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Onward and Upwards

With significant downside risks to the global economy turned aside, and worries over a possible recession diminishing, there is a sprouting belief supported by evidentiary proof in the data that global growth could gain momentum over the coming months.
Stephen Innes
Onward and Upwards

At the heart of this view is the agreement of a Phase One deal between the US and China, which has avoided a further escalation in tariffs between the two sides and led to a partial rollback of some existing trade taxes. Also, monetary stimulus from global central banks and an easing of financial conditions have helped to support growth. Globally, economic surprises are turning higher, after peaking in 2017. The massive levels of stimulus offered up by global central banks should have long-tailed effects. And since monetary policy typically has a lag -the easing may not be fully in the system yet. So onwards and upwards. 

Still, it’s not total blue skies on the horizon as there are still many risks that could veer this bullish view off course, especially around trade. Meaningful P 2 trade negotiations will continue to hog the limelight in 2020, trade discussions between the US and the EU remain open-ended, while the commencement of bilateral EU and the UK trade discussions could get thorny. But perhaps the real elephant in the room, the US election in November, will also increasingly pre-occupy investors as we move through the year.

Overnight US markets raced to yet another record high following the Senate endorsement of a new trade deal between the US, Mexico, and Canada on Thursday. So, with the US Administration and the Republican-dominated US Senate in a ” let’s make a deal “mood, hopefully, an olive branch gets extended to Europe so that we can put yet another tail risk in the rear-view mirror. 

But supporting the overall good vibe feel US retail sales for December came in better than expected with the control group coming in at 0.5% compared to estimates for a 0.4% gain while the key Philly Fed number was much stronger than expected at 17, well ahead of expectations for 3.8.

It’s challenging to be bearish in this environment, not only have investors embraced with open arms the signing of the US-China trade deal. But with the who’s who from corporate America headlining the weekly earnings winner list, it’s genuinely remarkable suggesting there could be more earnings surprises to the upside.

Oil markets

Traders are riding on the effervescent wave of risk optimism while reveling in the afterglow of the P1 trade deal. Oil markets advance supported by much stronger than expected US economic data; after all, at the end of the day, its data that counts not opinions. But the big mover for oil was the double whammy of positivity from the US-China trade deal and the Senate passing the USMCA, which should provide a significant lift to the US economy and give a boost to oil prices since the US is the largest consumer of oil.

Also, the IEA provided yet another bullish fillip. In a report forecast, the agency suggested that China’s, the world’s second-largest consumer of oil, demand for oil would remain unflinching and could average 14.1 million barrels a day this year compared to 13.6 million last year. While economic data in China is basing suggesting at the minimum that oil demand would likewise base, but the IEA is bullish to consensus outlook bolstered the positive price action momentum, which is crucial for sentiment to stick.

When you simultaneously get bullish impulses from the two largest buyers of oil on the planet, it does provide an impressive backdrop for oil prices. 

Gold markets

The gold markets like gold much more than the risk correlation matrixes do that for sure. Indeed, demand for all thing’s gold, as evidenced in the sturdy bid around $1550/oz. So, when it comes to the gold theory of correlation relativity, it could the year of out with the old and in with the new as investors continue to view global risk in absolute terms rather than its current relative state. What I mean by that is gold gains have been made in the face of record-setting equity markets, which is absorbing and hangs a sign on gold underlying strength, which could be an indicator of broader systemic risk to the financial market. This is creating a higher level of unease among gold’s hardcore investors, and some queasiness is at rubbing off on non-traditional buyers. 

Those risks I’m referring to revolve around multiple levels of global trade, geopolitical risk, US economic risk (current standard of tariffs haven’t filtered through yet), financial market risk (the repo market), impeachment risk, and the US election risk.

So even if the gold market does capitulate, there will likely be good buying down to $1530oz, and that support line could prove to be an impenetrable force. 

One of my clients asked me yesterday how I can be both constructive and yet short gold. I have two trading positions. The first account is a core long gold position that I have been buying and selling in and out of since 2002. The other trade account is to “over hedge”  my current long position (too lazy to obtain options), which offsets my long gold position market risk when the stars are entirely misaligned on gold like they are right now. Typically record-setting equity markets and higher gold prices seldom, if ever, can co-exist in the same space, not to mention neither can much better than expected US economic data. And yes, I’m still over hedged short in the ” Fools Gold Trade” from yesterday with a pivot on a clean break of $ 1575/oz So I hope that clears things up. 

Currency markets 

The “Buck” recovered overnight after sending the dollar bears back into a temporary state of hibernation after repelling an absolute onslaught of USD selling leading up to last night’s US data dump.

Australian dollar

The long Aussie global growth and catch up to the Yuan trade has all but petered out. China data look exceptional, and Dr. Copper is at the highs, but the AUDUSD trade lower, suggesting the idea has run its course. But when the bullish correlation is not firing on all cylinders, it’s wise to listen to the story, the market price action is telling you. 

The British Pound

The Pound is doing a mighty excellent job of ignoring the considerable move lower in UK rates as traders see the light of day. Meaning if the BoE does cut, it will be a one-and-done insurance move before Mark Carney punches out. 

Japanese Yen

The USDJPY is trading bid supported by higher US yields on the back of better than expected US data. Risk markets remain hugely supported, so there is little reason to fight the trend. But there remains a window of opportunity for the USDJPY to soar possibly. Not only does US policy support turn positive during an election year, but the GPIF is also to conclude its five-year asset mix review in February or March.

The giant pension fund is expected to announce a higher benchmark allocation for foreign bonds. If other funds follow suit, which is typical for Japanese funds to pursue the GPIF lead, that could add up to more than USD 100 billion of outflows with a good chunk earmarked for the US Treasury.

The Malaysia Ringgit 

Asia traders were a bit more cautious yesterday about the trade deal than their global peers, as foreign investors continued to pile in the Ringgit overnight. 

The Ringgit remains the bullish sleeper for H1 2020. The signing of the trade deal will boost ASEAN exporter and equity/bond inflow sensitive currencies like the Ringgit. Keeping in mind the Ringgit was undervalued relative to regional peers, so we are starting to see the catch up unfold even more so as the Yuan veers on a bullish tack post P! deal signing.   

With Asia key bellwether (USDCNH) is trading favorably, it bodes well for ASEAN currencies in general to start 2020 but even more so for the highly correlated Malaysian Ringgit.

As global growth continues to pick up the pace, Asia exporter currencies should be in good demand, and the Ringgit should prosper as risk appetite soars, and accordingly, oil prices move higher.

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

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