Dangerous Escalations | Daily Market Commentary with Jeffrey Halley
What is your outlook for 2020 has been the question to me on everyone’s lips this past week. My reply has been something along the lines of I’m just looking at Q1 thanks. After that, there are just too many variables to make a cohesive view at the moment. In fact, the only thing I am certain of at this stage, is that high US yields will mean the dollar will remain strong in 2020, even if it suffers in Q1 on global recovery euphoria.
We are only into the 3rd day of the new year, and a big fat dollop of geopolitical uncertainty has landed on investors desks already this morning. A US airstrike in Bagdad has killed the Iranian Quds commander, Qassem Soleimani. The Quds, by the way, are the Iranian “external security agency.” My first thoughts are that Commander Soleimani was a very big cheese in the Iranian hierarchy, and I am struggling to see how an Iranian riposte will not occur.
Oil agrees with me, after not budging initially. Both Brent crude and WTI are 3.0% higher in the past hour. An indirect response is the most apparent course of action, and oil installations and tankers were my first thoughts.
Readers now know why I am reluctant to look past Q1 of the new year at this stage.
That doesn’t mean its all doom and gloom though. US equities enjoyed a mighty night, led higher by Apple and other heavyweights. China stimulus, and a January 15th interim trade deal signing, implying that the global recovery trade is the path of least resistance as the year starts. That positive sentiment has overflowed into Asian equity markets today, which are a sea of green with regional currencies also at yearly highs against the dollar.
Ever the voice of reason though, I would prefer to avoid the celebratory noises just yet, and focus on the real start of the trading year, this Monday the 6th. A holiday-shortened week means that many investors and traders will not return to their desks until Monday. We additionally have no Non-Farm Payrolls this evening in the US. The holiday season sees it moved back a week until next Friday. My first impressions of 2020, though, are that a lack of volatility will not be an issue this year.
A strong showing by Wall Street has propelled Asian stock markets higher today. Japan remains closed today, but the Shanghai Composite is up 0.20%, the Hang Seng and Kospi by 0.40% and the ASX 200 by an impressive 1.20%. Singapore remains a laggard, flat on the day.
The initial rally in Asia, while still impressive, has had its wings clipped by the significant jump in oil prices in Asia this morning. Investors appear to bet that the initial caution will pass, preferring to focus on the broader global recovery story.
The US dollar index edged higher overnight, boosted by sell-offs in Sterling and to a lesser extent, the Euro. GBP fell 0.90% to 1.3140 as fears surfaced that the one-year trade agreement timetable with Europe was unrealistic. GBP/USD appears to be settling into a wide, but volatile, range between 1.2900 and 1.3300 for now.
The killing of the Iranian Qud’s commander in an American airstrike has seen a rush into haven currencies over the past hour. USD/JPY has fallen 0.50% to 108.00 and USD/CHF is lower by 0.20% to 0.9695, while the oil-dependent Korean Won has weakened 0.40% to 1164.40. With Japan on holiday, liquidity is at a premium and may exacerbate some of the moves during the Asian session.
Regional Asian currencies remain firm against the dollar, however. Mostly at, or near, one-years highs against the greenback. Markets are preferring to concentrate on the global recovery trade and its potential benefits to regional Asia for now.
Oil leapt by 3.0% today in Asia following the US airstrike described above. The move is understandable as it is unlikely that Iran will let this event pass without some retaliatory action.
Brent crude ahs climber three dollars to $68.00 a barrel and WTI has risen $2.80 to $62.60 a barrel. As this is a developing story, it is hard to say whether these gains will be sustained, thinking back to the price action after the attacks on the Saudi oil installations last year.
Oil will remain firm in Asia though and most likely early Europe as well.
Gold continued to defy gravity overnight, climbing through resistance at $1520.00 to close at $1528.00 an ounce. Safe-haven buying after the US airstrike has seen gold rocket higher, leaping $12 to $1540.00 an ounce and clearing long-term resistance at $1535.00 an ounce.
A daily close above $1535.00 an ounce today, will have me reluctantly acknowledging a very bullish technical development has occurred. All the more so, as the rally is driven by one of gold’s age-old Raison D’Etre, a hedge against geopolitical risk. One cautionary note though is that buyers may evaporate if the situation deescalates as quickly as it began.
Gold should remain bid though in Asia into the week’s end, supported by risk-hedging flows. Gold’s next resistance lies in the $1555.00/1557.00 an ounce regions.