Although EU and US indices rallied in their first trading day of the new year, Asian bourses turned south overnight following US airstrikes in Iraq, resulting in the killing of an Iranian and an Iraqi top military commanders. The safe-haven yen surged, while oil prices rallied on concerns of supply disruptions.
The dollar traded higher against most of the other G10 currencies on Thursday and during the Asian morning Friday. It gained against NZD, GBP, AUD, EUR, SEK and NOK in that order, while it underperformed against JPY. The greenback was found virtually unchanged versus CAD and CHF.
The strengthening of the safe-haven yen and the weakening of the commodity-linked currencies Aussie and Kiwi suggest that investors' appetite took a 180-degree turn. Indeed, although EU and US indices rallied on the back of the easing US-China trade tensions and PBOC’s decision to cut its Reserve Requirement Ratio, with Wall Street hitting new record highs, Asian bourses turned south.
The new-decade party was stopped early due to US airstrikes at Baghdad’s international airport, where Iranian Major-General Qassem Soleimani and top Iraqi militia commander Abu Mahdi al-Muhandis were killed. Warnings with regards to the strikes came on Thursday, after US Defense Secretary Esper said that there were signs that Iran-backed forces may be planning attacks after US strikes on Sunday against bases of the Tehran-backed Kataib Hezbollah group.
The heightening of the geopolitical tensions also raised concerns of oil supply disruptions, pushing both Brent and WTI up nearly 3%, which have been already trending north due to investors' latest round of risk appetite. This leads us to the conclusion that even if the Middle East tensions ease at some point, although this may not be very soon as the overnight strikes could draw forceful Iranian retaliation, oil may maintain its upside path, if rhetoric surrounding the US-China trade saga stays relatively upbeat.
Having said that though, as we noted yesterday, even if this is the case and the broader market sentiment recovers at some point, there are still several downside risks ahead of us in the new year. The world’s two largest economies may sign a “Phase One” deal soon, but the road towards a final accord may not be “paved with rose petals”. What’s more, the US may now be ready to turn its tariff guns against the EU, while the upcoming US elections the Brexit transition period may increase the element of uncertainty.
After yesterday’s sharp uprise, the Nasdaq 100 cash index reversed 180 degrees this morning and drifted back to the 8800 territory. That said, the price is still balancing above a few tentative upside lines – a short-term one taken from the low of December 3rd and a medium-term one drawn from the low of October 10th. The index could continue correcting a bit more to the downside, but if it stays above the short-term upside support line, this could result in another leg of buying. We also notice that on the 4-hour chart there is a negative divergence between our oscillators, the RSI and the MACD, and the price. This supports the idea of seeing some further correction first. We will take a cautiously-bullish approach, at least for now.
A further move lower may bring the price to the 8762 hurdle, marked by yesterday’s low. Slightly lower runs the aforementioned short-term upside line, which may provide additional support. If the index rebounds from that line, more bulls could join in and drive Nasdaq 100 to the 8818 barrier, a break of which may clear the way back to the current all-time high, at around the 8889 level.
Alternatively, if the above-mentioned short-term upside line breaks and the price falls below the 8726 hurdle, marked by the high of December 31st, this could spook the bulls from the field temporarily and more bears might be joining in. The index may drop to the 8671 area, or even to the 8635 zone, which is the low of December 20th. This is where Nasdaq 100 could test the 100 EMA on the 4-hour chart. If that zone holds, this could lead to a small bounce, but if the price cannot get back above the short-term upside line, this could result in another round of selling. A drop below the 8635 area could open the door for a deeper correction, as the index would still be above its previously-discussed medium-term upside line. The next potential support level to consider might be around 8576, which is the low of December 19th.
WTI oil was seen spiking higher during the early hours of the Asian morning today. Overall, the commodity is trading above a medium-term upside support line drawn from the low of October 3rd. Given that the price accelerated sharply to the upside within a small period of time, we may see a small correction, before another leg of buying, hence why we will remain somewhat bullish.
A small push up, could test the 63.45 hurdle again, which is the highest point of September. The price might stall around there, or even correct back down a bit, potentially sliding to the 62.37 zone, marked by the high of December 30th. If that zone holds, the bulls could grab the steering wheel again and lift WTI oil back to the 63.45 barrier, or beyond. This is when we will consider a possible test of the 64.00 hurdle, or the 64.77 level, which is the high of April 30th.
In order to get comfortable with the idea of examining slightly lower areas, a price-drop below the 60.65 hurdle would be needed. We will then target the 60.10 obstacle, a break of which may send the commodity rolling down to the 58.73 area, marked by the low of December 12th. Slightly below lies another possible support level, at 58.10, which is the low of December 11th. But let’s not forget that this whole move could just be part of a larger correction, as WTI oil would still be trading above the aforementioned upside line.
During the European morning, we get the UK construction PMI for December, which is expected to have increased somewhat, to 45.9 from 45.3. However, bearing in mind that the manufacturing index slid to 47.5 from 48.9, we see the risks surrounding the construction forecast as tilted to the downside.
We also get Germany’s preliminary inflation data for December. Both the CPI and HICP yoy rates are expected to have risen to +1.4% from +1.1% and 1.2% respectively.
In the US, the release of the FOMC minutes was pushed off to today due to the New Year holiday. At its last meeting for 2019, the Committee decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the new “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. However, at the press conference, Chair Powell said that “In order to move rates up, I would want to see inflation that’s persistent and that’s significant”. With market participants now pricing in a cut in January 2021, it would be interesting to see whether more members share Powell’s view, or whether indeed a hike in 2021 could materialize as the dot plot suggested.
The ISM manufacturing PMI for December is also coming out and the forecast points to an increase to 49.0 from 48.1. Although an improvement, this would be the fifth straight month of contraction and may revive some concerns with regards to the performance of the US economy during the last quarter of 2019. The Atlanta Fed GDP Nowcast model suggests a growth rate of +2.3% qoq SAAR, but the New York Nowcast points to +1.2%. The Atlanta rate is expected to be revised today, and if the ISM index indeed points to another contraction, the revision could be lower.
With regards to the energy market, we get the Energy Information Administration (EIA) weekly report on crude oil inventories. Expectations are for a 3.288mn barrels slide, following a decline of 5.474mn.
As for the speakers, we will get to hear from Dallas Fed President Robert Kaplan, Fed Board Governor Lael Brainard, and BoC’s Senior Deputy Governor Carolyn Wilkins.
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