Week Ahead – Middle East Tensions, Global Deflationary Pressures, US Jobs Report in focus

The start of the New Year has seen a drastic switch in focus from trade wars to possibly a US-Iran war.  The focus for the week ahead was supposed to be the leaking of the details of the phase-one trade deal, but that will not be the case.  Financial markets will now closely follow the tit-for-tat response following the US airstrike in Iraq that killed Iran’s top commander.  Iran’s response is likely to be strong but not necessarily swift as Iranians re-evaluate their strategy.  Iran is convinced the killing of Qasem Soleimani was an act of war and we should not be surprised if we see a limited military confrontation over the upcoming weeks.

Risk aversion could also remain the overall theme next week as we could see markets become disappointed with the lack of substance in the 86-page phase-one agreement.  Prior to the January 15^th signing, we should start to see leaks of part of the agreement.

USD

The dollar could continue to benefit on safe-haven demand as tensions escalate in the Middle East.  Safe-havens could see further gains next week because the US is sending more troops in preparation of a potential military confrontation.  The falling dollar call that markets were embracing for the first quarter will likely take a break here.

Oil

General Qassim Soleimani.  Oil prices spiked alongside gold as tensions are approaching a critical level between US and Iran.  The Trump administration strike was a strong retaliation to the attack on the US embassy in Iraq by pro-Iranian militiamen.  Financial markets are now awaiting Iran’s response which will likely have a wide-reaching impact on all asset classes.  Iran may choose to target Americans abroad, cyber-attacks, along with further uprisings in the regions that will see US troops on heightened alert in Iraq, Yemen, Syria, and the Israeli-Lebanese border.

Oil volatility will remain intense and we could see swings in both directions as investors will likely push prices higher on actions that yield supply disruptions or increased military conflict expectations.  If Iran initially targets allies to the America or cyber attacks, we could see oil prices somewhat soften.

Gold

Investors have not priced in the chance of a full-blown out war in the Middle East and gold will remain the favorite safe-haven trade.  Other safe-havens, such as the dollar and yen will benefit from the developments in the Middle East, but gold will remain king.  Gold prices could easily take out last year’s high and make a run towards $1,600 an ounce over the course of this month.

Bitcoin

Bitcoin could benefit from heightened tensions in the Middle East.  The digital coin has outperformed oil and gold following the US airstrike that killed a top Iranian commander.  We could see investors temporarily put concerns aside that tighter restrictions from the Chinese and US will weigh on the crypto space.  Bitcoin could see further bullish momentum on expectations demand will greatly increase in the Middle East.

UK

Nothing has changed over the festive period. The UK is still on course to leave the EU at the end of January, with only a few days of scrutiny over the withdrawal bill next week standing in the way. The pound has managed to hold onto much of its election gains although it remains a little off the highs. Given Boris Johnson’s recently earned majority in the House of Commons, I can’t imagine he’ll suffer any major setbacks next week, after which attention will shift to 11 months of trade negotiations and the direction of travel of the Bank of England under the leadership of Andrew Bailey, who replaces Mark Carney on 16 March.

Risk – Barring any bizarre surprises next week, the near future should be far less turbulent that we’ve become accustomed to. Of course, no-deal WTO Brexit remains on the table at the end of next year, so in effect, we just have a new deadline.

CNY

The Chinese yuan could decline on disappointment with the details with the phase-one trade deal and on further escalation in tensions between the US and Iran.  The yuan was expected to continue to strengthen on an extended pause in trade tensions between the world’s two largest economies.  Chances of any progress on a phase-two deal seem to be closer to slim to none.

Turkey

A relatively quiet week in store for Turkey with only a couple of pieces of low tier data due out. 2019 was a bounceback year for Turkey, with the central bank under the leadership of Murat Uysal – following the removal of Governor Murat Cetinkaya in July – cutting interest rates by 12% in five months to 12% in a bid to lift the economy out of recession. The plan worked although there remains questions around the independence of the central bank, considering the actions of Erdogan in removing the Governor and his past views on interest rates. The currency is holding up for now though, although risks remain.

Risk – This is a currency that’s prone to rapid devaluations, especially at a time when the central bank is cutting interest rates aggressively despite warnings about the impact such a move will have on the currency. So far, the central bank has been rewarded for ignoring these warnings but that may not last.

Riksbank minutes

Minutes from 19 December released on Wednesday. At the meeting, the Riksbank went against the trend and raised rates by 25 basis points to 0%, moving away from negative interest rate policy that some central banks continue to embrace. Policy makers appear concerned about negative unintended consequences of NIRP which makes a move back into negative territory in the near-term unlikely. They may also not be in any particular rush to hike though either.

