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Stephen Innes
Us Election Uncertainty Could Replace Trade Policy Doubt As To The Main Bugaboo Into 2020

With all the ballyhoo and ramped up concerns about:” the turn” financing, a fair assumption is that the Federal Reserve has primed the year-end turn a little too heavy to avoid a repeat of last year. On that basis, it’s not too much of stretch to assume we could see less liquidity in the system, and stocks could sag as a result in the New Year.

It’s all about the data and Fed policy.

For the market purists, it’s ultimately all about the data and what Fed policy signals. With that in mind, this week’s holiday-shortened economic calendar is chock-full of with noteworthy data releases and Fed speak. —namely, the Chicago PMI (today), consumer confidence (Tuesday), the manufacturing ISM, and the December FOMC minutes (Friday).

Accordingly, the Chicago PMI and manufacturing ISM surveys are expected to remain below 50, consumer confidence should stay elevated, given buoyant equity prices and an active labor market. If the manufacturing surveys do not take another significant turn lower and consumer spending remains sturdy, the Fed is likely to stay on hold in 2020.

At this stage, the market is only pricing in a slight chance of a rate hike towards the end of next year. As such, market participants may pay considerable attention to the FOMC minutes, notably if they reveal any new discussion around the Fed’s policy review.

Weathered the storm 

Investors have weathered a torrent of global riptides over the past year; the US economy enters 2020 – the eleventh full year of a record-long expansion – on much surer footing than anyone had forecast. Global growth momentum is showing nascent signs of bottoming. For now, the primary backburners and the significant tail risk concerning unfavorable outcomes from trade talks and Brexit have been avoided. And in a similarly positive light, critical leading indicators for the US economy have, all things considered, remain steady.

As such, big investment shops are in the process or have upgraded US growth prospects over the coming year. But before anything else, most of these assumptions are predicated that a trade escalation is avoided with China and auto tariffs are put aside. A rise on any of these fronts combined with all-encompassing “election year” uncertainty, would put the fragile state of the global rebound in doubt and could steer the global economy into a mild recession.

US election 2020 risk 

Is it too early to start factoring in US election risk? Absolutely Not! Thanks to the Democrats who have brought forward that risk given their Road to the White House seems to be built around airing Presidents Trump dirty laundry daily through a no-win impeachment process.

Oil markets

After being a constant thorn in the side of oil bulls this year, investors can revel in the afterglow of the above forecast crude draw to end a topsy turvy year.

If trading is indeed a case of following smart money, Hedge funds’ net-bullish bets on Brent surged for the night week in 10 touching a seven-month high water market according to the IMM commitment of trader report issued last week.

Oil has opened little changed in Asia trading on Monday, mainly sidestepping Alexander Novak comments on Friday that OPEC + would discuss ending production curbs next year. A year is a long way in the oil market, and several variables on the trade front can change that could alter the entire landscape of the OPEC agreement anyway.

Still, traders are keeping an eye on the smoldering powder keg in Iraq, OPEC’s second large producer. Insider reports stated that Iraq’s Nasiriyah refinery was shuttered due to precautionary measures after protesters marched into the facility on Saturday.


Gold markets

For gold traders, it certainly feels like the US election uncertainty is replacing trade policy doubts as to the main bugaboo into 2020.

But traders didn’t wake on December 24 worried about next year’s US election risk; instead, they probably woke up to the surge in gold import licenses in China. Indeed its seasonality that could be at play which triggered gold to its biggest weekly gain since early August as the physical market may have been caught unprepared into year-end by both SPDR ETF demand and possible Chinese Lunar New Year gold splurge as dealers are caught flat-footed now forced to prepare for that seasonal demand a bit earlier than usual since the celebration is falling a bit earlier in 2020, occurring between January 24 to 30 instead of February 4 to 10

Over the last

Gold is a commodity and tends to exhibit all the same supply and demand characteristics as other commodities.

But from a pure macro and risk perspective, it currently makes little sense for gold to be trading above $1500/oz. The surging equity market and higher gold prices seldom, if ever, exist in the same time frame and simultaneously moving higher.

What’s driving gold?

With the persistent backburner drivers, Brexit, and Phase 1 keeping a bid under gold and a Fed on hold forever narrative likely emboldening gold investors. However, once the P1 deal is confirmed, the market will likely push on to consider the plethora of global macro uncertainties that remain; after all, we are only starting to see early signs of a global economic recovery. But more significantly on the trade front is how much more progress can realistically be made ahead of the US elections next year. After all, the 7.5 % reduction in September tariffs is a skinny deal and is unlikely to turn the Fed even mildly hawkish.

Gold’s reaction to P1 suggests that a lot of optimism was already priced in ahead of the announcement, and gold passed that critical litmus test with flying colors. This was unequivocally bullish for gold prices and triggered another buying splurge into the holidays. SPDR ETF, the world’s biggest gold-backed exchange-traded fund, reported a rise of 2.92 tonnes to 888.85 tonnes.

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.

There has been much made of Vanguards article on Bloomberg, where the Chief economist called for a 50 % chance of a market correction (10 % fall) Still, frankly, statistical probabilities all but guarantee a 50 % market correction year in year out. However, it’s the US recession risk dashboards that are still flashing yellow that could be the harbinger of a bear market correction (20 % fall) that makes gold a must-have component in any balanced portfolio.

I think there is more to the Russian sovereign wealth gold buying story than meets the eye. Vladimir Putin is the mastermind to re-establish Russia’s sphere of influence and what better way to accomplish that feat than to reduce Russia’s dependence on the US dollar by shifting both sovereign wealth fund investment strategies and central bank reserve allocation into gold.

Official sector buying should remain a regular feature in 2020 as central banks diversify reserves away from the USD. But if Russia starts hoarding gold production and begins to back up the truck at the Royal Mint, it would severely crimp global gold supplies and drive gold prices higher. So, if Vladimir Putin’s pursuit of snapping Russia’s reliance on the US dollar comes to fruition, it could trigger a significant gold rush.  

Currency Markets 

The Ringgit 

The outlook remains positive as trade risk abates. Still, I’m not expecting any explosive gains to 4.05 USDMYR until we see a more significant chunk of US tariffs rolled back that will cause considerable improvement in Malaysia trade flows.

But the P1 deal should benefit the Ringgit form a small pick up in trade and equity inflows as business owners start putting capital to work as they become increasingly confident no more tariffs will happen.

Ringgit is very much dependent on equity inflows as such the higher oil prices, and the market bullish energy outlook should benefit the O&G constituent on the KLCI and improve equity inflows to the Ringgit benefit.

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

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