US Open – Deflationary Pressures, all eyes on ECB, Gold struggles, Oil and Bitcoin rise

A wrath of inflation data from China, Sweden and Norway exemplified the global epidemic that is falling price pressures.  China’s producer prices have steadily been declining since 2017, a sign that the industrial sector’s pain from deflationary pressures is getting worse.  China did see some areas of strength with food inflation as pork prices have risen 46.7% on an annual basis.  If the PBOC needed another reason for providing further stimulus, last night’s disinflation data points support the case for more aggressive measures. 

Norway had softer inflation data, but the hawkish trend remains valid and we should not see the Norges abandon their tightening schedule.  Sweden’s CPI readings came in lower across the board but when you back out the airline fare decline, the numbers are not as bad.  The Riksbank is expected to maintain their forward guidance and will still aim for a rate hike in early 2020. 

With lackluster trade updates, financial markets will likely see its next major move come from the ECB rate decision on Thursday.  A big component of the call for higher global equities requires an overflowing punchbowl of stimulus from the Fed, PBOC and ECB.  The other key driver remains the political situation which covers trade wars and fiscal policies. The first major act will require the ECB to deliver a significant easing package.  It seems aggressive calls are growing for the ECB to deliver a larger than expected cut and signal for the return of QE.  If the ECB only cuts by 10 basis points and fails to pull the trigger on QE, markets will expect Draghi to be done with changes to policy, paving the way for Lagarde to have a fresh go at it in December. 

Europe

Boris Johnson will hit the campaign trail after yesterday’s defeat over a new election, his sixth defeat in Parliament.  Parliament is now suspended until October 14th and the all eyes will be if Johnson can get some small tweaks from the EU to deliver a Brexit deal in Parliament. 

The other key story in Europe was German Finance Minister Olaf Scholz speech that confirmed Germany will have a balanced budget in 2020 with no new debt.  The so-called expansionary budget is attempting to help the recession bound economy with no major spending stimulus or openness to taking on debt.  It seems we will need to see the data get a lot uglier, possibly waiting for a potential round of Trump tariff threats on German cars in the transatlantic trade war before we see Germany have enough political pressure to drop the balance budget rule. 

OPEC

Oil is rising as markets appear content that Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman will not deliver any changes to the current OPEC + production cut agreement and on expectations that US crude stockpiles will see a drawdown of just over 2 million barrels. 

Oil ministers from Nigeria and Iraq reiterated their intent to continue to deliver their respective production cuts and we will likely see more continued supportive comments from the sidelines of the World Energy Congress in Abu Dhabi on Thursday. 

In order for oil to breakout, energy traders will wait to see if we see a major de-escalation in the US-China trade war. It seems the trade war is the key domino that will be required to start alleviating global demand woes.

Gold

Gold prices is testing the $1,500 an ounce level as demand for safe-havens ebb as stocks slowly crawl back toward record high territory.  The pullback for the precious metal could see one last thrust before buyers emerge.  The fundamental bullish case for gold is firmly intact as expectations for monetary and fiscal stimulus continue to grow as deflationary readings globally and recession like conditions persist. 

Bitcoin

Bitcoin continues to hold the $10,000 level as investors speculate, we could see Apple become involved in the crypto space ahead of their Apple event later today.   Bitcoin’s resilience over the past week was mainly supported on Chinese demand in what appears to be a hedge against the freefalling yuan.  Currently stuck in a consolidation pattern, Bitcoin bulls will be disappointed if we don’t see a test of the $11,000 level over the next week as short-term investors will quickly abandon their bullish bets.