Markets
With the numerous crosscurrents still in play, US shutdown and Brexit notwithstanding, A mild bout of risk aversion seeped into global markets Friday pressuring US equities, oil prices and US bond yields lower, and we saw mostly US dollar buying as traders pared back extended short dollar positioning on the EUR and CNH.
There was no specific catalyst for aversion to set in except general concerns over Brexit, the US Government Shutdown but there was more balanced debate over the US dollars near term direction which led to a fidgety flip flop Friday of sorts as currency trades are getting crowded quickly in early 2019. ( more on this below in my currency note)
Although it didn’t move the US rates needle, US CPI data did carry some weight given that many Fed officials were suggesting the absence of inflation was a big concern. However, the CPI print was decent with both headline and core figures printing very much in line.
Brexit uncertainty continues, and the clock is ticking with PM May running out of time to get concessions on the unsettling nature of the backstop. This week could hopefully bring us some “meaningful” answers, from a meaningful vote in the UK parliament as we reach the next critical hurdle for Brexit. Currently, a yea vote looks very unlikely in the first attempt, but it may not be all doom and gloom as there is still time for the EU to provide a last-minute pledge.
As for the government shutdown, we could say the writing is on the wall, as Trump threatens to declare a national emergency to bypass Congress. And while there is still no definite end in sight, S&P issued a report estimating that the US economy has already lost USD3.6bn due to the shutdown suggesting the markets will pay increased attention to this issue as those numbers are not small potatoes. And speaking of potatoes, Trump is due to talk to farmers in Louisiana who might not be receiving aide checks due to the shutdown and could turn into a contentious affair.
Fed Chair Powell remained coolheaded as his latest speech drew attention to a ” waiting and watching” FOMC who appear in no rush to raise rates. And then most especially, vice chair Clarida has confirmed that he is leaning on the dovish side by stressing the need for patience and stating that ‘if crosswinds sustained, fed policy should offset them’.Implying interest rates will very likely be kept on hold until June with the markets currently pricing in around zero for the rest of 2019 while monitoring data for clues to the next policy direction. But even with some Fed members discussing the chance of rates moving in either direction, at this stage of the game, a rate hike remains far more likely than a cut in 2019. But overall the FOMC messaging is providing relief to the stock market.’
Overall, Friday’s consolidation and market adjustments look and feel perfectly normal especially with the amount of turbulence still in the water.
Stock markets
Earnings start this week, and there should be a reason for concern given equity market stalwarts like Apple, Samsung and Macey’s have issued profit warnings in the past week, which likely triggered some pre-earnings week jitters on Friday as investors shifted into profit taking mode. But this week could be a critical test to see if we have reached peak short term equity markets optimism or can the positive mood extends.
Oil markets
Some confidence returned to markets last week as US equity, and oil prices climbed higher, however, Brent crude oil turned lower Friday on profit-taking as advancing equity markets hit the pause button after sharp gains in both markets last week. Also, traders were very unimpressed by reports indicating Russia has only reduced crude oil production by 50,000 bpd for January.
OPEC+ production cuts and optimism regarding recent U.S.-China trade talks are the primary factors stabilising prices. Notably, “Saudi Arabia’s oil production is currently at ~10.2 MMBbls/d – down 860 MBbls/d from the record-high in November and below the 10.3 MMBbl/d target it set for January under the production cut agreement”( Industry Data). Sure Saudi is on track to balance markets but is that good enough in the face of slowing global growth to push prices higher.
Meanwhile, comments from the US Federal Reserve chairman that the Fed is willing to be patient on policy buttressed global equity markets. ON the Pboc side of the equation, I think China stimulus will carry a lot of weight in the second half of 2019, but this will take time to filter through, and the market will most likely be unable to hold on to a bullish sentiment until then. So in the meantime, we could still be subject to a bearish worldwide economic view.
Indeed, slowing global growth continues to temper top side ambitions as speculation continues to mount that China will set a lower GDP target for 2019 of 6.0-6.5%. But adding to global slow down fears, the trend of weak data out of Europe continued last week as Industrial Production for November for Germany, France & Spain and Economic Confidence indicators for the European Union all printed lower than expectations, suggesting that the largest economies of the Eurozone contracted.
Who said production cuts are ineffective ? as Alberta’s mandated production cuts have seen the differential between West Canadian Select and WTI evaporate from $50 per barrel last October to under $ 7 per barrel last week as output cuts from both Alberta and Saudia Arabia have caught heavy crude refiners short and now left paying the piper.
Gold Markets
USD weakness will continue to be the key driver of market strength. However, I think equity sentiment this week could be a canary on the Gold mine gauge of global sentiment so Gold traders will be taking note of this very critical earnings season which could make or break this early 2019 equity market rebound. But ultimately on the Fed policy front, everything is lining up for a weaker USD and an eventual breakthrough $1300 level in convincing fashion.
Currency markets
Much of the current USD move on the Feds dovish shift is getting played out on the EUR and CNH which makes both currencies very susceptible to extended positioning and retracements into USD haven appeal.
