Familiar Back Drops remain but Macau, the new financial gateway to China?

Asia Wrap 

Asia risk sentiment has bounced on the less hawkish Fed narrative, which has weighed down the US dollar. There's nothing more appealing to ASEAN investors than to have a strong dollar impulse neutralized, especially by a less hawkish Fed narrative. While shrugging off any fears that fresh US tariffs could be imposed on China if significant progress on  Phase 1 trade deal isn’t reached this weekend.

The Nikkei climbed 0.28% and Hang Seng up 1.26%. Markets, overall, were calm with traders awaiting the UK election and any hints from new ECB President Lagarde on fiscal policy. But there are actually bets circulating in the interdealer markets on what color of a scarf she will wear, highlighting how little focus is on the ECB meeting.

The US Treasuries were unchanged while SPX e-minis were up 2 points to 3145.75. and gold traded quietly

The mighty pound trades resoundingly well as the market is taking the view that "a majority is still a majority," whether it's 28 or 68 seats. I would have thought that the lead shrinking below the margin of error would make the market more nervous as a hung parliament no longer looks like a zero delta.

But the market might not be anywhere near as long as I thought, and with virtually every good FX trader I've talked to is retaining a very confident and robust bullish lean into the election tomorrow, they're probably right. But the scary prospect of another hung Parliament remains a distinct possibility.

 The Aussie has consolidated after yesterday’s brassy performance. The AUD/USD is alive and well on the back of the enormous rallies in copper, BHP, FCX lend support, and the market turns a bit more bullish on global growth. Of course, a less hawkish Fed was a pleasant surprise.

While the initial intention yesterday was to position for little more than a chip shot to test the 200 DMA ( .6910), the Fed dovish delight suggests a possible moon shoot in the making, even more so if the market decides that "Global Growth Recovery" is the big theme going into 2020. Sure, the recent run of domestic data, looks dreadful but forward-looking global growth optimism will always trump backward-looking local data any day of the week in currency land.

USD/CNH has been trading very neutral today as traders don't want to run too far ahead of the trade talk and possible December 15 tariff realities. 

USD/KRW had a quite open but soon dropped to 1186 from 1189 with higher equities. Foreign investors have bought around $160 mn of local stocks so far. The move seems to be offshore-driven, but you should expect macro and fast money names to join in on the party if the December 15 tariffs get delayed.

USD/MYR has traded in a narrow range after a positive bounce at the open. Equity flows remain tepid, and the KLCI is struggling to make any traction towards soft resistance at 1575 so far today. Locals remain cautious ahead of December 15.

 

Gold 

Gold continues to gradually recover from last week's reaction to the better-than-expected US payrolls.

Traders continue to price in diminishing expectations around an imminent phase one deal while the yellow metal received a flip from lower US yields after a less hawkish Fed policy retort.

 India and Serbia central banks are reportedly increasing bullion holdings, which support the views of weaker US dollar narrative in 2020, hence a need for the official sectors to diversify reserve risk.

Gold focus on trade, UK election, central bank purchases, and the prospect of a less hawkish fed could keep the bid under gold. 

But the equity markets remain bid almost assuming the next cocktail of risk, UK election, ECB and December 15 is a positive forgone conclusion suggesting that gold's top side ambitions could remain capped over the short term.

However, from a pure correlation perspective; something will most certainly give as gold demand simply can’t hold in the face of a risk-on environment.

 

Macau, the new financial gateway to China?

Big news on the day is Reuters reports that Chinese President Xi will unveil new policies to build Macau into a financial center. Xi will visit Macau on December 20 and is expected to announce a series of new policies aimed at diversifying the city's casino-dependent economy.

While details of the policies have yet to be announced, there has been some speculation that they include the establishment of a yuan-denominated stock exchange and the acceleration of an RMB settlement center already in the works, as well as the allocation of land for Macau to develop in mainland China.

Back in October, a proposal to set up an offshore yuan-denominated Nasdaq in Macau was submitted to China for consideration but perhaps given the tumult in Hong Kong. Premier Xi is moving aggressively to provide a viable financial alternative to Hong Kong while helping Macau diversify away from gaming, its primary revenue source. 

At the time of the original submission Tom Chan Pak-lam, chairman of Hong Kong's Institute of Securities Dealers, said Macau was unlikely to pose an immediate challenge to Hong Kong's leading position in offshore yuan financial services, but with the carnage in the Hong Kong streets threatening the city's status as a viable commercial and financial Hub, Macau does offer an intriguing alternative. At a minimum, it will raise a few eyebrows.