Extracting Value | Daily Market Commentary with Jeffrey Halley
I was lucky enough to do a TV slot on a local Singapore business programme remotely from Jakarta last night. It was wonderful for two reasons. Firstly I got to strongly share my opinion on the Australian Federal Governments leadership and response to the bush fire crisis. Readers won’t be challenged in guessing my answer. Secondly, a very pertinent question was would the global rotation in haven positioning continue as strongly as the previous days. Here my response was along the lines of markets have short memories – much like the price action post the Saudi Arabia attacks last year – and that if Iran didn’t respond immediately, we had probably seen the best of the move.
Iran is far too clever to be so ham-fisted in its response to the Soleimani assassination. A reply will come, but most likely indirectly and with plausible deniability. In the instant gratification world we live in, a lack of immediate action by Iran has, in fact, seen the haven momentum wane overnight. Equities rallied in North America; US bond yields rose slightly, oil and gold gave back some of their intra-day gains and the safe-haven Yen and Swiss franc both weakened against the US dollar.
Taking a step back from the US/Iran situation, nothing structural has changed with the world. Most central banks are on a clear easing path, developed market fixed interest returns, ex the US, are almost non-existent to zero and thus, the search for yield goes on. The dips in equity markets, for example, in the absence of an immediate Iran retaliation, represent better levels to get long. And thus, the process of extracting value begins almost immediately. The Saudi Arabia attacks of last year highlighted the short memories of the global financial markets as the global savings glut searches for a home.
Extracting value comes in different forms, however. Andrew, my colleague on the analyst desk in Singapore, heads to the dentist this morning for a root canal and a tooth extraction. I’ve told him it wouldn’t hurt a bit, but it probably will as he hands his credit card over to pay the bill later, and the dentist extracts value. Probably quite a lot of it. Stay strong brother.
Overnight data showed the US economy remains strong, the December Market Composite PMI rising to 52.7, well above the 52.2 expected. Services drove the increase, but the manufacturing component on shrunk slightly. South Korea’s trade surplus shrunk to a worse than expected $5.97 billion. Japan’s Jibun Bank Composite PMI for December also disappointed, posting a below expected 48.6. The data contrasts with the strong PMI showing across Asia and Europe yesterday. South Korea and Japan have been engaged in their own forgotten trade-war over 2019. The underperformance of the data likely reflects that. Therefore, it should not distract from the overall picture of a mild global recovery as 2020 begins.
Wall Street rallied tentatively overnight as Iran fears faded in the memory of investors as quickly as they had begun, and strong PMI’s globally boosted sentiment. The two-day sell-off presenting opportunities to get long at better levels as the year starts proper. The S&P 500 rose 0.35%, the Nasdaq rose o.56%, boosted by Alphabet, and the Dow Jones rose 0.35%.
That theme has flowed through to Asia this morning with regional markets rallying strongly. The Nikkei 225 has bounced back from yesterday to climb 1.50% this morning. The Kospi is 1.10% higher, and the Straits Times has risen 0.60%. The Hang Seng has climbed 0.75%, and China’s Shanghai Composite is up 0.35%.
The positive sentiment is likely to continue for the remainder of the day as the underlying drivers of the stock market rally, the search for yield and global economic recovery, reassert themselves. Only geopolitical headlines surprises from the Middle East are now likely to derail the rally.
US Treasury yields rose slightly as investors started unwinding defensive positioning, giving some support to the Dollar overnight. The greenback rapidly unwound its losses against the JPY and CHF haven currencies. USD/JPY rising to 108.45 and USD/CHF rising to 0.9890.
Robust European PMI data saw the Euro climb 50 points against the Dollar to 1.1200, with the British Pound also gaining 40 points to 1.3170 as Parliament returns this week.
The off-shore Yuan has continued to hold most of its gains against the US Dollar, even with the Iran shock, trading at 6.9625 this morning. With the interim trade-deal due to be signed on January 15th, USD/CNH looks set to remain locked in a 6.9600/6.9800 range with a downside bias. The next significant support level being the 6.9500 regions.
The Australian Dollar has fallen some 100 points over the last two days and remains mired at the bottom of its recent range at 0.6930. Geopolitical woes aside, the AUD looks set to extend its weakness as a more precise picture emerges of the economic cost to the domestic economy, of the wildfire crisis in Australia.
Both Brent crude and WTI had a roller-coaster day yesterday, spiking to fresh highs after the Asian open, only to give all those gains and more back as geopolitical tensions eased. Spot prices spiked above $70.00 a barrel on Brent and above $64.00 a barrel on WTI. Both contracts finished the session lower though. Brent crude spot falling 0.40% to $69.20 a barrel, and WTI spot falling 0.30% to $62.85 a barrel.
The easing of geopolitical tensions, rightly or wrongly, has seen the sell-down continue in Asia today. Brent crude spot falling a further 0.70% to $68.75 a barrel, with WTI spot falling 0.65% to $62.45 a barrel. The rapid unwinding of the Monday morning moves higher implies that the rally has run its course for now. We will need further negative geopolitical headlines to regain the upward momentum.
Looking further out, for Brent to consolidate at levels above $70.00 a barrel, we will need to see a rapid improvement in the global economy and strong commitment to the OPEC+ cuts. Neither is a certainty.
Gold traded in a near 40 dollar range yesterday, spiking from $1552.50 to $1589.00 in early Monday trading. Sharp moves in the twilight zone of the Asia Monday often prove the wrong ones across most assets. And so it proved with gold, which finished the day only marginally higher, tracing a 1.0% gain to $1565.00 an ounce at the New York session close.
The rot has continued this morning, with gold falling 0.30% to $1560.00 an ounce over the Asia morning. Risk hedging positioning is clearly being unwound, with Friday’s close at $1553.00, the initial support. That trend is likely to continue as the financial markets short memory and complacency set in. Gold has probably traced out a medium-term high around $1590.00 unless we get a sharp deterioration in the Middle-East situation.