US Open – Trade Deal Odds Drop, Brexit, DBK, Oil, Gold

Political posturing ahead of the US-China high-level talks that begin on Thursday are dangerously raising the odds that we may not see a mini-trade deal or major de-escalation in tariffs.  After the Monday close, the US announced a tech blacklist over alleged human rights violations against Muslim minorities.  China refuted the human rights allegations and urged the US to correct their mistake and to ‘stay tuned’ regarding how they will retaliate.  Stocks will likely remain in a broadening channel ahead of the high-level talks that begin on Thursday.   

The odds for some sort of a trade deal to get done this week seem to have fallen from a coin flip to just 40%. Both sides need a win this week and despite the latest flare ups, we should still see some progress come out of this week’s talks.

Brexit

The British pound extended today’s loss after UK PM Johnson told German Chancellor a Brexit deal was essentially impossible.  Next week Parliament will be suspended ahead of the Queen’s speech.  Since we won’t see a deal done by the October 19th deadline, the next big date is October 21st, when Parliament returns.  By then we should have already heard Johnson’s request for an extension and if not, we could see the courts try to force the PM’s hand. 

The path for Brexit seems to be an extension and that elections will happen shortly after.  According to the polls, it seems the Conservatives have a strong chance of gaining a majority and we could see Johnson still deliver Brexit. 

DBK

Following HSBC job cuts, Deutsche Bank is planning to have half of its 18,000 job cuts in Germany.  Just like we are in the oil space, banks are likely to see continued consolidation here.  Negative interest rates in Europe are here to stay and will continue to weigh on financials. 

Oil

Fresh geopolitical risks from Ecuador and Iraq are driving oil prices higher today.  In Ecuador an oil production facility was attacked in violent protests.  A fourth night of state-of-emergency protests in Quito is also being accompanied by a week of protests in Southern Iraq. 

Oil could see further gains here as the energy markets have not priced in much of a supply risk that could come from Southern Iraq, a key input in the global supply chain.  TankerTrackers.com reported that 3.5 million barrels of crude was exported from Basra in September. 

Gold

Gold is ready to rip higher as China increases their gold holdings ahead of this week’s high-level trade talks.  Gold could rally further as odds for a major de-escalation or even a mini-deal have gone down following the recent political posturing from both the Chinese and Americans.  Gold is also seeing some added support that markets believe the Fed will deliver more rate cuts as they try to avoid triggering a market disruption.