Hong Kong

The quiet period on the protest front looks set to continue into early January. The economy continues to implode with tourist bookings over the Christmas period reportedly down 53% from a year ago. It could only be a matter of time before clashes break out between “normal” HongKongers who’ve been affected by the economic downturn and the protestors.

The unemployment rate rose to a 2-1/2 year high this month and retail sales fell 24% in October and are expected to fall more than 25% last month (data due on January 3). The US-China trade truce might offer a chance for the economy to rebound a touch.

The major events in January will be Unemployment on the 20^th, CPI on the 21^st and the Lunar New Year holidays on the last weekend.

Risk

As always, there is the risk that protests escalate and turn violent again, which would be negative for the HK33 index and could push USD/HKD back to the upper half of the trading band.

China

Nothing much to report now that the Phase 1 trade deal is agreed in principle, barring any unforeseen setbacks. Expectations are that it will be ratified/signed in the second half on January. PMI numbers were steady in December and next week we have only PPI and CPI to expect. CPI is currently running at a near-eight year high due to higher food prices, especially pork following the decimation of herds due to swine fever throughout this year.

The PBOC has trimmed its Reserve Requirement Ratio by 50 bps effective Jan 6, which is expected to free up about $115 billion in funds which could give the economy a lift as we kick off 2020.

Risk

Any back-tracking on the Phase 1 details would be negative for risk, hurt the CN50 index and boost USD/CNH.

India

The rupee could see strong gains in 2020 if the global growth momentum story continues.  Last year, the rupee underperformed against its other emerging market currencies.

Risk

The RBI may ease up their efforts in supporting the economy, but they should remain committed to preventing a sharp appreciation with their currency.

Australia

The first set of data of 2020 are due next week with trade numbers and retail sales on tap. It’s almost certain that the RBA is on hold until at least the second half of 2020, barring any sudden downturn in economic data. Wildfires raging in New South Wales could hit economic activity for Q4 and beyond, not forgetting the budget pressures.

Risk

Any downside misses on the data would reignite dovish RBA chatter which would be negative for the AUD. There is still some talk that the RBA may be forced into QE in the second half of 2020.

New Zealand

Very quiet for the next week.

Japan

Japan’s economy is still reacting to the autumn sale-tax.  Data in the upcoming week will likely show household spending dropped again in November.

 

Economic Events

Saturday, June 4^th

Spanish parliament to vote on acting Prime Minister Pedro Sanchez’s coalition program (debate on Saturday and first vote on Sunday and second vote on Tuesday).

Sunday, June 5^th

1:15pm Fed President Mary Daly, Fed’s Williams and ECB Chief Economist Lane, BOC Wilkins, BOE Deputy Governor Broadbent and BOJ Wakatabe speaks at the annual AEA meeting in San Diego

Monday, June 6^th

2:00am                 EUR Germany Nov Retail Sales m/m: 1.0% v -1.9% prior

8:30am                 CAD Nov Industrial Product Price and Raw Material Price Index

Tuesday, June 7^th

UK Parliament returns and begins debating on PM Johnson’s deal.

2:30am                 CHF Swiss CPI m/m to remain steady at -0.1%

5:00am                 EUR Euro-area inflation m/m to turn positive: +0.3% v -0.3% prior

8:30am                 CAD Trade Balance: No est v -1.08B prior

10:00am              USD ISM Non-Manufacturing PMI: 54.5e v 53.9 prior

7:30pm                 AUD Building Approvals m/m: 2.0% v -8.1% prior

Wednesday, June 8^th

2:00am                 EUR Germany Factory Orders m/m: +0.2%e v -0.4% prior

3:30am                 SEK Riksbank Minutes from Dec 18^th meeting

8:15am                 USD ADP Non-Farm Employment Change: 160Ke v 67K prior

10:30am              DOE US Crude Oil Inventories

7:30pm                 AUD Trade Balance (A$): 4.1Be v 4.5B prior

8:30pm                CNY CPI Y/Y: 4.7%e v 4.5% prior & PPI Y/Y: -0.4%e v -1.4% prior

Thursday, June 9^th

UK Parliament expected to pass Johnson’s Brexit bill

2:00am                 EUR Germany Industrial Production m/m: +0.8%e v -1.7% prior

8:00am                 Fed Vice Chairman Richard Clarida speaks on the outlook for the economy and monetary policy

1:00pm                 USD 30-year bond auction

7:30pm                 AUD Retail Sales m/m: +0.4%e v 0.0% prior

Friday, June 10^th

8:30am                 USD Nonfarm Payrolls: 158Ke v 266K prior; Unemployment Rate to stay steady at 3.5%

8:30am                 CAD Net Change in Employment: 31.7Ke v -71.2K prior; Unemployment Rate: 5.8%e v 5.9% prior