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WTI oil advanced over 2% on Monday, supported by rising tensions as two Saudi tankers were attacked on Sunday.

The oil price maintains strong bullish near-term stance, despite the latest news on deepening crisis between the US and China, as China announced their steps in response to increase of tariffs from the US.

Rising fears that escalation of tensions in the Middle East, after the US sanctions cut oil exports from Iran, can seriously impact global oil supply, so far offset negative consequences from US/China trade war.

Today’s bullish acceleration eventually broke above multi-day congestion, signaling that corrective pullback from $66.58 to $60.03 might be over.

Fresh bulls broke above important Fibo barrier at $62.53 (38.2% of $66.58/$60.03) but need daily close above to generate bullish signal for further advance.

Conversely, failure to close above $62.53 pivot would keep the downside vulnerable.

Res: 62.92; 63.30; 63.65; 64.08
Sup: 62.21; 61.94; 61.19; 60.85

Just your typical risk aversion Monday, trade talks see both the US and China ramp up punitive measures and Middle East tensions rise. Stocks are down, oil is up, while gold’s safe-haven bid is diminished on global deflationary conditions. Treasuries are in demand as the retaliatory tariffs prompt a flight to safety. Since China possesses $1.1 trillion of US government debt, many will wait to see if any dumping of Treasuries occur. Talks are getting uglier by the day, but it seems markets still are pricing in a deal, by June 1st or by the end of the G20 summit on June 28-29th. No dates have been set for further negotiations. The dollar is softer on the day, while the Japanese yen and Swiss franc are benefiting from safe-haven flows.

• Stocks – Boeing and Apple fall roughly 3%
• Oil – Higher after Saudi oil tankers attacked
• Gold – Rallies as trade war worsens
• Bitcoin – Market matures as Fidelity offers cryptos to institutions

Stocks

Bellwether stocks are getting punished this morning as the intensification of the trade war is seeing the market once again reprice a total collapse in talks.  The Global Times story that China may reduce Boeing orders led shares to slide 3.0% at the open.  Apple fell 4.4% as they will be one of the greater causalities from the trade war.

Oil

Rising production levels will take a backseat this week for oil traders, the focus is completely on geopolitical risks.  Brent crude surged over 2% after reports that two Saudi Arabian tankers were damaged from a sabotage attack as they were approaching the Persian Gulf.   Supply disruptions are likely to continue and that could lead to a tighter oil market.  Another catalyst for oil was last week’s outage that occurred in the Norwegian North Sea that could impact roughly 6% of Norway’s oil output.

If we see continued violence in the Strait of Hormuz, that could be a game changer that would mean West Texas Intermediate crude at $70 and Brent above $80 a barrel.  During prolonged military conflict between Iran and Iraq during the 1980s, the Strait of Hormuz was left alone for Saudi shipments.

Gold

Gold prices are finally catching a notable safe-haven bid as trade.  The yellow metal rallied 0.9% and touched $1,300.70 an ounce.  Trade war optimism and deflationary conditions globally were the main reasons gold could not deliver a significant bullish move in April.  With the base case scenario of trade deal being reached in early June as the latest scenario being erased, markets are repricing risks and gold is finally getting a bid.  Deflationary concerns however are likely to persist and gold may see this rally capped on the announcement of a new date for further trade negotiations.

The base metals are all sharply lower and will likely need a trade optimism return to reverse course.

Bitcoin 

Last week, Bitcoin made huge progress in become legitimate offering for some investors.  Fidelity announced plans to offer cryptocurrency to their institutional clients, joining the likes of Etrade and Robinhood who are looking for retail offerings.  Bitcoin is up over 17% at $7,384 on the day and has reinvigorated many crypto fans.

SP500 is turning south from the 2958 level where wave 5) of 3 has finished, and put a corrective wave 4 in play. We see choppy price activity within that pullback, now also reaching an important gap zone from April 1st which may cause a bounce. Also, index has retraced back into the area of a former wave four where current fourth wave of a higher degree may as well slow down. If we are correct then we will see a new shift to the upside soon.

S&P500, 4h

GBPJPY is trading in a simple three-wave, zig-zag correction down from 148.86 level, with leg C of B)/2) now in play. Ideally support for final leg within a wave 2) correction can be seen near the Fibonacci ratio of 38.2 or deeper around the 61.8 (142.63/138.5 region). Also former swing low of wave 2 can offer support for the pair.

