Brexit comes front and centre in the week ahead between the UK Parliament’s Meaningful Vote, Tuesday, December 11 and the following EU Summit, December 13-14. Remember that 320 is the crucial threshold to get a deal over the line in Parliament, with the single biggest issue now continuing to be the backstop arrangement.
Foreshadowing a gloomy start to the Asia session, data released on Sunday indicated China’s factory inflation cooled on subdued demand, while consumer price index moderated. The China slowdown has been dominating news outlets for months, and this weaker than expected print will add more ink to the mix. And will provide a stark reminder to Asian consumers getting ready for their holiday season shopping bonanza that local economies are slowing, and consumers will feel the pinch. If you’re living in my neck of the woods (Singapore) even if you’ve been ” good for goodness sakes”, I would expect that holiday stocking to be a little less full this year.
US Markets (the bar is high for a sustained bullish pivot )
Major US stock indices slumped more than 2% on closing Friday in what was a fitting conclusion to an argy-bargy week that left investors battered, bruised and running for cover after an injury -prone week in the markets.
In the wake of the Huawei Technology Co Ltd (SZ:002502), which will likely remain in the headlines for some time as China continues to pressure both Canada and US to withdraw charges, it’s more than apparent that US-China tensions are well beyond trade. And when combined with the fact ‘Tariffs-Limbo’ is likely to extend well into 2019, uncertainty is expected to remain high, and could still explode into a full-blown trade war. And as if we needed a reminder Trader Rep Lighhizer was back stirring the pot again this morning suggesting the US/China trade needs to be resolved by March 1 or new tariffs will be imposed. This announcement comes after China’s trade surplus with the US reaches record levels. But China’s overall trade last month was worse than expected, with export growth slowing to 5.4 per cent and import growth slowing to 3 per cent.
What was once a wall of worry built out of mud brick and bamboo which quickly eroded on the first glimmer of a US equity market rebound, has now morphed into an impenetrable edifice made of concrete block and rebar which towers menacingly over the global capital market even more so as those US equity market rebounds are few and far between these days.
Uncertainty about US-China relations couple with concerns about the health of the US economy is hurting risk assets across the board. Indeed, market sentiment remains fragile, and the US November employment report didn’t precisely provide a rosy outlook for the health of the US economy.
Of course, the markets are always prone to short covering rallies; even still I expect traders to be better sellers for risk knowing the hurdle for flipping to bullish positions seems high.
But do buckle in for yet another President Trump twitter offensive as the focus shall next be on China Vice Premier Liu He’s visit to Washington DC from 12-14 Dec’18.
There is so much hinging on the policy decision by the leader of the two largest economies.
Oil markets (desperately seeking stability)
Oil is up marginally this morning after Friday OPEC cut.
WTI initially surged towards the mid-50s on a 1.2mn production cut from OPEC. While the analysts were out in hoards with canned commentaries post-OPEC, but frankly, the only sigh of relief for oil bulls was the opportunity to cut intraday long positions, as industry veterans know oil markets are not even close to being out of the woods yet. As of yet, we have no idea what will happen on the US Iran sanctions waivers, and we still do not know what President Trump’s response will be, which is not going to be market stabilising that’s for sure. A cooling global economic climate which is being reflected in struggling US shares markets, I would be amiss not to suggest that Oil prices were weighted down by Friday US equity markets sell-off.
I didn’t lose any sleep over the OPEC announcement although it came in higher than the mean estimates. I’m not convinced about Friday’s bounce as the bar for a positive surprise was shallow, particularly after Saudi oil minister Al-Falih indicated on Thursday that no agreement was guaranteed. So, the price action was an unwinding of negatives triggering an interday short squeeze, with few if any new positives are coming to the table. And while this cut should help actuate OPEC self-inflicted production damages, it’s probably not thick enough to eliminate global supply inventory overhang and trigger a bullish market follow through.
However technical analysts are reminding us the Oil WTI could head back to $ 60 per barrel as recent price action is eerily similar to 2011 when Oil prices plummeted 35 % followed by a 26 % rally over 4 weeks. The only bit of caution I suggest in this view is that ” times are a changin” in the oil markets. But no doubt Oil charts will be included in virtually every technical analysts ” 12 Charts of Xmas” packages.
Now we make the all-important pivot to April OPEC meeting; investors will be looking for evidence of how much of these cuts will be delivered, while OPEC monitors market conditions to determine if further adjustments are needed to maintain price stability. Interesting this breaks with OPEC convention of scheduling meeting every six months so apparently OPEC is serious about fine-tuning the supply side of the equation which could keep a base intact on oil prices.
