Risk-off open as full markets return to the sounds of war drums

January 2020 has now well and truly kicked-off with full markets returning following the Christmas and New Year holidays. The Santa-Claus rally we have seen, particularly, in US stocks, could well now come to a halt given the sounds of war drums emanating from the latest escalation of tensions between the US and Iran. 
Expect a risk-off start to full markets returning 

We can expect a risk-off start to the week supporting the Yen and weighing on global equities in general. Not only was the US ISM Manufacturing PMI falling to its lowest in over a decade, a sign that global growth remains under pressure, the implications from which could come of an Iranian retaliation to the US drone attack which terminated Qassem Soleimani, head of Iran's elite Quds Force, will be the driver.

Iran has pinpointed 35 “key US targets” for revenge

Weekend headlines were flowing whereby Iran has promised to retaliate after three-days of mourning. Iran has pinpointed 35 “key US targets” for revenge and there have already been rockets fired near the US Embassy in Baghdad just hours after mourners chanted "death to America" at the funeral of top Iranian general Qasem Soleimani. US troops are to leave Iraq by order of the nation while more are being deployed into the region. 

FOMC minutes confirmed all was under control

The minutes of the Federal Open Market Conditions confirm that the Committee thinks it has everything under control. However, the timing of a war could not have come at a worse time for the Fed, as rising oil prices, in part due to a full-blown Middle Eastern war, will apply unwanted upward pressure on inflation in the US. 

Subsequent expectations in the opening markets

• Gold to surpass the confluence of the September resistance and 2011/2012 support with eyes on $1,600s. 
• Oil higher, targetting 200-month moving average and $70 handle –  Chart of the week: Oil prices spiking and intent on 2019 highs
• USD/JPY to break the daily support at 107.80.

Looking ahead

It is about to get very busy on the economic calendar.

• On the 7th Jan, we will have the US ISM Non-Manufacturing (Dec) as well as European Core Consumer Price Index and Headline HICP.
• On the 9th Jan, Chinese CPI and the Australian Trade Surplus will be key events.
• On the 10th January, we will finally have the delayed Nonfarm Payrolls as well as the Canadian Jobs Report data. Australia will report Retail Sales.

As per usual, the major focus will be on the US Payrolls which analysts at TD Securities suggest probably slowed significantly after an exaggerated surge in November (266K and around 220K excluding returning strikers). "Even our below-consensus 145K forecast implies a strong 189K average for Q4, above the 173K average for the first nine months of the year. We expect the unemployment rate to hold at 3.5% and average hourly earnings to hold at 3.1% YoY."