10 days until Christmas, but don't call it a year just yet
The last two weeks in December are typically associated with game planning for Q1, so, breaking with our usual week ahead macro docket narrative, we’ll look at some possible year-end emerging trends.
The "big trade deal with China" has become clearer, despite the chaotic China press briefing Friday night local (HK) time.
The US only had to give up a small nominal rollback in tariffs and a December tariff deferral in exchange for China's commitment to purchase some form of US agricultural products totaling 40-50 billion per year. Yes, we have a deal, but trade negotiations will continue and, for now, escalation seems to be off the table. However, the path to the comprehensive agreement is still miles away.
But, ultimately, the Phase One deal fell short of market expectations. So, this week we should expect more of the same twists and turns in trade talk sentiment we’ve experienced over the last 18 months.
The market might be cautious, chasing moves in the GBP this week. The size of the Conservative majority in the UK election was a surprise but the market behavior played out almost as scripted, peaking at 1.35 and stop profits triggered on the break of 1.34 on the way down.
The million-dollar question facing Sterling traders is whether the much-touted 100 billion GBP of real money buying appear? Or will real money hedgers and FDI inflows wait for more certainty on the structure of the new EU vs. UK relationship?
In the interim, traders will turn focus to the Bank of England's (BoE) decision this week where no change to the bank's policy setting is expected; given the lack of communication since the November Monetary Policy Report, it's unlikely there’ll be a rate change as the BoE usually telegraphs rate moves. But beware of a change in the voting split which could lean on the dovish sided and dent near term GBP sentiment.
The second half of December is typically associated with robust seasonal demand for risk assets and, given the market has cleared three significant overhangs (UK election, USMCA and December 15 tariffs), risk may be supported despite the expected gyration in the trade talk narrative. This notion could bring focus on the AUD and NZD as traders begin the process of positioning for the big global growth rebound trade of 2020.
With the Fed on hold and global economic data bottoming – especially in the Eurozone - †he January 1 trade most talked about in trading circles is short dollars, while in G10 the focus is on the EURUSD.
The Yuan surged below 6.95 Friday on what was thought to be a robust trade deal but backtracked after the reference rate fix which held above 7, indicating an unwillingness for the PBoC to strengthen the Yuan quickly. Eventually the Yuan gave up more ground and traded above 7 as the market was disappointed by the details in the Phase One trade deal –particularly the level of the tariffs rolled back.
But the key for the Yuan and global risk sentiment is that China is likely to kick off next week on a positive note with a rebound in high-frequency data.
Analysts expect China to report stronger consumption and production data. Retail sales growth is likely to accelerate to 8% in November, up from 7.2% in October, while IP growth rises to 5.2% from 4.7% in the same period. Although fixed asset investment (FAI) growth is likely to have moved sideways – unchanged from October at 5.2%yoy YTD in November – its rebound is expected in 2020, led by a recovery in infrastructure and manufacturing investments. At the minimum, data are likely to support the view that China's growth has bottomed.
Gold continues to recover, catching up with the yen and getting back to pre-NFP levels. The market may have been too complacent on the US-China trade negotiations, so there could be some follow-through demand this week on disappointment on the trade deal developments. Also, take note of the strong seasonality for gold to rally in January (+5.22% for 5yr trailing average). The gold market does like seasonality factors so this could be something to keep an eye on.
Gold traded to a low of $1,462.50 from $1,469 on the back of the original headlines on the US-China trade deal. But the fact remains that there is no binding agreement in place between the US and China and, as such, the Fed remains anchored to a cautious bias.
IMM (International Monetary Market) Data
The shifts in IMM data can influence trading decisions in the week ahead.
IMM data (as of Tuesday 10 December) showed a contraction in speculative USD length which now looks in keeping with a steady decline in long positioning throughout 2019 – perhaps foreshadowing a return to near-neutral USD positioning, which we last saw in early November.
At the same time, the cross-asset Risk-Fear index showed positioning threatening to cross over neutral into bullish territory this week, mainly on the back of reduced short opper positioning.
Investors reduced GBP short positions in advance of the UK election on Thursday, although positioning remained -9% short early in the week.
A reduction in NZD short positioning also contributed to the reduced USD long, with a strong performance extending early December gains.
Gold long positioning saw a modest reduction, but oil positioning jumped materially higher to 22% (from 20%) following OPEC's decision to reduce output quotas, along with a promise to tighten compliance.
To view all the events, go to: AxiTrader Economic Calendar
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies