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Wall Street ‘s ” Pretzel Logic” and ” Fed Spin” has the markets on very shaky grounds

I am a HUGE fan of Christmas “ginormous” presents, Christmas trees, Turkey with all the trimmings, and the dog swallowing baubles aside; it’s time when cliché thrives like bacteria on a mince pie. So, I promise I will spare you from any more Xmas clichés in my pre-holiday market note. Other than to wish everyone a very happy holiday.

  • Markets
  • Oil Markets
  • Gold Markets
  • Currency Markets ( JPY, MYR, CNH)
  • A busy Friday on Wall Street
  • Trump is firing Powell, say what?
  • Government Shutdown
  • Cryptocurrencies 

Markets

I think we are all struggling to make heads or tales of this market and while quantum physicist will tell you perception is 99 per cent of reality,  today’s market volatility is more perception than reality as  Wall Street ‘s ” Pretzel Logic” and ” Fed Spin” has the markets on very shaky grounds. Deferring a December rate hike could have been as equally destabilising but rest assured the markets will be able to channel their best Goldilocks( economy)  impression as its very unlikely the Fed will raise rates again before mid-2019 unless there is a surprising development on the trade war front.

Oil Markets

The production cuts haven’t yet taken effect, yet OPEC Oil ministers are already taking to the airwaves with ” price stability at all cost” mantra with U.A.E’s energy minister while suggesting that the 1.2 million barrel-a-day cut will clear global inventories, he left all options on the table  by suggesting that OPEC can hold an extraordinary meeting to discuss finding the right balance.

Incredibly in the face of even deeper production cuts, petroleum markets have hit fresh lows. And while the production cut should restore a semblance of supply balance for the first half of 2019. Global growth concerns and shale production which continues to make new record highs has investors deeply concerned.

Macroeconomic fear seems to be dominating sentiment and causing virtually every growth related asset class to melt away like a snowflake in May. And while this bearish run was was fun, its time to put my economist hat on for a few minutes. Even if  US GDP data for 3Q drops to 3.4 % and 2.9 % in Q4 those numbers are nowhere near recessionary fear, nor is China’s slowdown from a GDP of 6.5 % to 6.4 or even 6.3 % in 2019 for that matter. That’s not to say growing late-cycle recession fears will not consume investors psyche as the relative yield curve continues to invert.  Its just that recessionary fears are not here today nor do they look likely to seat in the medium term.

But this type of market fear tells me on the thing for sure; traders will start to adopt”bad news now is good news” mentality  (i.e. the weaker the data, the more dovish the Fed will be), which will create more irrational market moves.

In the News 

International Energy Agency chief Fatih Birol reportedly said US production could rival Saudi Arabia and Russia combined by 2025. Reuters  Indeed ” The Times They Are A-Changin’

US Shale producers to hit the brakes on 2019 spending. Reuters   I think this is hard to argue with prices falling, but with the technology advancement, well production cost has declined dramatically while major shale players have hedged a good chunk  2019 liquid volumes that could insulate some players. I’m not sure if December ” silly season” meltdown should be factored into the longer-term projection, but its a slipperier slope than most had anticipated

Gold Markets

The downdraft in Global equity markets has firmed up the major support level to $ 1240. However, after trading above $1265  markets softened on profit-taking as the USD dollar charged back after investors priced far to much USD  risk into the negative impact of a government shut down only to realise the sun always rises in the morning. But given the shaky global equity markets, we should expect safe-haven demand for gold to remain firm into year end

Currency Markets 

Japanese Yen 

US economic and policy uncertainty in the wake of the weekend headlines( Trump vs Powell) suggests risk will continue to struggle on Xmas eve. USDJPY is trading below 111 as the US political overhang is predicably dampening this morning open. And while I don’t think the shutdown risk is particularly dollar negative. In the Yen’s case, solid arguments are being formed around being short USDJPY on the back of Japanese lifer repatriation flow or increased hedging propensity. But there’s an abundance of investor money parked on the sidelines and given the dire state of the US equity markets; I wouldn’t be surprised to see the US administration move more constructively to resolve trade war issues with China, which should go a long way to stabilising risk and boost global equity market sentiment.