Euro
While it could be argued that much of the EURUSD push to 1.1570 was a result of short covering, but that would belie the number of EURUSD longs that were entered on the break of 1.1525 only to have a “mea culpa “moment during the brutal move lower as stops were triggered on the break back below 1.1500.
Still, the Fed’s about-face is significant, and it should play out in as weaker USD eventually, but at least for today, the market disagrees. However, I remain confident that provided we can continue to close the day above 1.1450, there is scope for a more significant rally to play out.
Market Conviction LONG EURUSD with the 200 days moving average at 1.1629 the primary target: Provided the Fed has indeed paused, the EUR is going higher as a dovish fed should outweigh the weak EU economic data which is already baked in.
JPY
The Yen is mired in a relatively tight range but given the Fed dovish pivot I would expect more Yen repatriation flows and increased hedging from Japanese lifers, so I remain bullish Yen. I think last weeks flash crash is a foreshadowing of where USDJPY will trade in the months ahead.
Market Conviction NEUTRAL suggesting 107-110 range for USDJPY with the downside vulnerable
CNH
First of all, the stabilisation in CNH has no significant domestic economic rationalisation, but instead, momentum from a softer Fed coupled with easing in US-China trade tensions is providing the bullish synergy. In other words, its a highly speculative driven CNH rally and uber prone to retracements. And while I’m confident the US administration is pushing for a weaker USD but certainly during this depressing economic downturn, China would prefer a stable to weaker Yuan due to the monetary tightening effect a stronger Yuan generates.
And predictably we did get some suggestion of possible intervention in the offing on Friday. “Market News International around 8:00 AM EST: “Any further rapid appreciation by the currency, which has risen sharply at the start of this year’s trading, could impact China’s exports, the source said, without saying whether the PBoC would intervene to slow any move in the yuan. Separately, reports started circulating that The People’s Bank of China does not want a sharp appreciation by the yuan, the reports were citing a “source close to the PBOC”.
So, if we are looking for a reason why the Euro fell look no further then the move in USDCNH that was driven by some concerns that the Pboc could be preparing to slow the pace of the Yuan appreciation.
Market Conviction Short USDCNH with an extended target of USDCNH 6.65: Provided trade war detente continues to move forward constructively there should be a strong recovery in mainland capital inflow. The one stumbling block on the path to 6.65, however, is that the Pboc is starting to express concern via MNI news at the pace of RMB appreciation, While intervention is highly unlikely as the Pboc don’t want to be seen as ” market manipulators ” they are most likely tempering the appreciation via a verbal response. None the less over the short term Pboc warning could be good enough to hold the dollar bears at bay.
However after the trade truce dip fades, long CNH positions will have little in the way of domestic economic support to hang their hat on with domestic growth set to slow to 6% in Q2, the Yuan will most certainly be overvalued and will need to rebalance. So against the current market grain Im looking to build long CNH positions gradually but since I remain long term bullish EUR long EURCNH is the ideal vehicle to express this view, which also leads into my opinion below.
CNH and EUR connection?
If there were a deal afoot between the US and China to weaken the USD, it would make sense for China to buy Euro given that China has an enormous appetite to diversity from USD over-reliance.
The Ringgit
The “risk on” signs are compelling which should benefit commodity and oil-linked currencies driven by a Fed pause and easing the US-China trade tensions.
The Fed pause walks back a lot of long USD positions that were built around the Fed policy normalisation vs BNM neutral stance. And if we get shot in the arm from a definitive Trade war truce, we could see the MYR extend gains to USDMYR 4.05 in a heartbeat.
Over next week traders will put greater emphasis on the dovish Fed vs the already baked in downside risk for the Ringgit.
One of the big key for the Ringgit next week is that Malaysia will soon issue Samurai bond(A samurai bond is a yen-denominated bond issued in Tokyo by the non-Japanese entity). While adding money to the government coffers is always a welcome boost the Samurai issue will remind investors of the fear of a credit rating downgrade, which has been looming over Malaysia capital markets, has left the picture.
Market conviction has improved to guardedly positive from negative territory which is a considerable improvement. Provided trade war detente continues to move forward constructively, oil prices extend into a bullish area ( WTI + $ 55) and the Fed has indeed paused we could see the USDMYR trade to 4.075 and possibly extend below 4.05.
Korean Won
IN the wake of the Samsung warning and the slide in memory chip prices amidst regional growth concerns with China economy flapping in the wind, I’m also shifting negative Won in preference of the high yielding IDR.
Cryptocurrency
BTC, the flagship cryptocurrency took a deep dive to 35, $3500 that is, coincidentally in the wake of the 51% attack on the ethererum classic. These types of security breaches usually cause a drop in investor confidence. I don’t have a particularly exciting view of why this happens other than to suggest investors start to think If it can happen to A, it can happen to B and C; then people panic because someone big is selling to move the markets. Case in point, market chatter was doing the virtual rounds on Sunday of large institutional investors pushing the market lower which unfortunately can spook the Crypto markets which are heavily dominated by retail investors. However, on a break of $3000, there will be no middle ground between success or failure and for those expressing sell-offs are good for Crypto( scratching my head on that theory) , they will likely be in for a reality check as markets could move in to the realm of irrational depreciation on the back of retail investor panic.
