Surprise tariffs on Mexico pushed markets says Bill Baruch, President of BlueLineFutures.com.
E-mini S&P (ESM)
Yesterday’s close: Settled at 2790.50, up 10.50
Fundamentals: U.S benchmarks turned sharply lower yesterday evening after President Trump said he will impose a 5% tariff on all goods coming from Mexico beginning June 10. The tax could rise to as high as 25% by October If the country does not curb illegal immigration into the U.S. Although this news comes as a surprise, it aided our bearish bias and helped the S&P achieve our immediate-term downside target of 2755. What does not come as a surprise is further deterioration on the U.S.-China trade front. It has been reported that China is preparing to move forward with retaliatory measures on the U.S including restrictions on rare mineral exports. Additionally, as we noted here yesterday, U.S and European negotiations have seemingly hit stand still. All in all, this would explain why 10-year Treasury yields are at 21-month lows and there is now a 91.1% probability the Fed cuts rates this year according to the CME’s FedWatch Tool.
Adding selling pressure was another poor read on Chinese Manufacturing PMI last night, which contracted worse than expected at 49.4. Worsening PMI data around the world continues to echo the trade war. The Fed’s preferred inflation indicator, the PCE Index is due at 7:30 am CT. This number does not typically deviate from expectations much but after a flat read in March, it is expected to bounce back to +0.2%. April’s expected gain of 1.6% would be the lowest in over a year. Without inflation, the Federal Reserve certainly has the fire power to loosen policy later this year. The final read on May Michigan Consumer data is due at 9:00 am CT and NY Fed President Williams speaks at 11:00 am CT.
Technicals: Although our downside target of 2755, aligning with major three-star support at 2752 has been achieved, we will continue to hold a bearish bias because the tape is bearish.
Crude Oil (CLN)
Yesterday’s close: Settled at $56.59, down $2.22
Fundamentals: This weakness in crude did not start yesterday because of a bearish EIA report or overnight because of deteriorating trade conditions between the U.S and multiple nations. This weakness in crude was the making of seven massive builds in inventories over the previous nine weeks after last Wednesday and then a dagger from dismal PMIs last Thursday. Yesterday’s EIA inventory report was bearish relative to the expectations and estimated production increased by 100,000 barrels per day. To top this off, trade conditions between the U.S and Mexico, China and Europe are worsening, and China’s Manufacturing PMI contracted more than expected last night.
Technicals: We upped our bearish bias at the trade desk yesterday after the EIA data. However, now that our downside targets have been achieved ahead of the weekend, we will hold neutral Yesterday was a bearish engulfing chart pattern on the daily and this signals lower to go.
Gold (GCQ)
Yesterday’s close: Settled at $1,292.4, up 6.1
Fundamentals: Gold put in a strong session yesterday despite dollar strength. Today is setting up to be an ideal landscape for the metal. The dollar has struggled to follow through on gains and risk assets are getting smacked. This has now pinned the probability of a Fed rate cut this year at 91.1% according the CME’s FedWatch Tool. The Fed’s preferred inflation indicator, the PCE Index confirmed that there is no inflation and this support that backdrop. However, Personal Spending and Income did beat. If the Dollar Index continues to struggle at 98.00 and the Treasury complex holds its bid due to safe-haven demand, look for Gold to finish the week on a strong note. Final May Michigan Consumer data is due at 9:00 am CT and NY Fed President Williams speaks at 11:00 am CT.
Technicals: Gold closed strongly out above $1,288.2 yesterday and is now stretching above the $1,300 mark.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.
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