Malaysian Ringgit 

China tax cuts will be mildly positive for regional growth. But with oil prices weakening and markets still fretting about global growth concerns, it’s unlikely the Ringgit will make any significant headway into the  New Year

Yuan 

China’s Central Economic Work Conference wrapped up on Friday. The Xinhua News Agency reported earlier that prudent monetary policy will strike a balance between tightening and easing in 2019, vs. last year’s language saying it should be kept neutral. “Significant” cuts to taxes and fees will be enacted in 2019. The tax cuts are designed to spur domestic demand and offset the fallout from trade war while maintaining currency stability.

Meanwhile, US-China tensions too yet another cyber escalation. China on Friday demanded the withdrawal of US Justice Department charges overnight that alleged Chinese officials coordinated a decade-long espionage campaign to steal intellectual property and other data from dozens of companies.

A busy Friday on Wall Street 

Besides the weekend headline that Trump was considering firing Powell, more on that in a second, the best tidbit I read was the US exchanges has their busiest volume day since the day after Brexit vote.

Indeed, nothing like a panic parade during “the silly season” but with 80%+ of pro’s sidelined and the rest in the risk reduction mode, investors relying on asset prices to anchor based on a squiggly line on a chart was sheer folly. As such, loss aversion and the herd mentality took over as individuals’ tendencies toward irrational investment decisions were on full display post FOMC.  While I still don’t know if the market necessarily knows what to make of the last Fed hike, as I’ve never seen a post rate hike debate go on this long. Central banking is an exercise in confidence, data analysis and trying to predict the future. I thought Powell hit all the right notes and I have to agree with Secretary Steve Mnuchin that the market’s reaction is ” completely overblown”   Bloomberg I thought the Fed did exactly what I thought they would do, the market’s reaction, however, continues to befuddle. But market fragilities are beyond comprehensible, none of which was the Fed’s doing but have certainly tipped the current scales in favour of a policy mistake if price action is a good barometer of sentiment.

However a significant problem has been global pension funds have continued to divest equities in favour of bonds, while Yen strength has triggered some equity outflow from Japanese lifers. Unfortunately, from my experience, these US equity outflows are coming at the wrong time of year when big speculators have little appetite to stand in front of moves knowing full well these opportunities will be there post January 2. But there may be a sliver of light at the end of the equity market tunnel of despair as some sector reallocation may be on the horizon.  ” Meanwhile, Credit Suisse Group AG estimated on Tuesday that pension funds would move $63 billion out of bonds and $24 billion into developed market stocks. Investors often sell assets that have done the best and buy those that have done the worst at the end of the quarter to “rebalance” to a target position. Reuters

Trump is firing Powell, say what ??

Honestly, I couldn’t believe my eyes when I read the Bloomberg headline over the weekend that Trump was considering firing Powell. Markets rise on confidence as well as economic growth and coming off one of the worst weeks since GFC; one would have expected more reassuring comments from the Whitehouse

Thankfully Mnuchin came to the rescue to squash any thought’s of this happening as I was about to crazy glue my “sell button” down at  Monday’s open.


I’m, not a constitutional lawyer, so I will not wade in the debate if Trump has the power to fire a “Governor.” And while It’s not exactly surprising that Trump was up and arms about the Fed chair hiking rates and even downgrading GDP forecast for 2020 (#election2020). What is even more bizarre is that the President seems unconcerned that his constant Fed berating makes the FOMC committee even more resolute to prove their independence and stay the course on monetary policy.

Government Shutdown

While a short-term government shut down doesn’t have enough economic punch to force Congress into an agreement any time soon, which means that drag could go on for a while.  But the shutdown erodes investor confidence in ” the process” and adding this kind of political uncertainty on top of the mountain of economic and financial risks around the world is bound to hurt markets. But frankly, there’s a host of more significant concerns weighing on investor sentiment than a US government shut down

Cryptocurrency 

BTC appears to be anchoring its self to the $4000 level marker, and I’m getting an eerily similar feeling like $ 4000 is the new $6000 as investors are just waiting for the next big thing, good or bad to happen.

I think there remains a lot of downside risk given that regulatory actions have been reactive instead of establishing a strict cohesive policy substructure that would create worldwide investor trust. In my view, this continues to act like an anvil around the cryptocurrency markets neck. However, I remain entirely optimistic about the future of blockchain projects primarily in the financial sectors which should accelerate in 2019, and I think this will provide a high level of confidence for the future of crypto coins, assuming the regulatory committees can put forth some proactive actions and establish a robust public policy framework.

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