US Open – Stocks drift lower on Hong Kong Bill and trade news, Oil and Gold post modest declines

US stocks remain in a holding pattern as optimistic comments from China do little to assuage rising fears we will see a collapse in talks for the phase-one trade deal as President Trump is expected to sign legislation passed by Congress to support Hong Kong protesters.  China Vice Premier Liu He stated he is ‘cautiously optimistic’ about reaching Phase 1 deal with US but confused about some of the US demands.  S&P 500 futures rose to session highs after a Dow Jones report noted that last week, China sent an invitation for more talks to Treasury Secretary Mnuchin and Trade Representative Lighthizer. 

Markets seem to still be pricing in a Christmas Trade Miracle as the Hong Kong bill seems to be a major bump in the road that will complicate ongoing trade negotiations, but not completely derail them.  The bill would make the State Department annually review special autonomous status it grants Hong Kong.  Sanctions will also fall upon Chinese officials for human rights abuses.  Trump signing the bill will complicate the US-China relationship, but it might be as bad as it sounds since the bill punishes Hong Kong and not the mainland.

Oil

Oil is holding onto most of yesterday’s gain as trade war developments provide greater uncertainty as to when we will see a phase-one deal finalized.  Positive speak from China is not offsetting expectations that President Trump will sign a bill supporting Hong Kong protesters.  The timing of phase-one deal is unclear, but markets are starting to get nervous we could see a repeat of the collapse in talks that took place in May. 

Oil prices could start to see further support from rising geopolitical risks in Middle East.  WTI could easily test the $60 region as unrest grows in Iraq and Iraq. 

Gold

Gold prices continue to coil on a seesaw full of trade news.  While global stocks are softer and bond yields are somewhat rising, gold struggles to muster up a rally today.  The base case seems to be we will still see a phase-one deal even after President Donald Trump signs legislation backing Hong Kong protesters.  Higher gold prices will require weakness with the US economy, specifically further deterioration with the business outlooks and softness in the labor market.