It is hard to believe that just one week ago, markets were again contemplating a potential war in the Middle East. That bullet was dodged, as both the US and Iran stepped back from the brink, albeit with a human tragedy that may still come to haunt Iran’s leadership. Markets instead have focused on their happy place, a trade-deal signing this week in Washington DC accelerating a global recovery. In turn, it is powered by a worldwide savings glut searching for a home as central banks hold rates globally at or near zero per cent.
What has been lost in the euphoria of the buy everything trade, are the worlds central banks. Ex the Federal Reserve, which got its punches in first, the rest of the pack appear to be easing at a frenetic pace, with interest rates in developing Asia at or near record lows or soon to be. Europ and Japan continue to quantitatively ease, with no end in sight. The Reserve Bank of Australia is thinking about it, and the Federal Reserve continues its guerilla operation via the short-term repo market.
The world’s central banks seem to know something we don’t, as US Q4 earnings season gets underway, with the results expected to be generally positive. Breaking the world’s addiction to a zero per cent cost of capital is proving much more complicated than they could have imagined. Their aversion to inflicting losses and “draining the swamps” of commerce hasn’t helped. Nor have much of the world’s governments, who have lazily put the onus on monetary policy rather than from the more politically odious fiscal side.
From that perspective, it is therefore of no surprise that Wall Street hit yet another high overnight. Asset markets globally, be it equities or property, for example, continue to power ahead. No one should be surprised that Tesla rose $500 a share overnight, making it I believe, the worlds 3rd largest auto manufacturer by market capitalisation. Aside from calling the repo men on the fleet of Tesla shorts, it may go higher still as anything “tech” basks in the monetary sunshine. It was the FAANG’s plus Microsoft and Tesla that led Wall Street higher overnight. If MT-FAANG were a rap-star, he or she would have a lit gangsta multi-platinum hit on their hands.
MT-FAANG and their fans around the world will likely keep on partying late into Q1’s night with the world as it stands now. Money has to go somewhere, and the world’s central banks won’t be the noise police and spoil the party. But when Greece and Italy, can issue 10-year government debt at levels 40 basis points below the US government, something is definitely amiss in the world still.
China hogs the data spotlight today in Asia, releasing its Balance of Trade at 1100 SGT, followed by Foreign Direct Investment at 1500 SGT, and New Yuan Loans at 1700SGT. The trade surplus is likely to rebound to $48 billion for December. Still, even if the data disappoints across the board, markets will likely concentrate on the trade deal signing tomorrow and the ensuing economic recovery story.
On the interim US-China trade deal itself, details are starting to emerge of the nuts and bolts. The South China Post is reporting that China is committing to purchasing $200 billion of US goods and services over the next two years. That is made up of $75 billion of manufactured products, $50 billion of energy, $40 billion of agricultural goods and $35 billion of services. The agreement contains provisions allowing the US to unilaterally reimpose tariffs and intellectual property and forced technology transfer provisions. First impressions are that it appears better on paper for the US than I initially expected, and could be a boost for likes of Boeing and Caterpillar.
Equities
Wall Street leapt strongly overnight to new record highs, led by big tech and Tesla and powered by rapidly diminishing geopolitical risks, along with the impending signing of the US-China trade agreement. The S&P 500 rose 0.70%, the Nasdaq 1.04% and the Dow Jones by 0.28%.
Asia has followed strongly, being one of the regions best placed in Q1 to benefit from the global recovery trade. The Nikkei returns from holiday and as risen 0.70%. The Mainland China CSI 300 is up 1.0% and the Shanghai Composite by 0.40% with large caps outperforming. Hong Kongs Hang Seng is 0.40% higher, and the Singapore Straits Times is 0.30% higher.
Regional peripheral markets are all in the green with the goldilocks zone Asia finds itself in, likely to continue throughout the day.
Currencies
Currency markets have a busy night with the rotation out of risk-hedging currencies and into developing ones continuing at pace. USD/CNH fell 0.50% to 6.8750, ahead of its 6.8600 support region. USD/JPY climbed through 110.00 as expectations rise that Japanese pension funds will increase their overseas asset allocations.
Regional Asian currencies continued their strong run led by the Indonesian Rupiah after the central bank greenlighted further appreciation of the IDR. The IDR was boosted by the news that the UAE will invest over $20 billion in Indonesia’s new sovereign wealth fund. If they spend come of it on new MRT lines and drains in Jakarta, I will be a happy man.
With regional Asia having underperformed in 2019, the positive start to 2020 is a welcome respite. If strength continues on local FX in Q1, this will give Asia’s central banks room to cut policy rates to support domestic consumption.
Oil
Oil continued to edge lower overnight, despite the positiveness in other markets about global growth in 2020. Brent crude fell 1.0% to $64.25 a barrel, and WTI fell 1.20% to $58.20 a barrel.
As previously stated, I fell that given the supply situation in international markets, Brent crude would struggle to maintain $70.0 a barrel in 2020. The elevated prices levels on both contracts would also almost certainly bring shale oil producers into the market to hedge production by selling the futures curves.
The spike in prices and their subsequent falls aside from last week, the moves lower do look correction in nature, rather than a wholesale run for the exits. Brent appears set to consolidate at a new equilibrium between $63 and $65 a barrel with WTI seemingly set to settle in a $56 to $58.0 range in January.
Gold
Gold’s safe-haven unwind continued overnight after it failed to regain the $1560.00 an ounce levels. Gold fell 0.50% to $1548.00 in New York and is lower by another 0.50% to $1541.00 an ounce in Asia this morning. Most of that blame can be laid at the interim US-China trade agreement’s door, with details emerging of its make-up.
With such strong global growth sentiment evident in markets around the world, and a lack of geopolitical tensions to give support, gold’s price erosion is likely to continue. The rise from $1525.00 to $1607.00 an ounce was driven entirely by the US-Iran situation. With that out of the picture, for now, it is altogether feasible gold can continue to retrace to its rally starting point.
Gold has support at $1540.00 an ounce this morning with a close below implying further losses to $1525.00 and possibly $1500.00 an ounce.
