October 3, 5:00 pm EST

China remains the hold-out on making a deal with Trump on trade.  And itlooks likely that they are holding out to see what the November elections look like.

Will Trump retain a Republican led Congress? I suspect we may see China do what they can to influence that outcome.

As we know, the Republicans will be promoting the economy as we get closer to voting day. 

What can China do to rock that boat?

They can sell Treasuries, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets – which has a way of shaking confidence in the economy.

As we’ve discussed, the economy can withstand a 10-year yield in the low 3s.  But what has spooked market this year (namely stocks) is the fear that a 3% 10-year could quickly turn into a 4% 10-year.

We may have seen a taste of it today.  We had a run from 3.08% to 3.18%.  That’s the highest level since 2011.  And stocks came off of the highs.

If China was the culprit, or if China chooses to dump some Treasuries over the next month, in attempt to stir up some instability in markets, we should see them move that money elsewhere.  The likely recipient of that capital would be gold.

It wasn’t evident with the behavior gold today.  Gold had a big dayyesterday, but backed off today, even as rates ran.  But as you can see in the chart below, the set up for a bounce in gold here looks ripe.  The level to watch will be 1214. 

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