Hopes of an economic growth acceleration are grounded in market sentiment

Highlights:

Market Update: Crude oil was the top performing asset yesterday, followed by bonds and gold. The dollar was slightly stronger, and stocks were down on news that the phase one trade deal with China might not get done before year end. Transports were the worst performing broad market segment (IYT). The one bright spot is that volatility (VIX) was also down on the day.

Top Three Things:

Utilities: Utilities gained against the broad market yesterday as interest rates fell 6 basis points on the 10-year Treasury note. Defensive sectors led the way and utilities were strong. Relative to the S&P 500 (XLU/SPY) the ratio remains below its 200-day moving average. However, utilities are up substantially relative to the broad market since the business cycle peak in mid 2018.

Crude Oil: One of the bright spots yesterday was the move in crude oil. West Texas crude oil rallied over 3%. The ratio of oil to gold is still below its 200-day moving average and in a negative trend. The negative trend in this ratio is suggestive of deflationary pressures and is characteristic of the fact that growth and inflation have slowed since the cycle peak last year.

Energy Sector: Slowing growth and inflation can also be seen in the ratio of the energy sector relative to the S&P 500 (XLE/SPY). This ratio has not been above its 200-day moving average since mid 2018. It has made a series of lower lows and lower highs and is in a typical negative trend. Will recent Federal Reserve actions to stimulate the economy (and markets) work to also create an acceleration in inflation expectations? If that is the case, we would expect energy stocks to start outperforming the broad market. This is a key ratio to watch for clues on whether Fed stimulus is translating to rising inflation.

Chart of the Day: Hopes of an economic growth acceleration are grounded in market sentiment, not hard data. Industrial production and real retail sales continue to deteriorate in the U.S. We see no growth reacceleration in this data

Futures Summary:

News from Bloomberg:

Democratic candidates were united against President Trump in last night's debate, even as they sniped at each other. Kamala Harris went after Tulsi Gabbard on foreign policy. Cory Booker took on Joe Biden over marijuana. And Amy Klobuchar painted Pete Buttigieg as inexperienced. Here's a look at the key takeaways. Polls show Biden, Elizabeth Warren and Bernie Sanders on top, but Buttigieg did well enough to overtake Biden on PredictIt's projections.

U.S. stock futures pared losses after China's chief trade negotiator invited the U.S. team for new talks, the WSJ reported. Liu He was "cautiously optimistic" about reaching a deal. Shares in Europe and Asia fell. Treasuries declined with most other bonds. The dollar and oil slipped with gold.

Trump will sign the bill supporting Hong Kong protesters, a person familiar said. It passed the House 417-1 yesterday and may be sent to the White House today. China's foreign ministry urged the U.S. to prevent it from becoming law, warning the American side not to underestimate its determination to defend its "sovereignty, security and development interests." Here's a look at why Hong Kong's "special status" is touchy territory.

U.S.-China tension dominated the Bloomberg New Economy Forum in Beijing. Ray Dalio said we're headed into a "new world order," with China on the rise and the U.S. in relative decline. Henry Kissinger said they're in the "foothills of a Cold War." Goldman CEO David Solomon said the company may plow hundreds of millions into its China JV if it takes complete control.

Charles Schwab is in talks to buy TD Ameritrade, CNBC reported. A deal may be announced today. TD Ameritrade's market value is currently $22.4 billion. It would create a firm with roughly $5 trillion in combined assets. TD Ameritrade's shares soared 20% pre-market.