The tailwind from better than expected data continues to support equity markets as US stocks traded at record levels, and those in Europe notched new highs on Friday after Chinese growth data reassured investors over the health of the world's second-largest economy.
Weaker global inflation, coupled with constructive comprehensive growth data and a US-China Phase One signing, has set up for a Goldilocks scenario which investors find incredibly alluring. All the while, a Fed on hold ensures yields are held at bay while reflationary assets like equities and commodities continue to flourish as risk aversion continues to slide.
Indeed, there's a belief that global growth will continue to pick up speed over the coming months as significant downside risks to the global economy have been turned aside and worries over a possible recession have diminished, with the data giving credence to the possibility.
Oil prices pushed higher on Monday following supply disruptions amid political disquiet in Libya and Iraq.
Libya's biggest oil field began to halt production after armed forces shut down a pipeline, pointing to possibly more turmoil in Libya. Compounding the Libya supply disruption, a security guard strike has forced a temporary stoppage of work on an Iraq oil field on Sunday. This outage comes amid rising fears that general unrest in Iraq, OPEC’s number two producer, could intensify and trigger a more widespread supply disruption – even more so if the protesters set sight on the oil fields.
Still, prices are likely to remain capped, given the market's reactive nature to fade geopolitical risk quickly.
While the Phase One deal is being viewed in a favorable light, as is the basing in global economic data, at this stage of the global economic recovery it doesn't point to a significant enough upward rerating of global demand to provide a solid bullish catalyst. And the IEA monthly report made headlines projecting faster non-OPEC supply growth than demand in 2020, which provided a not-so-subtle reminder about the global supply glut.
Gold is still trading fairly constructively despite the somewhat positive risk news flow in the last few days. The yellow metal continues to find support from January seasonality, which has tended to be a positively active month for gold prices over the past decade.
Gold continues to mount rallies despite a higher USD and firm equities.
In 2019, gold was less sensitive to the USD as US interest continued to move lower, and while the Fed lower for longer narrative is not necessarily bullish for gold prices, it's no bearish either.
US equity markets have provided a poor indicator of the health of the US economy as the equity market rally remains primarily sponsored by the Fed’s short term money deluge. So, with equity indices trading at record highs and much uncertainty over how the market will react once the Fed starts to pull back on Repo injections, the fear of a mini equity market taper tantrum keeps strategic gold buyers coming back for more.
And while the US economic data continues to stabilise favorably, at this stage the US economy doesn’t warrant a significant enough rerating to push bond yields higher, which is supportive for gold.
Still, the gold market is in search of the elusive catalyst to trigger a gold rush revival and the big question for the risk market is: Do we continue to party like it’s 2017?
Asia currency markets
Asia currency volatility continues to grind lower and the local carry trade remains in fashion. In addition, the more export sensitive currencies in the North Asia basket also continue to flourish in the wake of the P1 trade deal. And with the USDCNH extending gains below 6.90, the market has also continued to unwind any remnants of existing bearish Yuan hedges as traders now position for a growth revival in China to kick in at a faster pace than expected. However, CNH might be a bit rich at the current level, given the level of tariff rollbacks.
BNM is scheduled to meet on Wednesday, where they’re widely expected to keep their benchmark rates unchanged although, subject to where the P1 economic data unfolds, they could cut rates later in the year.
As for the Ringgit, the local unit is expected to be a primary beneficiary of the global reflation trade, so improving worldwide economic data could be the key to a more fruitful Ringgit revival.
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Equities hit with the inflation stick; Saudi assurance provides oil with shelter from the storm; USDJPY hedge plays building; Gold appears prone