China GDP outperforms

China's GDP for Q4 showed an increase of 6.50% YoY for Q4, leaving China on track to expand by 2.30% for 2020. Industrial Production rose by an impressive 7.30% as the rest of the world's insatiable demand for Made in China showed no signs of slowing down. By contrast, domestic data still showed the caution that has been prevalent throughout the year. Retail Sales for December rose 4.60% versus 5.50% expected, a cause for joy in any other country but China. That likely reflects the Covid-19 restrictions in parts of the country and the freezing weather that has sent energy prices soaring. Unemployment, though, held steady at 5.20%, and this metric will leave Chinese authorities still in their comfort zone. 

All in all, China's data continues to show that it is and will continue to lead the world out of the pandemic-related recession in 2020. It will lift the rest of Asia with signs of life appearing in Japan, with the Reuters Tankan Index rising to -1 from -9 previously. Singapore's Non-Oil Exports also vastly outperformed, rising by 6.60% in December (3.30% exp), although admittedly, it is an extremely volatile number. 

The Bank of Japan announces its latest rate decision this week, and although rates will remain unchanged, there is an outside chance they maker tinker with its yield curve control programme. Japanese JGB yields have spiked on this which has seen USD/JPY ease to 103.75 this morning after US yields eased on Friday. The effects are likely to be transitory though as I see no reason for the BOJ to tinker, and ahead of an expected flurry of Biden executive orders on Wednesday which will probably lead to US Dollar strength.

Bank Negara Malaysia could well trim interest rates later this week though. Having held rates steady at q.75% since the mid-year, Bank Negara finds itself in an almost unique position in Asia where regional central banks have cut rates to rock bottom. Along with Indonesia, it has room to ease, helped by Malaysian Ringgit strength, and may choose to exercise that option and cut 0.25 this week. The driver is the impact on the domestic economy caused by the surge in Covid-19 cases, and the ensuing movement control orders across the regions that form the backbone of Malaysian GDP. The Ringgit will almost certainly come under pressure this week as I expect the US Dollar to remain firm anyway. Malaysian equities though should receive the news warmly.

Although we have a lot of second-tier data across the world this week, all eyes will be one Wednesday in the United States with the transfer of power from President Trump to President Biden. Expectations are elevated for a flurry of directives unwinding many Trump executive orders, as well as a flurry of Mr Biden's own. 

Markets will be especially interested in US-China relations as the administration banned US companies from selling semiconductors to Huawei over the weekend. That has caused a temporary dip in semiconductor manufacturers across Asia today, although it should be short-lived given the global semiconductor shortage. More interesting will be if some of the Trump administration restrictions regarding China are eased. President-elect Biden has been deafening in his silence on China relations, and any sign or a less confrontation approach should be bullish equities everywhere.

The Presidential nomination for Treasury Secretary, for Federal Reserve Governor Janet Yellen, testifies tomorrow. The Wall Street Journal has written that it expects Ms Yellen to say that market forces should determine the US Dollar level. A stark contrast from the weak Dollar Trump administration. The US Dollar rose ominously on Friday and continues to do so today. With almost a years’ worth of short US Dollar positions in the market still, that could give more momentum to the US Dollar short squeeze which I expect to extend into February.

US markets are partially closed today for Martin Luther King Day. Stock and bond markets are closed amongst others, although currency markets remain open. That is likely to reduce liquidity in Asia and Europe and leave markets vulnerable to volatility spikes on headline risk. Into the second half of the week, policy visibility and executive order issuance from an inaugurated President Biden will dictate markets direction.

Asian equity markets slide

A weak Wall Street close and the Huawei semiconductor ban over the weekend has set up Asia for a soft opening today. Wall Street took fright at poor Retail Sales data on Friday, highlighting a weakening trend in the domestic sector over the past few months as Covid-19 restrictions undermine the US recovery. Industrial Production once again remained immune to the slowdown, but actually only makes up 10% of US GDP these days, domestic consumption being 70%. A final nail in the coffin was less than encouraging earnings outlooks for large US Banks, some of whom telegraphed warnings with the earnings releases on Friday. 

The S&P 500 fell 0.72%, the Nasdaq retreated by 0.87%, and the Dow Jones slid by 0.57%. There was probably an element of risk aversion involved as well, as investors lightened exposure ahead of today's US holiday and Wednesday President inauguration. Investors rotated out of equities and into the safety of US bonds, pushing US yields lower. US index futures are closed today.

Asian markets are mostly lower with the Nikkei 225 down 0.90% with the Kospi falling 1.25%. China's impressive GDP data has lifted local markets, though, the Shanghai Composite rising 0.70% and the CSI 300 climbing 0.50% and the Hang Seng by 0.40%.

