And as quickly as it began, the latest Middle East crisis was over it appears. President Trump announced that no further action was to be forthcoming from the United States as Iran’s missiles caused no casualties in yesterday's attack. Iran, for its part, said yesterday that it was effectively “one and done.” And just like that, the next Middle East crisis had gone in 60 seconds, faster than a stolen Ford Mustang Shelby GT500 over the horizon.
The massive rotation into haven positioning yesterday had already started to run out of steam in the European morning, such is the attention span and the complacency of financial markets these days. The logic being that if the United States didn’t immediately push a button, triggering an instant shock and awe air campaign retaliation, then one wasn’t going to happen. The shocking ignorance of the logistics of war aside, no surprise in this age of smart-phone instant gratification, financial markets got it right; by luck, not talent.
The nimble and the brave would have used yesterday's price action in Asia to get on board the global growth FOMO trade at better levels. With President Trump choice discretion over valor, the haven sell-off completely unwound as markets went into business as usual mode. Gold collapsed along with oil, equities rallied into the green, and the Japanese yen and Swiss franc longs were reversed, and then some, in yen’s case.
The most relieved people on the planet overnight were the world’s central bankers. Open hostilities between Ithe U.S. and Iran would almost certainly have pushed the world into a recession. As I have warned numerous times before; their continuous feeding of the world’s addiction to a zero percent cost of capital has left monetary policy around the world in a box canyon. The abject failure of the world’s politicians and central banks to impose losses on anyone post the GFC, has left interest rates at or near record lows across the globe. When Greece can issue 10-year debt at lower rates than the U.S. Government, something is clearly still wrong with the world.
The world’s central banks now have precious little ammunition left in their armories – as opposed to the U.S. and Iran – to counter a war-induced shock recession. Or any recession for that matter. The world’s central banks are drawing a huge sigh of relief today because, like the U.S. and Iran, they have dodged a bullet.
That all means that it will be back to business as usual, i.e. getting long the Asian post-trade agreement recovery trade, buying equities anywhere, and generally hunting for yield in any form. Early indications from Asia are that precisely that is happening with Asian stock markets enjoying a robust start.
Overnight data from the U.S. saw the ADP Employment Change outperform, adding 202,000 jobs. It sets up markets for another robust Non-Farm Payrolls number tomorrow evening, around 165,000; lower than last month, but still respectable.
Australia’s November Balance of Trade rose more than expected to A$ 5.8 billion. The rise was driven by an increase in exports by two percent, and a fall in imports by three percent. Unfortunately, that was November. Going forward, the effects of Australia’s bushfire crisis will start to be felt. Notably in agricultural exports, but also in tourism receipts and domestic consumption. Thankfully, after a total failure of leadership, Australia’s Federal Government is starting to get its act together on the fiscal front to help offset those effects. Early estimates though suggest the lucky country’s GDP will be shaved from 0.20% to 0.50%.
China’s December Inflation has just been released, holding steady YoY at 4.50%. Food prices continue to be the main culprit for the elevated inflation read, driven by the ravaging of China’s pork stocks by African Swine Flu. It has had a knock-on effect on pork substitute prices. Those jumps though should start to fall out of the CPI data later in Q1, and geopolitics aside, China inflation should wane in the coming months.
Looking ahead, the data calendar is light for the remainder of the day. Tomorrow, Australian Retail Sales and Malaysian Industrial Production could provide some short-term volatility, ahead of the week’s main event, the US Non-Farm Payroll data.
For the remainder of the day, Asia is likely to busy itself, forgetting that yesterday ever happened.
Equities
The de-escalation of U.S.-Iran tensions overnight greenlighted equity investors to pile back into the long any stock anywhere FOMO trade. Wall Street’s Indices all finished dint he green as President Trump declined further military action against Iran for now in his speech. the S&P 500 rose 0,50%, the NASDAQ rose 0.73% and the Dow Jones rose 0.68%.
Asian markets have proceeded directly to go this morning as well, recouping all of yesterday’s losses. The Nikkei is up 1.95%, the KOSPI 1.15% and the Shanghai Composite by 1.0%. Over in regional markets, the Straits Times has risen 0.35%, the Hang Seng 1.30% with the Australian All Ords climbing 1.0 percent.
The relief that business has returned to normal so quickly is palpable. We expect that equities will continue to perform strongly this afternoon and into the European morning session.
Currencies
The safe-haven rotation of yesterday has been aggressively unwound, most notably in the Japanese en. USD/JPY climbed 150 points from its lows yesterday to finish 1.10% higher at 109.20. Assuming no shocks on the geopolitical front, USD/JPY may well eye another test of multi-month highs at 109.75.
The market’s other goto haven currency, the Swiss franc, also fell against the dollar. USD/CHF rose 0.50% to 0.9740, which is a daily resistance region. A break higher implying further rallies to 0.9800.
The off-shore yuan rally has also resumed in earnest, USD/CNH falling to 9.9280 this morning from a high of 6.9600 yesterday. USD/CNH has support at 6.9000, followed by 6.8200.
Regional currencies have strengthened against the U.S. dollar this morning as confidence returns. Most notably the Korean won, which is 0.30% higher at 1159.50.
Oil
Oil had its wildest day since the Saudi Arabia attacks last year. After spiking aggressively as news of Iran’s missile attack hit the news wires, oil gave back all of those gains to finish much lower on the day. Both Brent and WTI futures traded in a roughly 8.0% range yesterday.
Brent Crude hit $72.0 a barrel in early Asia yesterday, but ended the session lower than its open by 3.65%, at $ 65.90 a barrel. WTI also spiked and traded at $65.40 a barrel in early Asia yesterday. But it also plunged as tensions eased, finishing 4.0% lower from its open, at $60.00 a barrel.
Both contracts are unchanged this morning in Asia, which is hardly surprising, the aggressive ranges of yesterday most likely flattening near all short-term positioning. At these levels, both Brent and WTI are very near to daily support regions. Given the potential for headline-driven spikes though – and the clearout of speculative longs yesterday -the street is likely to be reluctant to push oil significantly lower from here int he short -term.
Gold
Gold’s day in the sun has ended as quickly as it began. After touching $1611.00 an ounce on panic Iran buying yesterday, gold steadily gave up its gains. President Trump delivered the coup de grace by declining to retaliate militarily against Iran. Gold falling all the way to $1552.00 an ounce before closing at $1557.00 an ounce, a stunning fall from grace.
Off course, gold’s rally had been driven by aggressive risk aversion buying since the US assassination of an Iranian general last week. With both sides apparently finished with posturing and chest-thumping, calling it a one-all draw, the reasons to own gold have diminished as fast as they occurred.
Gold has support at $1550.00 an ounce with a move through this level, implying further losses to $1525.00. Some weeks end risk hedging has seen gold climb to $1561.00 an ounce this morning. However, the rally is tiny in the context of the recent day’s ranges, and short of another Middle East conflagration looks more like a dead cat bounce. Looking at the price action in equities over the last 12 hours, gold bulls should exercise caution at these levels.