Markets
As the dust gradually settles and traders remove holiday blinkers only to find there are no recessionary monsters hiding in the closet nor a Federal Reserve Board boogeyman lurking in the nearby shadows. A sense of normality returns to global markets. For the most part, trading remains in calm spirit as risk continues to reflate on the back of Fed Chair Powell messaging amid constructive US sentiment data.
Indeed it was a positive sign for risk when the markets shrugged off damaging profit warnings for Samsung (KS:005930).
Overall, it looks like the market is finally getting the gist of the Fed shift to a more “evidence-based” approach to monetary policy. Nothing could be farther from the truth than the idea that the Fed wanted to hike interest rates until the economy rolled over and died. The objective has always been a soft landing while guiding interest rates being sufficiently high so that when the Fed reverses policy course, the cuts would be impactful in a stimulatory sense. In reality, it’s nothing new for the Fed to tweak policy making “mid-cycle adjustments" when it becomes obvious inflation isn’t that much of a problem.
Also, reports were circulating on the US-China trade talks as the mid-level US, and Chinese officials in Beijing have extended negotiations to the third day which is fuelling investor optimism suggesting there might be a light at the end of the trade war tumultuous tunnel. Markets already hope the base case scenario to be favourable and talks to continue into Davos later this month as some trade concessions are already in motion regarding soybeans and China approved five genetically modified crops for import, which had been an early Trump administration demand in trade talks dating back to 2017.
Not overly surprising, especially for a President who judges his popularity by the US stock markets levels, reports are circulating again that President Trump is more and more eager to seal a deal with China to prop up the global financial markets. While traders are just as eagerly awaiting the elusive resolution roadmap before Trumps self-imposed March 1 deadline for raising tariffs.
Also, the political news from the hill was cheery for a change as The Washington Post claimed Trump will not declare a national emergency in his address late Tuesday night, quelling concerns that a prolonged political infight will reach high courts. But Trump is holding a lunch meeting with US Senators on the shutdown Wednesday, meaning there is potential for some headline fireworks.
Oil markets
Crude continues to extend gains as early reports from Beijing regarding trade negotiations are fueling optimism around successful trade talks between the US and China. This optimism amidst arguably oversold market conditions due to a dreary December for risk is counterbalancing reports that indicate more Iranian barrels are making their way to the international market ahead of the US waivers only set to expire in April.
But in summary, after a dreadful December for risk markets, crude oil continues to catch a positive vibe on the back its strengthening correlation with the S&P which has been faring well as trade thaw optimism continues to permeate. Still, the slowing economic growth must be a concern, particularly in Europe where business sentiment gauges have slipped to the lowest level since 2017s.
However, the Large Crude draw in the API survey failed to inspire as gasoline and distillates stock continues to skyrocket, so the report sees us stuck in no man’s land bullish WTI but bearish products.
Gold markets
It was a quiet session for the gold market as FX markets traded for the most part in a sea of calm. While demand remains frim ahead of critical $1280 support level, higher US yields and firming equity markets continue to weigh negatively. But chirpy risk appetite getting fueled by optimism around US-China trade talks would suggest $1300 could be an impenetrable ceiling over the near term.
Currency markets
The Greenback perked a bit overnight, with DXY coming off the lows. It was helped along by soft AUD trade data in Asia and terrible industrial production data out of Germany. The positive trade war vibe is predictably filtering through to the commodity currencies which are trending positively out of the gates in Asia as both the AUD and USD are faring well on two fronts. First, the risk is expected to remain on the front foot as Powell did provide a credible narrative. Second, if we get a roadmap to trade resolution I would expect equity markest and commodity currencies to flourish along with EM Asia FX.
But keeping in mind this isn’t the first time the President has spoken favourably about trade, however, given the current state of affairs in the equity markets, investors are taking his comments a bit more to heart.
Yesterday we alluded to the difficulty with trading the USD is trying to factor in just how much of a driver the balance sheet will be going forward. It’s not only the dots traders are contending with as the Fed is now juggling two tightening paths. I think that was evident by overnight price movements on the EUR after two sets of data suggested the same old negative story for EU zone growth, yet the USD was unable to capitalise.