A Not So “Silent Night”
Indeed, twas the week before Christmas and the markets were waiting for the chaos to break out.
Markets
The S&P 500 plummeted to its lowest level since October 2017 in a very objectionable environment for risk: China's economic woes, Brexit impasse, dovish central banks, continued European political malaise, soft data and Trump legal issues are all taking their toll on investors' souls. Trust me the markets have been doing a lot of soul-searching the past 96 hours.
U.S. equity markets followed their European rivals lower after a negative warning from online retailers. Indeed, this is not the time of year one would expect concerns from the retail community. In reality, the tumultuous run in global equity markets since October does suggest that no matter how good you have been, expect the stocking to be a little less full this year.
Weak data from both China and Europe reminded us that global growth remains elusive and 2019 prospects look dispiriting.
Last nights U.S. economic data is a stark reminder that the U.S. economy is not immune to a slow down. The NY Fed Empire manufacturing index fell to 10.9 versus consensus forecasts of 20.0, which is the lowest level since May 2017. This triggered a USD sell-off in favour of safe havens like CHF and JPY. Gold turned bid as U.S. stocks and yields headed south leaving risk aversion to set the tone for the tone for most of the session. Additionally, we received another humbling reminder that the U.S. housing industry is weakening – the NAHB housing market index, which surveys homebuilders, fell to the lowest level since 2015 in December. Both data prints are providing less than ideal footing for risk.
If the U.S. economy turns south, we’re in for a world of hurt. After all, it was the U.S. market was carrying the weight of global risk sentiment on its shoulders.
It is an extremely bearish environment. While market expectations are for a dovish hike from the Fed and for the central bank to temporarily pause its rate hike cycle at the beginning of 2019, the markets aren’t taking any solace in a softer forward-looking Fed as a chorus of "no rate hike” for December is echoing loudly, but likely falling on deaf ears.
Asia markets will be holding on for dear life today with local investors running out of places to hide.
Oil Market
Oil market bears were on the prowl overnight as WTI plummeted to close near $49 per barrel. Whatever semblance of support was building between 50-51 quickly evaporated as traders refocused on a supply glut — a Genscape report showing a build of 630,000 barrels at the Cushing, much higher than expected and adding to the oversupply argument. There remains high suspicion as to what extent Russia will fill their commitment Russian oil output has been at a record high of 11.42 million barrels per day (bpd) in December so far. Enveloping supply concerns is the increasing likelihood of a protracted economic downturn in China that continues to stoke fears of demand slowdown.
As usual, oil markets are all about the basics of supply and demand, so when excess amount crosses paths with a bearish global growth outlook, it provides an exceedingly bearish signal for oil prices which have only one place to go, and that’s down.
With the market struggling for direction, oil prices were very prone to shift in risk aversion. When global growth concerns trigger risk off, it’s hugely negatively impactful for oil prices.
Gold Markets
In a time where investors are fleeing equity markets in droves, gold remains one of the few places for investors to wait out this storm. Even more so when the move lower in the equity market was triggered by softer than expected U.S. economic data, with natural pressures the USD lower as it plays into the dovish Fed narrative.
Currency markets
USD was weighted down by US equity market sell-off, which triggered a flight to safety on JPY and CHF because investors are running out of options of where to hide in a severe case of the Monday blues for the greenback.
Euro
With progress on the Italy budget front, the Pound is anchoring itself to the 1.2600 and we have seen bearish bets unwind. The EUR has been unable to make further gains below 1.1275 on a dovish ECB and weak PMI’s. Given this is the final trading week of the year, no one is that interested in pushing any bullish are bearish agenda as year-end positions squaring is as likely to trip up a hard-earned trading position as it is to favour one.
Malaysian Ringgit
The prospects of Global central banks, especially the Federal Reserve Board, entering a dovish phase in this current cycle is triggering yield appeal ahead of what’s expected to be a dovish leaning Federal Reserve Board. All of which suggests that the USD dollar will run out of gas in 2019 and make EM FX (Asia especially look attractive).
While the weaker global growth storyline weighs on local equity markets, currency markets are experiencing some carry trade and bond appeal, which is filtering through EM Asia particularly the higher yielder.
The MYR is not precisely a higher yielder in the sense of IND, INR or PHP. The yield is still attractive to investors as the economy looks robust as it is supported by oil exports.
Speaking of which, oil prices slid overnight, which will likely blunt the MYR ambitions today, while providing relief to the dual deficit oil importers IDR and INR, which is backed by very lofty yields.
Bitcoin
Bitcoin has made an impressive move overnight after holding the line at significant support levels above the cliff edge $3000 mark. And while its far too early to say that the bottom is in, it’s very encouraging to see that BTC investors can celebrate some holiday cheer instead of a lump of coal under the tree as even small wins have been very elusive the past month.
Now only if the Bitcoin community can give the markets some breathing room. Frankly, Crypto’s need an extended period of “boring times," the problem is that Bitcoin is never far from the limelight with everyone chiming in “I told you so,” whether its a 500 dollar bounce higher or lower. If only the community would let the market settle and enjoy these small wins, the space would be so much better off.