US stocks reached all-time highs this week as optimism grew that Trump and Xi have a trade deal on the way and the US Federal Reserve would lower interest rates later this week.

On the trade front, President Trump reaffirmed that “Phase 1” of the deal is largely complete after China’s leadership said the first part of the agreement was “basically done” over the weekend. The first part of the deal is reported to include Chinese concessions on intellectual property, agreements to buy more US agricultural products and additional freedoms for US financial firms to operate in China. In return, the US is canceling a scheduled round of tariffs aimed at $250 billion in Chinese goods. President Trump has stated that he would like to sign Phase 1 with Xi at APEC next month in Chile.

Meanwhile, in bond markets US Fed Chair Jerome Powell is expected to deliver his third consecutive rate decrease this week to juice an economic recovery that is showing signs of strain from old age. US government yields rallied due to the optimism on the trade front, but futures markets still see two rate decreases from the Fed between now and June of 2020. Equity markets applauded the news by lifting US shares to a record high with the S&P 500 trading 3,040- up about 6% in the last six months. Meanwhile, the Shanghai Composite rallied to 2,980 for a nearly 8% rally in just the last two months.

Unfortunately, commodity markets seem to be taking a more moderate view of the economic outlook, cautioning it might not be time for bulls to break out the champagne. In fact, relative to stocks, commodity returns have been wretched with copper, oil and US gasoline prices down 10%, 18% and 19%, respectively, over the last six months.

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So why the disconnect? How can risk assets which are both dependent on economic strength offer such disparate views on the economic outlook?

We’ve written here before that it will be tough for oil to rally substantially until you remove the macro ceiling of the US/China trade war. However, this doesn’t create a guarantee that commodities will rally if a deal gets signed. Stock markets are clearly pricing in increased odds of a deal. Perhaps commodity markets are also pricing a deal in and simply saying that even a large bilateral trade agreement won’t be enough to lift global demand out of its slump. There is a very real risk that a trade deal could result in a ‘buy the rumor, sell the news’ type of reaction.

And why are oil market operators glummer than their stock brethren? Buried in the background of market headlines the EIA, OPEC and IEA continue to forecast sizeable crude inventories builds (with supply outpacing demand) through the first half of 2020 despite the recent declines in US production. We think it’s likely the oversupply trend- while less flashy than any headline including the word ‘Trump’- is dampening any market enthusiasm and traders are simply waiting on better supply/demand data before sending the market higher. While stock markets appear content to feast on central bank easing and trade deal hope, oil traders appear to be waiting for something more; good fundamentals.