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Stephen Innes
It's Always Sunny On Wall Street.

It was a much more active day now that the new year has arrived, but markets won’t be back into full swing until next week, with many people still out of the office enjoying an extended holiday break.

Risk markets are opening well in Asia this morning as local investors may continue to bask in the afterglow of the PBoC dovish pivot and supportive regional economic data.

Yesterday’s calendar was dominated by PMI releases where traders largely sidestepped the US and European readings, which were final December prints and not that hugely market impacting. Still, Markit US Manufacturing PMI came in at 52.4, a little lower than expectations for an unrevised 52.5. But it’s probably fair to say that Markit’s view on the US economy as cautiously optimistic.

However, there were a few other PMIs releases that stood out. Firstly, in China, the Caixin China manufacturing PMI came out at 51.5. That may have missed expectations (51.6), but it does mark the fifth consecutive month of expansion.

There was better news in South Korea as the manufacturing PMI moved back into expansionary territory. The index came out at 50.1, the highest reading since April 2019 while output rose to 50.6, the highest since October 2018

The South Korea data, a bellwether for global trade and technology, shines a massive ray optimism confirming that the rebound in the world economy is taking place, which is being viewed in an extremely positive light by global investors.

Focus now shifts to the s US manufacturing ISM and the December FOMC minutes, released later today, which could provide a policy impulse. While the FOMC minutes could largely echo Chair Powell’s message, that monetary policy is in the right place barring a “material reassessment.” Lately, we’ve seen a shift to inflation outcome-based forward guidance from several members with a willingness to let the economy overheat. So, it will be essential to see if this type of outlook gains popularity amongst the board.

Oil markets

At the heart of the matter, growing optimism that a trade deal between the world’s two largest economies will support energy demand, the OPEC/OPEC+ agreement to deepen production cuts and growing caution around US supply growth continues to resonate with oil bulls.

Also, Oil prices gained on Thursday after data showed a substantial weekly decline in US crude stocks.

All the while, oil markets continued to put in a stable performance on the back of expansionary economic data from two of Asia’s oil-importing behemoths, China and South Korea, as their respective PMI readings are confirming a rebound in global growth.

In addition, the headline-grabbing middle east smoldering powder keg has oil traders on heightened alert for any possible escalation that could threaten supply chains from OPEC’s number 2 producer, Iraq. Still, there’s a sense of been down this road before reluctance that continues holding back traders from chasing the bump higher in the global political risk index.

However, its debatable just how much gas is left in the rally tank ahead of today’s definitive EIA inventory report. Still, a solid start to the New Year as Oil markets have definitively formed a solid base for prices to springboard higher.

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Gold markets

Rising gold and equity markets apparently can exist in the same space. But I think this is more of a seasonality quirk than a breakdown in the steadfast correlation.

I think seasonality was a big trigger on the recent gold market move as in the past five Januaries, and gold has gained 5.2% on average without a single hic-up. But significantly during those rallies, there was no correlation with equity performance, gold simply moved higher. So, I do believe part of the explanation lies in Asia retail demand, which is likely getting enhanced this year due to a bearish market consensus view on the US dollar. The weaker US dollar outlook could provide additional encouragement to push prices higher over the next few months.

But stagflation seems to be gaining some momentum as an early 2020 narrative. For reference, stagflation is a toxic mix of persistently elevated unemployment, doggedly subdued demand, and continuous inflation pressures. Massive amount of liquidity was injected into the US financial system en masse and has quarterbacked the beckoning call that “inflation is coming” And when combined with a pessimistic US growth narrative, it suggests the possibility of rising unemployment is on the horizon also. So even with stagflation dashboards starting to flicker amber, the nearest gold vault sure sounds like a beautiful place to take refuge.

Currency markets  

G-10 and the Yuan

Without going through the PMI and manufacturing data replays from overnight, let’s just say it might be a bit too early to put a tombstone over the US dollar just yet, especially against the EUR and GBP. Indeed, it was a rather unimpressive start to the year for the USD bears who came hobbling out of the New Year starting gates.

But does that change current US dollar bearish sentiment as we move into an election year and which the Yuan setting it sight on 6.90? Probably not.

Although I’m past my interbank shelf life, still, my FX network is pervasive as I’m only one year divorced from running a big book out of Tokyo. With that in mind, every interbank trader I know is looking for the dollar to weaken into the election year, and with most views now pivoting to a stronger Yuan, short dollars is probably a good position to be. However, it feels like everyone is 50 %” max short” and waiting for better levels to get in, which opens the market up to a short squeeze panicked correction. Also, I think everyone is caught off guard by the brassy S&P 500 performance to begin the year, which is looking like a legitimate move as opposed to a year-end overshoot. This certainly doesn’t detract from the US dollar appeal.

Ignore all the mumbo jumbo around interest rates as central bank policy transmission, as expressed in the FX market, is weak, especially with global interest rates so low. Instead, the RMB is the purest barometer to understand the broader USD dollar movement amid US-China friction. Renminbi is by far the most significant driver of the US dollar across EMFX and will leave a massive footprint on G-10 this year. So, if you’re bullish Yuan, you need to be bearish USD across the board.

If you are bearish USD and you are one of the few that haven’t entered a short dollar trade, GBP is probably still the place to focus. But I’m starting to have my reservation after the holiday season run of not so Bullish Cable headlines as traders could soon wake up and  realize that Brexit uncertainty remains high, investment is not guaranteed to pick up in the UK, and the fear that the enormous real money inflows might never show up is enough to keep sterling bulls awake at night

The Ringgit

The Ringgit has been trading well supported by the imminent P1 deal, higher oil prices, and improving China and local economic data. But as we are bearing witness to across global markets, investors’ sentiment has been significantly enhanced by the PBoC monetary policy impulse. So, a combination of a trade truce and improving comprehensive economic data could set the Ringgit on a favorable course to touch 4.05 if global risk sentiment can remain on an even keel, and the Yuan continues to strengthen.

BNM has likely diffused the FTSE Russel ticking time bomb sufficiently enough to keep Malaysia bonds included in the index. None the less we should expect investors to hold smaller MYR exposure than other local currencies until we pass the inclusion hurdle. So there’s still an element of catch up still yet to play out later in Q1.

This article was written by Stephen Innes, Asia Pacific Market Strategist at AxiTrader

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