Post-Christmas Bliss

At the NY Futures open, Oil and the SPX opened higher while Asia’s critical risk bell-weather” The Yuan,” has strengthened below the significant 7.0 USDCNH mark in early Asia trade.

Despite recession worries, trade tiffs, and rancorous politics, investors managed to have their Christmas cake and eat it this year.

With the heavyweight colossal tech sector giants leading the way, investors are showing no fear as the market remains underpinned by the thawing in the US-China trade tiff and easy central bank policy.

It drives me nutty when analysts try to rationalize this year’s bouncy equity markets as some magical ” Santa Clause ” rally. When, in fact, the explanation is not fantastical or that complicated at all.

The most likely reason way stocks are scaling record heights and fears of a recession are fading is old fashion money in the system and lots of it. Due to the rapid expansion of the Feds balance sheet, the money supply is outstripping nominal GDP.

Meaning, the money supply is rising faster than the economy is expanding, which is providing a deluge of liquidity for institutional investors to gorge on, making it extremely difficult to short risk assets in this “cushy cashy” risk-taking environment. When you combine this cash bonanza with the probable economic bounce from a tariff reversal, it gives more than reasonable cause to own risk assets.

Bond markets

The bond market was given a bit of jolt on Christmas eve as the December Richmond Fed manufacturing index came in at -5, +29 wages (vs. -1 and +24 in November). A weak headline print, but salaries are trending back higher. Stagflation is the best way to describe it.

Most of the sub-series on Richmond is negative (and weaker) – so outright a soft print from November.

Oil markets

Oil prices continue to show year-end strength supported by a combination of definitive progress on the US-China trade deal, the Dec OPEC/OPEC+ agreement, and slowing shale activity. All of which is pointing to a stronger performance for oil prices in Q1 than anyone had thought only two months ago.

Gold markets

Despite froth risk assets and a range-bound US dollar, there remains a demand for year-end protection, and gold seems to be the primary beneficiary of that call.

Gold found its wings again on Christmas eve as signs from the Philly Fed Index indicated US macro growth momentum is waning into year-end.

And with the persistent back-burner drivers, central bank buying, Brexit, and Phase 2 triggering a “just in case bid ” into the holidays, gold bullishly pressed above the $ 1500 level as offers were few and far in the holiday-thinned climate. But as a side note, it did not take much buying to push gold higher.

Gold, as a hedge against an equity pull-back, makes sense as bonds will be very reactive to that correction (Yields lower). Still, it’s the history of gold seasonally doing well into January (+5.22% for 5yr trailing average), which bolsters the case even further to stay long gold into the year-end turn.

Without a dovish Fed pivot, its unlikely gold will make explosive gains, but it does appear the market is trying to carve out a new higher trading range, which is a very favorable sign for gold bulls. Nevertheless, caution needs to be exercised as the bullion markets could be extremely volatile, given the market’s low liquidity profile, especially to the downside as trade news remains positive and equity market still scaling new heights.

Currency markets

The Pound

A mix of residual long position squaring and thin liquidity possibly drove the pound lower into Xmas. But with the critical support level 1.2920 GBPUSD (38.2% retracement of Sept.-Dec. rally) holding, there’s been a technical bounce at this morning market open.

I think Cable traders are having difficulty shorting the pound below 1.2900 unless they see at least one other BoE member voting for a cut. Even more so, given the general direction of travel, Sterling is expected to take in 2020 as GBP topside is very much in vogue these days.

The pound may stabilize and possibly rally into January and February before trade negotiations come to back to haunt in mid-March ahead of the European Council.

The Ringgit

The Ringgit should trade with a positive tone today and back of trade deal calming rhetoric from China, stronger Yuan, and stable performance in the energy markets.

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