Jakarta is also bucking the trend, rising 0.50% as vaccinations start and commodities prices and demand remain firm. Elsewhere though, it is a sea of red. Singapore is 0.80% lower, Kuala Lumpur and Manilla are lower by around 0.90%. Australian markets have followed suit, the ASX 200 easing by 0.90%, and the All Ordinaries falling by 0.70%. I expect European equities to move lower in sympathy this afternoon.

Markets will be acutely sensitive to headline risk, positive or negative, emanating from Washington DC this week. Either from the outgoing President, or the new one.

The US Dollar short squeeze resumes

The US short squeeze resumed in earnest on Friday, with the dollar index rising 0.54% to 90.73, leaving the index just shy of one-month highs. Despite US yields easing, the dollar firmed as investor's nerves arose about the Trump administration's last days, as well as the amount of new spending the new administration will be pencilling in. 

With market's having spent most of 2020 selling US Dollars against everything, it probably won't take a lot of news to see some of that speculative positioning unwind. The dollar index is just shy of resistance at 91.00, the 21st December high, and its 50-day moving average. (DMA) A daily close above 91.00 suggests further gains that could extend above 92.00 in the coming weeks. A firming of US yields after Wednesday's inauguration should give the firmer Dollar trade more extra momentum.

In the G-10 space, the Euro, Swiss France and Australian Dollars have all traced out technical highs, and look set for more losses as the week progresses. Sterling has not yet recorded a technical reversal but has traced out a formidable quadruple top at 1.3700. Sterling fell 0.80% to 1.3580 on Friday and has eased to 1.3560 in Asia. Failure of 1.3450 signals a much deeper downward correction, possibly extending to 1.3200, its 100-DMA.

USD/JPY is bucking the trend, with JGB yields firming on speculation in Japan, the Bank of Japan will adjust their yield curve control programme this week. I find the likelihood of this remote, and is the BOJ does nothing on Thursday, USD/JPY's rally could resume. USD/JPY's critical level is 104.50, and multi-month descending resistance line. A daily close above 104.50 signals a move to 106.00 initially.

In Asia, USD/CNY has risen to 6.4900 this morning with the offshore USD/CNH reaching 6.5000. A rally by USD/CNY through 6.5000 likely signals further losses to 6.5500 in the week ahead. Overall, Asian regional currencies have eased this morning against the US Dollar. In general, Asian currencies remain in longer-term uptrends. However, I suspect a further retreat over the next couple of weeks is likely. US yields are likely to rise after the inauguration, and the Democrat spending plans become more transparent.

The US Dollar appears to be strengthening on risk aversion ahead of Wednesday's Presidential Inauguration. Post that event; US yields are likely to rise once again. That, I believe, will b the catalyst for the US Dollar short squeeze to extend into early February.

Oil prices correct lower

Oil prices suffered a sharp fall on Friday, with a rising US Dollar enough to see extended speculative longs heading for the exit door. Brent crude fell by 2.90% to $54.80 a barrel, and WTI fell by 2.95% to $52.10. In Asia, both contracts have eased modestly again to $54.60 and $52.00 respectively. As I noted last week, the Relative Strength Indexes (RSI's) on both contracts were in overbought territory, indicating a correction was on its way. The sideways trading of the second half of the week, and the upcoming weekend and US holiday, appear to have been the downward catalyst.

Both RSI's have now moved back into neutral territory, but oil will probably be buffeted between opposing forces this week. On the one hand, Reuters reports that US shale producers are back in force, selling rallies in the futures to hedge future production. The price action on Brent and WTI in the second half of last week seems to bear that out. Fears will increase that a President Biden may also ease restrictions on Iran. However, the massive squeeze in gas and coal prices in Asia, as inclement weather and power shortages increase demand, will have a spill over effect on oil prices. Asian buyers should be active on any material dips.

Oil's correction does have the potential to extend lower with the $53.00 leaving being a critical pivot level for Brent crude. WTI's support is nearer, at $51/50 a barrel although only a loss of $49.30 calls the overall rally into concern.

From a supply/demand perspective, a President Biden's re-engagement with Iran remains the most considerable danger to oil's recent rally. Hopefully, markets will have more visibility on this by the end of the week.

Gold's choppy range-trading continues

Gold's choppy range-trading between $1817.00 and $1864.00 an ounce continued on Friday, with a stronger US Dollar sending gold lower by nearly1.0% to $1829.00 an ounce. With a US holiday, trading has been muted in Asia. Gold has edged lower to $1828.50 an ounce.

Gold has been capped above $1860.00 an ounce all of last week, while conversely, finding good support on each dip to the $1820.00 an ounce region. Gold will need a daily close above or below those regions to set its next direction; otherwise, the noisy range trading is set to continue, with the market tying itself in knots to fit news flow to the price moves.

With the US Dollar expected to remain firm, the weight of probability errs towards the downside. Beyond $1817.00 and $1800.00 an ounce, the 61.80% Fibonacci remains gold's critical support level. A daily close below $1760.00 an ounce signals deeper losses to the mid-1600s.