By Stephen Innes
Thankfully for investors, the relentless selling on the back of risk-off sentiment which prevailed leading up to Xmas has mercifully halted, as US stock markets recorded significant gains, with the Dow surging over 1000 points while adding the most significant points gain in history.
It didn't take much to persuade the bargain hunters into action, as early retailer reports are all pointing to a strong holiday season, while investors took comfort in Kevin Hassett's, chairman of the White House Council of Economic Advisers, affirmation that Jerome Powell's job is "100 per cent" safe. And oil bulls finally had something to cheer about with WTI recovering north of 9%, reflecting gains in US equity markets but also supply discussions.
The surge in online purchases over the holiday season should be a reminder for the markets never to underestimate the purchasing power of the US consumer, as Mastercard payments tracking between November 1 and Christmas Eve leaped 5.1% from a year ago.
This data comes at the perfect time and will provide a huge relief for investors, who had to watch with sheer horror the Christmas Eve plunge. There was a good buzz to buy the dip, given the US underlying data suggested the latest rout was far too extreme and unwarranted. And indeed, for long-term investors who are more apt to weather the volatile times, which aren't about to leave the picture anytime soon, post-Xmas equity market bargains were there for the taking. But this recovery should put to rest the feverish fear-mongering that had investors believing the investment world as we know it was coming to an end.
And adding to the positive vibe were reports that a U.S. government delegation will travel to Beijing in the week of January 7 to hold trade talks with Chinese officials.
But don't get too comfortable, as discussions regarding the various political and policy questions remain hanging in the balance. Expect those conversations to continue Thursday amid a particularly light economic calendar.
Oil bulls are breathing a collective sigh of relief this morning, as the robust tone in global equity markets helped provide the perfect springboard for a massive rally in both WTI and Brent to ensue. A clear signal that the oil market tumult was rooted in the equity market volatility, where investor sentiment has been weighted down by the unfortunate events in Washington, higher US interest rates, China's economic slowdown and the omnipresent US-China trade dispute.
But the real kicker for oil markets was the reaffirmation from Russian Energy Minister Novak, who voiced expectations for a more stable market in H1 2019 and, most importantly, suggested 100% cooperation among OPEC and its allies in supporting the market. Also, Novak supported recent comments from other OPEC ministers indicating Russia's willingness to make deeper production cut if needed. Russia always remains a wild card, so with Novak singing the OPEC compliance tune, it's providing a massive boost to sentiment.
While the demand-side issue lingers, the overnight moves go a long way to righting the ship, while reversing out much of questionable pre-Xmas sell-off that was lacking in any pure fundamental basis.
For good record, The American Petroleum Institute weekly statistical bulletin for the week ended December 21 has been delayed until 4:30 PM EST on Thursday.
The DOE Weekly Petroleum Status Report will follow at 11:00 AM EST on Friday.
A case of too fast, too soon given the US economic fundamentals were not screaming panic while fear-mongering was steering the ship. Still, various political and policy questions remain hanging in the balance, not to mention an endless laundry list of concerns around Brexit and Trade wars which should keep gold prices bid on dips. I still expect $ 1300+ in 2019, as given the recent equity market shellacking, unless there is significant progress on the trade front, the Fed will most likely hold off raising rates until mid-2019, which should be supportive from gold prices. So, gold should continue to glitter in the risky environment despite overnight profit-taking triggered by surging equity markets and a stronger USD. Near-term support now comes in at $1260, indeed a bullish flip when I need to add $5 to my support channel for four consecutive days.
Improved equity market sentiment and Kevin Hassett's support for Fed Chair Powell was a boost to US capital market sentiment, which saw the USD flourish overnight. USDJPY and EURUSD have both recalibrated 75-100 pips in USD's favour,
US yields provided some support for USD, as US 10-year yields moved towards 2.8% following the 5-year auction, which saw a 2.3 bp tail.
On USDJPY, with the lack of follow-through below 110, and with US equity markets stabilising yesterday, traders were pairing USDJPY stop losses around 110.75, anticipating a swift equity market correction if there's no selling in the US session. Fairly prophetic, as those stops were triggered overnight, but USDJPY lower remains a favourite trade for G-10 traders.
On the EURUSD, the great debate continues, with analysts expecting the ECB to hike next year, while traders are taking a more pragmatic view based on the horrible EU economic data. But as we find markets trading the very familiar 1.1300 handle, range-trade mentality will likely kick in once again.
The local unit should take solace in surging oil prices, along with the bullish flip in global equity markets.
These are two significant positives for Malaysian capital markets, despite the stronger USD.