GBPJPY, 4h

Spot gold accelerated higher on news that China retaliated to US tariffs that heated the trade conflict, with threats of further escalation of crisis. Bad news prompted investors into safe-haven assets and gold price rallied through important barriers at $1293/95 (55/100SMA) and 1297 (Fibo 38.2% of $1346/$1266), coming ticks ahead of o psychological $1300 barrier. Improved sentiment on fresh risk-off mode can drive gold price through $1300 handle and next significant barrier at $1303 (base of thickening daily cloud), violation of which would expose key resistances at $1310/11 (10 Apr lower top / daily cloud top. Fresh rally turned daily MA's into bullish configuration, with bullish momentum in steep ascend, adding to bullish outlook. Daily close above broken $1297 Fibo barrier will generate bullish signal which is needed to confirm scenario.

Res: 1300; 1303; 1306; 1310
Sup: 1297; 1295; 1293; 1289

USDCHF targets further weakness on bear pressure as it sold off during Monday trading session. Resistance resides at the 1.0100 level. Above here, resistance lies at the 1.0150 level and then the 1.0200 level. Further out, resistance comes in at the 1.0250 level. On the downside, support is seen at the 1.0000 level. A turn below here will set the stage for more decline towards the 0.9950 level. And then the 0.9900 level. Further down, support resides at the 0.9850 level. Its daily RSI is bearish and pointing lower suggesting further weakness. All in all, USDCHF targets further weakness on bear pressure.

• China today retaliated against Trump's tariffs. On the surface it looks like a measured response but China is also likely to stop purchases of US agricultural goods and other products.
• However, we believe China will retaliate in a moderate way in order not to provoke a further escalation. We do not expect China to sell US treasuries.
• We continue to see the risk that things will have to get worse before they get better and that it will take financial stress and declines in the stock markets to get Trump back to the negotiation path.

So the response from China to Trump's tariff increase came today with the announcement that the tariff rate on US goods worth USD60bn will be raised to up to 25% on 1 June. The USD60bn figure is the same as when Trump launched the initial 10% tariff on USD200bn of Chinese goods. So in that sense the response is symmetrical.

However, China is also likely to take other measures. We would expect China again to halt purchases of a range of agricultural goods, as was the case last year when the trade war was ongoing. In that sense, China is choosing a quota over a tariff response, which last year proved quite efficient. At least, exports to China suffered more than Chinese exports to the US and the US-China deficit increased even more. This year it came down again after China resumed the purchases, but that will stop now.

The editor of Global Times Hu Xijin tweeted today that 'China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China'. He added that 'Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.'

While we could see a reduction in Boeing orders and restrictions of service trade, we have a hard time seeing Chinese selling of US Treasuries. It would simply not be a wise choice as it could easily backfire and provoke a big reaction in the US. It could be that the purchases would slow down a bit but outright selling is not likely in our view.

China's top negotiator Vice Premier Liu He said on Friday: 'If the US raises tariffs, we will react. Of course we hope that the US maintains restraint, and China will also restrain itself, and not escalate it indefinitely". This indicates China will be careful not to overreact but will give a measured response. At the same time, it will not sit back and take the hits without reacting.

The Chinese response was to be expected and should not come as a big surprise to markets. Nevertheless, they reacted negatively. It suggests that as we have seen before, markets tend to react to actual announcements on trade sanctions even when they are well flagged in advance.

Trump tweeted today that China had a great deal and backed out. On the Chinese side the view is there was no acceptable deal and that China will not 'back down on matters of principle'. It is difficult to see how the differences can be ironed out in the short term, and we see a risk that it will take financial stress to force the two sides back to the negotiating table to find a solution.

Rising on risk aversion and Dollar's weakness, gold surges to as high as 1299.67 so far today. The strong support from 4 hour 55 EMA is a sign of near term strength. Also, current development argues that fall from 1346.71 is merely a corrective move. It has also completed with three waves down to 1266.26. This will now be the favored case as long as 1281.97 support holds. Further rise should be seen to 1324.49 structure resistance first. Break will confirm and target 1346.73 high.

More importantly, gold also drew strong support from 55 week EMA, which is also a sign of medium term strength. That raises the chance of further rise for an eventual break of 1375.17 resistance as well as 38.2% retracement of 1920.70 to 1046.37 at 1380.36. We'll monitor the momentum after breaking 1324.49 to gauge the chance again.

Markets:

Global core bonds gained ground today with US Treasuries heavily outperforming German Bunds. The negative risk sentiment of last week continued this morning as the US-Sino trade negotiations reached an new low. President Trump has given China a month to agree to a deal or it will impose tariffs on all remaining Chinese imports. Asian equities edged lower overnight, while global core bonds opened higher. The US/EMU eco calendar is empty today, leaving sentiment to be investor’s sole driver. EU equities also opened lower, further supporting core bonds. After lunch, China announced it will levy up to 25% import tariffs on $60bn of US imports, further deteriorating hopes of a positive outcome and initiating a new upleg in core bonds. The German yield curve bull flattened with losses up to -1.6 bps (30-yr). US Treasuries retreated from session highs as Chinese media reported that China, who’s a large and important purchaser of US public debt, is discussing the possibility of dumping US Treasuries. US equities opened with losses up to 2%. At the time of writing, the US yield curve edged lower with changes up to -7.4 bps (2-yr) as investors raise the odds of a Fed interest rate cut. Peripheral spreads over the German 10-yr yield are widening with Greece (+7 bps) and Italy (+2 bps) underperforming. Italian local media reports that PM Conte suspects that deputy PM Salvini may be preparing to bring down the government coalition.

Sentiment on risk remained fragile this morning, keeping USD/EUR and USD/JPY near recent lows. Of late, the dollar suffered more from the trade tensions compared to the euro and the yen. European equities opened with modest losses but investors soon realized that headlines on a further escalation of the US-China trade conflict are probably just around the corner. Global market sentiment indeed deteriorated again as China retaliated last week’s rise in US tariffs as it announced a reciprocal hike in tariffs on US goods starting June 1. The dollar again proved to be the weakest link amongst the FX majors. US yields dropping triggerd further USD selling. Later, the decline in US yields slowed on rumours that China was considering to reduce its holdings of US Treasuries. The rumours were not confirmed but evidently didn’t help the dollar. Will the trade war translate into some kind of currency war? USD/JPY dropped to the low 109 area. The EUR/USD 1.1265 intermediate resistance is coming within reach.

EUR/GBP hovered in the 0.8645/25 area for most of the day. The political stalemate in Brexit persists even as officials of the labour opposition and the government were scheduled to continue talks today. However, with no high profile news on the negotiations, trading in the major sterling cross rates was mainly driven by the global performance of the dollar and the euro. EUR/GBP regained a few ticks this afternoon bus is trading little changed in a daily perspective (currently 0.8635 area). Cable is extending gains north of 1.30 on USD weakness.

News Headlines:

China said that it would increase tariffs on $60bn worth of US goods to between 1% and 25% starting on June 1 in a response to the US’s tariff action. The global times also suggested China may stop purchasing US agricultural goods and reduce Boeing orders. The editor even hinted at building down the US Treasury portfolio.

Norwegian growth slowed more than forecast in Q1. GDP grew by 0.3% Q/Q when excluding oil and shipping, down from an upwardly revised 1.1% Q/Q in Q4 2018. A 1.2% decline in investments and a pickup in imports dragged down growth. The Norges Bank which plots another rate hike next month, penciled in 0.6% Q/Q growth for Q1. EUR/NOK temporarily rose from 9.8 to 9.84.

EU trade chief Malmstrom said in a Bloomberg television interview that the EU is preparing a list of possible items to slap tariffs on against the US in the event that US President Trump imposes levies on car imports. The US President is expected to make that call by May 18.

Daily Pivots: (S1) 1.6009; (P) 1.6046; (R1) 1.6090; More...

EUR/AUD's rise resumed and surges to as high as 1.6170 so far. The strong break of 1.6122 resistance should confirm that correction from 1.6765 has completed with three waves down to 1.5683. Intraday bias is back on the upside. Further rally should be seen to retest 1.6765 high. On the downside, break of 1.5959 resistance turned support is needed to indicate completion of rise from 1.5683. Otherwise, near term outlook will remain bullish in case of retreat.

In the bigger picture, as long as 1.5346 support holds, outlook will still remain bullish. Up trend from 1.1602 (2012 low) is expected to resume sooner or later. Break of 1.6765 will target 61.8% retracement of 2.1127 (2008 high) to 1.1602 at 1.7488 next. However, firm break of 1.5346 key support will indicate trend reversal, with bearish divergence condition in weekly MACD, and turn outlook bearish.

Daily Pivots: (S1) 1.1214; (P) 1.1234; (R1) 1.1254; More.....

EUR/USD's consolidation form 1.1111 is still in progress and stronger rise could be seen. But upside should be limited well below 1.1324 resistance to bring fall resumption. On the downside, break of 1.1111 will extend down trend to 100% projection of 1.1448 to 1.1183 from 1.1324 at 1.1059. Break will target 161.8% projection at 1.0895.

In the bigger picture, down trend from 1.2555 (2018 high) has just resumed. 61.8% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.1186 was also taken out. Current fall should now target 78.6% retracement at 1.0813. Sustained break there will pave the way to retest 1.0339. On the downside, break of 1.1448 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.