agreeing to sign the lauded “Phase One” deal if tariffs are rolled back. Make no mistake, China would benefit most with this occurring. Let’s not forget, there are tremendous questions surrounding what concessions China will truly make when it comes to the substance such as intellectual property. Headlines have been favorable, eluding to China coming to the table. However, just look back to our Tuesday Morning Express write-up describing these negotiations as the Kansas City Shuffle – a bait and switch confidence game.
Today’s U.S economic calendar is bare. Weekly Jobless Claims were better than expected, there is a 30-year Treasury bond auction at noon CST and Dallas Fed President Kaplan, a 2020 voter, speaks at 12:05 CST. Disney (DIS) reports after the bell.
Technicals: What is there not to like here? Major three-star support in the S&P 500 and Nasdaq 100 held perfectly yesterday. In fact, we discussed it here and in our Midday Market Minute; if this level holds and we can see price action respond into the afternoon, which it did by noon yesterday, we should see price action again elevate.
Crude Oil (CLZ)
Yesterday’s close: Settled at $56.35, down 88¢
Fundamentals: Crude oil is surging this morning on China’s announcement that tariffs between the U.S and them will be alleviated in phases as they sign the interim “Phase One” trade deal. For now, crude oil is 2% off the overnight low, which also happens to be major three-star support. Price action traded to a new swing high, squeezing shorts just ahead of the EIA inventory report which of course was overall bearish and causing the market to pare those early gains. Creating additional pressures was news an interim “Phase One” trade deal may not be signed until December (something China seems to be attempting to get in front of). Meanwhile, expectations of pressure from Saudi Arabia to push for additional production cuts in December and escalating tensions with Iran have coupled with China’s comments to add a bullish tailwind this morning. With Iran, they are accusing a UN inspector of having tested positive for explosive nitrates, essentially eluding to a staging. This comes shortly after Iran injected uranium gas into centrifuges as it moves further and further down the path to nuclear power.
Technicals: We remain neutral at these levels now largely because of crude’s struggle to close out above the 200-day moving average, which ultimately could provide additional trend following tailwinds.
Gold (GCZ)
Yesterday’s close: Settled at $1,493.1, up $9.40
Fundamentals: Its risk on this morning on the heels of those comments from China’s Foreign Ministry. Gold’s construction yesterday has been completely negated as it not only struggled against first key resistance but U.S benchmarks achieve fresh records and Treasury yields surge. Today’s economic calendar is fairly dull but weekly Jobless Claims were better, adding pressure to Gold, a 30-year Bond auction is due at noon CT and Dallas Fed President Kaplan, a 2020 voter, speaks at 12:05 CT. Yesterday’s 10-year Note auction saw strong demand, suppressing yields. Although this has been negated given today’s headline direction, it exemplifies the true and broad demand for safe assets.
Technicals: Gold again is battling at major three-star support at $1,484.5-$1,490.7. We reintroduced a slight bullish bias yesterday as gold responded healthily off this level and given our long-term approach.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.
