US equities are poised for a slightly lower open following nervousness on the trade front, disastrous European PMI data, and fading optimism that the path to fresh record highs with US stocks will be a lot harder to reach.
At the end of the last week, trade talks were mostly positive with one major exception, the Chinese abrupt cancellation to visit a farm in Montana. While the news, pretty much derailed the last attempt for US stocks to hit fresh record highs, we should not see agricultural purchases be a key hurdle for the Chinese. The key debate will likely remain the US demand to change Chinese law and to impose an enforcement mechanism that is tilted to being more one-sided.
EU PMIs
The European preliminary PMI readings for September were terrible. The ECB doves are here to stay and we should not be surprised to hear a much more aggressive call to action over the next policy meetings. Lagarde will need to deliver much more stimulus and help coordinate fiscal policies with governments. The euro and European stocks tanked after the German flash readings fell after the manufacturing sector had the worst downturn since the financial crisis. The rest of the readings from France and eurozone were abysmal.
Repo
Last week, the NY Fed was able to get liquidity into the market and got the short rates back to where the markets needed them. The Fed is the primary source of liquidity and this week markets will look to see if a host of Fed speakers signal a united stance on expanding the balance sheet. The funding markets for now appear to seem calm, but if the Fed does not deliver a more permanent fix by the self-imposed October 10th deadline, we could see another spike in rates that could have a domino effect into putting additional stress on the Treasury yield curve. The Fed announced they could extend the daily repurchase, or “repo” operations of at least $75 billion beyond October 10th, so even if they don’t have a consensus on a permanent fix, they should at the very least signal this patch will work through the end of next quarter. Corporations needing cash for quarterly tax payments may have added to the strain.
Oil
Oil prices are falling lower as tensions are temporarily easing in the Middle East as Iran tries to help their position ahead of the annual UN General Assembly. French President Macro also noted that caution is required before blaming Iran for the Saudi oil field attack. An Iran government spokesman stated the Britain’s Stena Impero, the oil tanker seized in July is free. The gesture on the UK oil tanker and Macron’s comments are hardly anything to brag about and do not in any way de-escalate anything in the long-term, just maybe for this week. The US is planning on sending more troops to Saudi Arabia and Iran reiterated they will not rule out war. This week will see a plethora of constructive and destructive comments regarding Iran-Saudi-US relations, with the net outcome likely being the situation will remain tense and supportive for oil prices.
Gold
Gold could have a huge week as bullish investors focus on mounting geopolitical risks, calls for more stimulus in Europe, and lack of catalysts for the US markets to reach record highs. The trade war and Middle East could provide the trigger for the next major gold rally, but in the short-term, support will come from the terrible EU flash readings which will likely see the ECB doves call for greater easing. With stocks near record highs and market participants being so nervous, we should see gold diversification also provide a nice backdrop of support.
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