Markets traditionally kick back into high gear after Labor Day, but one should not underestimate this last week of August. Trade talks remain at the forefront and last week’s newest round between the United States and China failed to yield true substance. However, the purpose was to delay the imminence of the third wave of tariffs in which the White House would impose $200 billion on Chinese goods; this, in our opinion, would be the official start of a trade war.
At first glance, this seems to have been achieved with a potential delay until November. In fact, China has been weakening the Yuan to combat the first two rounds of tariffs, and on Friday they announced the resumption of a counter-cyclical currency fixing mechanism that actually strengthened the Yuan. This appears to be in response to President Trump’s calls for them to stop devaluing their currency. If true, this would be a step in the right direction to say the least. On the NAFTA front, a deal between the United States and Mexico is closer by the day and we could hear something official as early as Monday. This would assumingly reinvite Canada back to the table. Additionally, the United States is pressuring the European Union to speed up talks on that front. All in all, there seems to be a light at the end of the tunnel.
On the economic calendar, we look to Climate and Confidence data from both the United States and Europe over the first three days of the week. The second look at U.S Q2 GDP is due on Wednesday. Most importantly, we await PCE data on Thursday. This is the Federal Reserve’s preferred inflation indicator and it was certainly in the news last week; the FOMC Minutes showed that the Fed revised their inflation expectations lower and Fed Chair Powell’s dovish tone on Friday again emphasized that there are no signs inflation will run away. These concerns are warranted, after peaking at their 2.0% target in May, June quietly slipped back to 1.9%. Expectations for July remain at 2.0%. Thursday evening, we look to Manufacturing PMI from China. On Friday, the Eurozone releases a preliminary read for August CPI. All three of these data points will be crucial for the currency trade to finish out the week. In last Sunday’s Tradable Events this Week we called the dollar’s safe-haven melt up the pinnacle of the trade. We further pounded the table that this was peak dollar on CNBC’s Trading Nation on Monday. While the ball certainly got rolling immediately as the dollar slid to start the week, the move by China on Friday coupled with Fed Chair Powell’s dovish rhetoric was the dagger on the weekly close.
From the dollar’s peak on Aug. 15, the yuan has gained 1.9% and the Euro 2.7%. This has directly paved the way for a recovery in the metals sector and this will be what we are watching most closely to start the week. On Friday’s Morning Express we used all caps to emphasize our shift to outright Bullish in Bias on gold: WE HAVE TURNED OUTRIGHT BULLISH IN GOLD AND ALL METALS FROM PRECIOUS TO BASE.
Furthermore, in a phone interview with Neils Christensen from Kitco Metals, Bill Baruch was quoted saying, “He has turned outright bullish on gold and looks for momentum to push prices to $1,250 an ounce before it starts to fade again. He added that his firm is recommending to their clients to go long gold aggressively and to monitor the position closely. This is the move in gold we have been waiting for. We are telling clients to buy as much gold as they are comfortable with and then we continue to ask ourselves on an hour-by-hour, day-by-day basis: is the trading doing what it’s supposed to do? As soon as that answer is “I don’t know,” is when you start reducing your position. However, until then we press this market.”
Below are the three charts we are watching most closely. Gold’s momentum is of the utmost importance and Friday’s close above 1212 was crucial, however, we must continue to see this constructive chart pattern continue. The second, Palladium, which is on an absolute tear has gained as much as 13% since the washout. Palladium’s price action can be a tailwind for other metals but must continue to lead the way or hold ground at a bare minimum. Lastly, we have Copper. On a fundamental basis, copper will be a tremendous gauge on whether recent momentum has a broader ability to hold. Furthermore, a potential recovery here will be forced to sink or swim upon China’s Manufacturing PMI read.