Unimpressive US data, China’s countermeasures, Oil higher and Gold lower on Manufacturing recovery

Both US weekly jobless claims and Markit preliminary PMI readings showed improvements but were nothing to brag about.  The pace of initial jobless claims continues to decline, as the 9-week total rises to 38.6 million.  First time filings for unemployment came in slightly above expectations at 2.44 million, while continuing claims printed at 25.07 million, also above the 24.25 million consensus estimate.  The weekly jobs figures are disheartening, but at least headed in the right direction, with most states showing declines. 

The latest US PMI data confirmed Wall Street’s belief that collapse in the service and manufacturing readings bottomed out in April.  May’s preliminary readings still has private sector firms deep in contraction territory with new orders posting the second sharpest reduction since the Great Recession.  The US economic recovery will be slow due to the US economies staggered reopenings and haunting fears that a second wave of coronavirus is inevitable later this year. 

US equities were grasping at gains in early trade as optimism remained intact that the economic recovery is taking shape in both Europe and the US. 

China countermeasures

Risk appetite quickly evaporated after China warned of countermeasures over the US coronavirus sanction threat, the next domino to fall in what will be a lengthy tit-for-tat fight over the next several months.  China is bracing for an onslaught of attacks from President Trump that will focus on Beijing’s failure to contain COVID-19 and living up to their end of the phase-one trade deal. 

Before the coronavirus, President Trump’s path to re-election was a foregone conclusion on Wall Street.  COVID-19 has changed everything and no one knows when the world will have firm control of the virus.  Trump’s re-election campaign will have to deal with the likelihood the US will likely see well over 100,000 deaths due to the virus, over 40 million Americans will have filed for unemployment, and many doubts that a vaccine will get done with his truncated timeline. 

Trump’s latest tariff threats however could cripple the fragile economic recovery and that is why the strategists don’t expect him to come down hard on China.  China will protect their interests, security and sovereignty and will likely match any escalation that is thrown their way.  We’ve seen this movie before and if Trump wants to win the war with China, he needs to get re-elected first.  Wall Street will likely use rising tensions among the world’s two largest economies to hit the sell button.  Extreme downward pressure with global equities however seems unlikely as more fiscal and monetary stimulus efforts are likely coming.  Negative rates expectations for both the UK and US are not going away anytime soon and that is why we only may see a risky assets take a stumble here.

Oil

Oil prices were tentatively higher after preliminary PMI readings from Europe and the US suggest the economic recovery is advancing and crude demand should continue to improve.  The remarkable crude price rebound however will likely struggle to continue as higher prices will trigger non-compliance from OPEC+. The line in the sand for WTI crude seems to be the $40 a barrel level.  If the goal for the Saudis and Russians is to win back lost market share from US shale, they can’t throw American oil companies a lifeline by having oil prices advance any further. 

Crude prices are well off session highs after China responded to President Trump’s accusations, prompting fears that a renewed tit-for-tat attack could derail the global economic recovery trade.  For oil prices to remain supported, the world’s two largest economies need to get along. 

Gold

Gold prices are getting battered as the dollar rebounds, EU and US PMI data suggests the bottom is in place, and as jobless claims starts to show encouraging signs.  Gold rebounded off the lows after China promised countermeasures if the US introduces sanctions over COVID-19. 

After another failed attempt at capturing (daily close) the $1760 level, gold bulls may want to consider scaling down their longer-term positions.  This market is screaming for a move lower, despite little changes to the fundamental backdrop, investors still expect a tremendous amount of monetary and fiscal stimulus to get pumped into the global economy, negative interest rate prospects are not going away, and risks of second wave of COVID-19 could derail reopening optimism.  Gold needs a healthy pullback before prices can once again target uncharted territory.  If downward momentum persists, gold could see initial support around the $1675 level.