While OPEC matters, it’s becoming more apparent the colossal super producers Russia -Saudi Arabia and the US appear to be the main oil market rudders. Russia wants to pump; the US wants lower prices while Saudi needs higher pricing as ageing oil field are more expensive to produce. But let’s face it, Russia is as compelling to OPEC as Riyadh, and the U.S. are now net exporters of oil all of which suggest the balance of power is shifting. But at the end of the day, US political pressure over Saudi Arabia is likely handcuffing the Kingdom from making the necessary cuts required to rebalance oil markets for their domestic concerns favourably.
Baker Hughes reported that US driller cut the most rigs since May 2016 despite record production.
Gold Markets
A weaker USD, softer US NFP data and sagging US equity futures this morning has gold back to testing the $1,250 levels. With risk in the tank coupled with the Fed dovish pivot, gold continues to shine.
Currency Markets( looking for the next big trade)
The US dollar traded slightly weaker after a miss on Friday’s NFP headline and wages data, but the participation didn’t change. G-10 majors were confined to a relatively muted range, however, knowing that this miss does not alter the broader macro landscape of robust growth and subdued inflation, and will not change the Fed plans to raise rates in December and into 2019. But in the US market focus will turn to this weeks inflation prints
AUD: The AUD is trading lower out of the gates this morning on follow through effects from the weaker China inflation prints. The outlook remains negative for the Australian dollar over concerns about China trade, while on the domestic front credit and housing market conditions are weighing dovish on RBA policy.
EUR: Its the moment of truth for the ECB this week where it is widely expected the ECB will end the APP but the master of illusion Mario Draghi will likely temper the Euro ambitions by revising inflation forecast lower, given the recent string of poor EU economic data.
At his latest press conference, Draghi said that a few board members discussed TLTRO’s, but since then nary a peep suggesting the ECB may keep those powders try for perhaps for more desperate times.
However, the EUR is still trading in a range as seller emerge above 1.1400 as weak EU data weighs will support remains firm below 1.1300 as with only seven bps of rate hike priced into the 2019 rate curve; it does look far too cheap. But traders are increasingly warming up to the later suggesting we could see a push higher ahead of this week ECB.
GBP: Tuesday will also see one of the most significant events lined up for the week – Westminster’s verdict on Theresa May’s Brexit plan. Remember, 320 is the crucial threshold to get a deal over the line in Parliament, with the single biggest issue at the moment continuing to be the backstop arrangement. GBP is very much a binary reactive trade and very much subject to the headline roulette wheel. This morning , The Times is reporting PM May is expected to face 48 MP letters this week calling of her to step down.
JPY: USD/JPY trading continues to spin a broken record as even in the face of US equity market routs the pair continues to hold firm at 112.50 and surprising many. But with the shift to a more dovish Fed view, traders are moving away from an early BoJ interest rate hike . However, the S&P futures are opening up poorly this morning and we are back to testing 112.50 once again as risk off greets Asia this morning.
Asia Currency Markets
Local markets are still beating to the pulse of the Huawei headlines
IDR: Sentiment remains favourable as the reducing of long USD/IDR positions continues as Foreign investment inflow into Fixed Income market ( carry trade) remains buoyant.
MYR: After last weeks surprising test of 4.15 on USD/MYR long unwind, and strong bond flows. Traders will focus on oil prices in the wake of OPEC production cut.
CryptoMarkets (I’m ducking already from the soothsayers’ retort)
When Bitcoin fell through $6000, I expected BTC to trade $3500 in December and then possibly follow through down to $2500 in the New Year. And Gold would shine into year end due to escalating political risk. And let me tell you did I hear it on social media from soothsayers and HODL (those holding on for dear life) getting accused of shattering their “LAMBO” dreams. Nothing personal here just calling things as I see them, that’s what people with 20 + years in the market do for a living.
Well, in three weeks, coins have shed another 30 % and to think only a year ago we were at $ 20,000. Of course, at that time I would be lying if thoughts of joining a secret nerdy libertarian crypto club didn’t cross my mind. Fortunately, someone reminded by about “Tulip Mania” in the 17 the century.
But, Bitcoins have gone well beyond the ridiculousness of tulip bulb mania. It’s has been a disastrous year for Cryptos, and by all indication, the current bear market could go from bad to worse with no fundamental or underlying reasons to buy BTC even more so when the only support offered up is a squiggly line on an analyst chart. Not to mention, it’s Xmas time, people need dollars, not Crypto coins to buy a gift.
But when factoring in a more regulatory oversight and the world of tighter credit conditions, there is probably a bit more downside on this trade with $2500 looking much likelier than $6000 is today.