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Relief Rally Or A Significant Fundamental Swing, Skeptical Or Open-Minded.?

Just a few of the questions investors are facing heading into the New Year . US equities were a tad stronger overnight as investors rode the wave of improving US economic data.
Stephen Innes
Relief Rally Or A Significant Fundamental Swing, Skeptical Or Open-Minded.?

US housing market data continues to beat expectations. Housing starts and building permits were both better than expected. Building permits rose 1.4%, reaching a 12-year high. This follows Monday’s home-builder sentiment survey hitting a 20-year high.

And, US industrial production data was decent up 1.1%, better than forecast for 0.9%. Capacity utilization was 77.3%, lower than estimates, but a reasonable jump from 76.6% in the prior month.

The robust US data is very encouraging for equity investors, given it’s very unclear that improvement in trade sentiment; hence a better global outlook is going to translate into real positive economic momentum immediately. But it’s probably  safe to say things shouldn’t get worse after the tariff rollback. And with the global data apparently bottoming, investors are playing from a much stronger hand than initially imagined.

Equity markets are enjoying a massive finish to the year, but at some point, investors will need to kick back into Christmas mode and put some money in the bank defending profits.

With the Brexit brouhaha conjuring up Ghosts of Christmas Past, today could be about as good a time as any, especially with frightening tales of the dreaded Triple Witching Hour making their way through the blogosphere.

But frankly other than an increase in activity, nowadays, with changes in expiration times, timeliness of order executions, and technological shift to the overall market structure all have contributed to significantly reducing the volatile swings we used to experience in yesteryear.

But feel free to hang the string of garlic over your trading monitor if you decide to delay your quarter-end position housekeeping duties until Friday. It can’t hurt …

Oil Markets

The sizzling oil market rally came to a grinding halt after an unexpected climb in the weekly US crude inventory report. And since market positioning is a bit stretched, I’d expect price action to be impacted to an even greater extent by any surprise when official EIA data is released. As such the market may consolidate ahead of the report.

Given the volatile nature and the relatively short shelf life impact the API report has on sentiment, it’s unlikely to be a game-changer. Price action is merely reflecting the miss on what short term traders’ guesstimates that were factored into the report, and not what will happen to oil prices in the absolute sense.

Realistically you could probably pick inventory numbers more accurately out of a hat than what the current group of survey participants can offer up. And that’s the problem I don’t think enough quantified efforts are getting thrown behind these surveys.

Oil markets are enjoying a durable finish to the year supported by the OPEC+ cuts, the U.S.-China trade de-escalation, a likely slowdown in shale production, and a trough forming in the global economic data. But the key here is investors have transcended the trade deal inspired relief rally euphoria and are now banking on a fundamental demand-driven shift that could quicken the pace of the oil market re balancing in 1Q 2020.

China’s insatiable demand for oil is evidenced in the data. Despite their well documented economic woes, China imported a staggering 11.18 million barrels a day in November, which isn’t about to stop anytime soon as the thawing in US-China trade tensions will likely boost domestic economic activity and keep the “teapots” working overtime. Indeed, a bullish signal for the demand side of the equation

And critical to the global economic growth revival and supportive for US oil demand, Industrial production data was decent in the US, up 1.1%, better than forecast

OPEC non-OPEC groups’ compliance commitment should provide a high level of downside insurance. Indeed, Saudi Arabia is looking strong-arm cheaters into compliance and this should continue to resonate into the New year

Following forecast cuts from the EIA and IEA, the market sees moderating expectations for 2020 US production growth, albeit it at a wide range of prognostication. Still, it could be enough to drive prices higher during 1H20.

But we also have to factor CAPEX considerations as there is  little love for the oil space these days as the sector remains out of favor as the worrisome effects of climate change brought  into focus the increasing importance of ESG investing and other such green energy initiatives.

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Gold markets

Gold has held up well on lingering Brexit and trade concerns despite robust US economic data. But with the FOMC continually reminding us that rates are on hold indefinitely, it adds an element of support for gold but will not necessarily catapult prices higher. For that, we need a dovish Fed impulse.

The quandary for the gold investors amid the improving economic data is deciphering if the equity markets are experiencing a trade deal relief rally or if there a fundamental shift afoot. If the later, gold’s bullish ambitions could be significantly dented if the significant global growth rebound trade comes into fruition next year.

In the meantime, look for gold’s seasonality patterns and Brexit flare-ups to buttress price action into years end   

Currency Markets

The Pound

What a difference a day made, 24 little hours.

Views on the Pound are turning bearish as both economic and political risk could crystallize, and in no small degree, the market is entirely ill-prepared. With that in mind, traders are now starting to pencil in a precautionary BoE rate cut in January. So, despite the brighter political scrim, the BoE could remain concerned about the lengthy Brexit transition period and now must factor in a possible no-deal Brexit outcome into the equation. Plus, the stronger Pound is effectively tightening policy at a time when the economy is barely expanding, all of which at minimum points to a dovish nod. Saunders and Haskel dissented in November. There’s a tail risk of an even more full split vote with Vlieghe possibly roosting with the doves

The Yuan 

The Phase One agreement reached on Friday reduces the valid tariff on Chinese exports to the US modestly, from 14.8% to 13.2.% That said, discussions around a currency pact suggest that the CNH should quickly sidestep any short-term disappointments that Phase One did not offer more tariff rollbacks. Had 50% rollbacks on all US-China tariffs been agreed, USD/CNH could have shifted towards 6.80-6.85.

But as importantly, the economic data tides are shifting pointing to more favorable inflow for Yuan

The Ringgit 

Phase on trade deal continues to resonate favorably, but with year-end approaching the market appetite for ASEAN markets, especially the beleaguered KLCI is getting parked in neutral which had held back the Ringgit. Still oil prices look favorable and regional risk sentiment remains on the ups. But importantly, absent the tail risk from trade, there is significant scope for export and equity flow-sensitive currencies like the Ringgit to perform well in the new year, especially with cheap valuations on offer at the KLCI. 

In the meantime, look for the pace of play in the Ringgit to be dictated by the underlying movements in the Yuan.  

You can catch me on live on Channel News Asia TV today at 9:30 AM Singapore chatting about the Aramco MSCI inclusion, Brexit and Trade. And on CNA radio 938 at 5:30 PM Singapore on my regular Thursday market wrap show

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

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