We’ve come a long way in 14 days

Markets

Wall Street hit fresh record highs as investors chose to look through the impeachment charade while making merry after Secretary of State Mnuchin said on CNBC that the "phase one" trade deal was complete and that the US and China would sign the agreement after the New Year. He said that it would not be subject to renegotiation, which has eliminated any remaining market doubts as far as this segment of the trade talks is concerned.

Indeed, agreement of the P1 deal between the US and China has removed quite a lot of the uncertainties in the outlook for 2020, and with the global growth revival trade looking better and better by the day, equity investors are reveling in the holiday cheer.

A decline in global risks and an improving growth outlook is boosting investor confidence. But significantly, it eases the level of negativity in the term premium, which should free up more cash from defensive hedges that should find its way into the equity market, even at this late stage of the year.

When I left the office 2 Fridays ago, there were two significant tails as I looked towards the year-end: 1) US-China trade deal risk; and 2) year-end turn repo risk.

On the repo front, New York Fed pulled out a liquidity bazooka, which alleviated much of the year-end liquidity fears.

On the trade war front, the markets haven't even considered the prospect of a phase two trade deal or anything beyond. Still, given the way US President Trump has played this so far, I wouldn't be surprised at all to see a phase two deal in mid-2020 to goose the US markets a bit more ahead of the 2020 presidential election.

We've sure come a long way in 14 days hence the reason for all the market enthusiasm, so enjoy your well-earned Christmas dinner!

 

Oil markets

Crude price continued their stellar performance into years end nudged along by the more benevolent inventory data published by the EIA.

Product demand is up, and with a more constructive global growth outlook than at any time of this year, oil markets remain supported by the fundamental backdrop. Still, and just as crucial given the speculative nature of the oil markets, sentiment has improved hand over fist since the OPEC + agreement. 

However, the market is thinning out, so there will likely be a degree of randomness as price action on headline risk could be exacerbated by declining liquidity levels. 

 

Gold markets

Gold rallies, aided by lower yields, despite easing trade risks and firm equities; still, I expect sideways range-bound trading into year-end.

Gold remains sticky below spot as gold investors are looking through the Santa Clause equity rally, possibly picking up on seasonal gold trend while likely emboldened by sliding bond yields, which appear to be capped by the Fed on hold policy.

Philly Fed Manufacturing business conditions survey for December came in at the lowest level in six months and seemed to give the bond markets quite a jolt. That wallop was no coincidence as the data from the Philly Fed reflects on whether the deterioration in the US economy is spreading from the well-documented slide in manufacturing into the services sector.

Also, the US existing home sales missed expectations and were revised down, which triggered US dollar weakness, predominantly showing up in USDJPY. While the FX market remains reasonably passive and not triggering much of a rise in gold investors, the strong inverse correlation to the USDJPY did illicit a small top side reaction in gold prices overnight. Again, both assets are highly sensitive to the rise and fall in UST 10-year bond yields.

 A lot hinges on developments on US-China trade talks and implications on growth. But for right now, trade risks have cooled, and with it, so have top side bullish ambitions for gold.

Currency markets

The Pound

Although the BoE opted not to jump the gun, the MPC continued to strike a cautious chord all but signaling a rate cut in Q1 as they expect both Brexit and economic risks to crystalize. The Pound was less than enamored and dropped another 100 pips.

Following the colossal rejection of 1.3500 in GBP, we are now finally entering the primary support zone. (1.2990 touched), so if you are bullish GBP into 2020 (and who isn't!), then this may be the place to take a shot. I think we will see significant resistance between 1.2990-40, but if the bottom end of resistance gives way, all hell could break out. 

The Ringgit

The Ringgit is trading very neutral, but I expect resistance at 4.20 for USD/MYR to hold, notwithstanding disappointment in US-China trade talks, which drives weakness in CNY, to which MYR remains correlated.

But with the MYR looking "cheap" relative to other local units, with an undervaluation ( my model) correlated between -3 to -7 %. I think the MYR could be the sleeper trade entering 2020 and absent the tail risk from trade; there is significant scope for export and equity flow-sensitive currencies like the Ringgit to perform well.