Mid-Market Update: Tentative Peak in Stocks?, Dollar’s Dead-Cat bounce, Oil ignores bullish EIA report, Gold stumbles on strong greenback

US equities rose higher as investors rotated back into utilities, health care and consumer stocks.  Europe outperformed today following some dovish central bank all over the world and after the ECB’s blog noted urgency in creating a fully-fledged capital markets union. 

The US session started off with a disappointing ADP payroll release, another precursor that the Friday’s nonfarm payroll report could disappoint.  Yesterday’s ISM report showed the pace of labor hiring is slowing.  Bullish stock market sentiment seems to be nearing a tentative peak as the labor market recovery stalls. Congress seems no closer to delivering the next virus relief package, and the constant back and forth rotation with tech and cyclicals is not enough of a reason to keep the major indexes from making fresh record highs. 

Stocks pared gains after the release of the Beige Book highlighted economic activity increased in most districts, but continued uncertainty and volatility was abroad theme.  A tentative peak for the Nasdaq and S&P 500 index could be in place until financial markets get passed Friday’s nonfarm payroll report.  Too much stimulus is in place for the economic recovery to completely stall, but if hiring doesn’t improve more robustly, Capitol Hill’s ineffectiveness in getting the next stimulus relief bill will provide a pullback for cyclicals.   

Dollar

The dollar rout is taking a timeout.  A pullback for the euro is warranted after well-deserved profit-taking, some disappointing German sales figures, and  most importantly ECB Chief Economist Lane’s cautionary comment that we have seen a repricing with the euro, implying they are not happy with the euro’s recent surge.  The dollar rebound was inevitable, but it should prove temporary as the ‘Powell Put’ will be in play for the next few years at minimum. 

Oil

Crude prices got hit hard after a stronger dollar sank commodities across the board and as energy traders shrugged off a bullish EIA oil inventory report to focus on deteriorating crude demand prospects.

With over 30% of oil output in the Gulf of Mexico disrupted due to hurricane season, a larger-than-expected headline draw did not surprise many and failed to yield your typical sustained spike higher in oil prices.  The EIA report signaled refiners got hit harder than expected and with the end of driving season upon us, it seems unlikely full production will happen.  The impact of Hurricane Laura took refinery utilization down 5.3ppt, worse than the consensus estimate of -4.3ppt. 

Crude production dropped by 1-million barrels a day and net crude and product exports posted the best rise since April.  WTI crude is starting to look heavy as the demand outlook remains shaky as new cases are spiking in places like Iowa and South Dakota. 

Gold

Just when everyone thought they saw a greenlight for the gold rally to continue, an inevitable pullback for the greenback thwarted gold’s plan for another run at record highs.  Consolidation is healthy for the longer-term bullish outlook for gold and that will remain the case if $1900 holds, which it should. 

Stocks enthusiasm is stealing part of gold’s thunder, but that won’t last much longer.  Dovish Fed and ECB speak is the backdrop for higher risky assets and that will continue to fuel steady demand for gold.  Gold will see strong demand from presidential election uncertainty.  It’s not just the outcome of the election, but the risk of not getting results immediately on election day.  Wall Street hates uncertainty, and with mail-in voting, the risk of not finding out the winner immediately is growing as President Trump continues to chip away at Biden’s lead, now down 7-percentage points in the USA TODAY/Suffolk University Poll, an improvement from 12-percentage point edge seen in June.