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[PODCAST] US Open Rundown 6th January 2020

  • Markets remain risk-off as Middle-East newsflow dominates, spot gold set 6-year highs at USD 1587/oz overnight
  • USD is subdued to the aid of G10 counterparts, particularly GBP and EUR with PMIs providing assitance
  • Iran has finalised a new retreat from the Nuclear Deal in which it will not comply with any restrictions on the amount of uranium enrichment, enrichment rate and number of centrifuges
  • Iraqi parliament has voted for the government to work on plans to end US troop presence in Iraq
  • Chinese trade delegation, led by Vice Premier Liu He, tentatively plans to travel to Washington on January 13th to sign the Phase One trade agreement
  • Looking ahead, highlights US Services and Composite PMIs

GEOPOLITICS

Reports noted of multiple rocket impacts in the vicinity of the US Embassy in Baghdad which resulted in civilian casualties, via ELINT News. Reports noted that three Katyusha rockets fell inside Baghdad’s green zone near the US Embassy. Two civilians from the US Department of Defense were reportedly wounded, according to INTELSky. Furthermore, a US official noted that Iranian missile forces across the country are at a heightened state of alert, although it is unclear if Iran is in the defensive or preparing for an offensive. (Newswires) This comes after Iraq’s Kataib Hezbollah militia warned Iraqi security forces to stay away from US bases in the country from Sunday, reported via al-Mayadeen TV. Iran may retaliate by striking allies of America in Iraq and the Middle East, according to CNN citing a “well-informed” source. (CNN) Iranian Foreign Ministry spokesman stated that no war can be expected but Iran is prepared for all possibilities. (Al-Jazeera) On Friday, Iranian Foreign Minister Zarif said Iran will retaliate to the US' attack at any time and any way, according to state TV. (Newswires) Hackers claiming to be from Iran hacked a US government website dedicated to the Federal Depositary Library Programme and posted messages vowing revenge for the assassination of Senior IRGC Commander Soleimani. (Guardian)

The Iraqi parliament has voted for the government to work on plans to end US troop presence in Iraq following the assassination of Senior IRGC Commander Soleimani. (CNN) Further, Iraqi Militia leader Khazali said US troops will be considered an occupying force if they do not leave. In response, US President Trump has threatened sanctions against Baghdad and said US will not leave Iraq unless it pays for the US air bases there. (Newswires)Trump administration officials have warned senior Iraqi officials that Iraq would suffer dangerous consequences if the U.S. withdrew its military and its funding of the Iraqi security apparatus, according to sources cited by Axios. (Axios)

Iran has finalised a new retreat from the Nuclear Deal in which it will not comply with any restrictions on the amount of uranium enrichment, enrichment rate and number of centrifuges. (Al-Jazeera) Subsequently, French President Macron is attempting to hold talks with Iranian President Rouhani in the coming days, according to Macron's office and a German Foreign Ministry spokesman notes that Iran's announcement on enrichment does not mean an automatic end to the JCPOA nuclear agreement . (Newswires)

US Military said one US service member and two American defence contractors have been killed at Manda Bay airfield in Kenya following an attack by Al-Shabab – an al-Qaeda branch. (Newswires)

US President Trump tweeted that the US will quickly and fully strike back, perhaps in a disproportionate manner should Iran strike any US persons or targets and stated that there will be a “major retaliation” if Iran retaliates. On Saturday, the President tweeted that Iran will be hit very fast and very hard, adding that the US wants no more threats. (Twitter/Newswires) US House will introduce and vote on a War Powers Resolution to limit President Trump's military actions regarding Iran, according to a statement by House Speaker Pelosi. (Newswires)

NATO will today hold an urgent Ambassador-level meeting on the Iraq-Iran situation, according to a NATO official. Meanwhile, a joint statement by French President Macron, German Chancellor Merkel and UK PM Johnson condemned the recent attacks on coalition forces in Iraq and are gravely concerned by its negative effects in the regions. The countries note of an urgent need for de-escalation. (Newswires)

Turkish military units have started to move towards Libya, according to reports, despite Libya’s parliament unanimously voting against Turkey’s military intervention in the region. (Al-Jazeera)

US President Trump said he does not believe North Korean Leader Kim would break his word but "maybe he will". (Newswires) This comes after North Korea's official newspaper warned of "immediate and powerful" strikes against threats.

ASIA-PAC

Asian equity markets kicked the week off mostly in the red following downside seen on Wall Street on Friday as US-Iran developments and dismal US ISM metrics weighed on sentiment. ASX 200 (Unch) was initially led lower by a bulk of its constituents in negative territory including its largest weighed financial sector, albeit losses were somewhat cushioned by gold miners and energy names as prices in the complexes rose amid the escalating geopolitical tensions, thus the index later pared losses. Meanwhile, Nikkei 225 (-1.9%) underperformed given the recent safe-haven demand in the JPY and as Japanese participants had the first chance to react to the Middle Eastern events after their extended New Year break. Elsewhere, Hang Seng (-0.8%) opened modestly in negative territory but extended losses as heavyweight financial names accelerated downside - with traders attributing the closures of local bank branches due to the protests, albeit the index later climbed off lows as energy names benefitted from the surge in crude prices with oil-giants CNOOC and PetroChina notching gains in excess of 3%. Finally, Shanghai Comp (U/C) oscillated between gains and losses as the overall risk aversion in the market was countered by the tentative dates touted for the US-China Phase One signing and with the PBoC’s RRR cut going into effect today, releasing over CNY 800bln of long-term funds. 

Chinese trade delegation, led by Vice Premier Liu He, tentatively plans to travel to Washington on January 13th to sign the Phase One trade agreement and will return on January 16th, according to a source cited by SCMP. (SCMP)

China has dismissed the official in charge of relations with Hong Kong, Wang Zhimin, who will be replaced by the Communist Party Secretary for Shanxi, Luo Huining. (BBC)

China will not “sit idle” if Huawei is excluded from Germany’s 5G rollout, according to Global Times citing the Commercial Counsellor of the Chinese Embassy in Germany. (Global Times)

PBoC set USD/CNY reference rate at 6.9718 vs. Exp. 6.9692 (Prev. 6.9681) (Newswires) PBoC skipped open market operations for a net daily drain of CNY 50bln

Chinese Caixin Services PMI (Dec) 52.6 vs. Exp. 53.2 (Prev. 53.5) (Newswires) Chinese Caixin Composite PMI (Dec) 52.5 (Prev. 53.5)

PBoC reiterated that it will keep monetary policy prudent, flexible and appropriate and will continue progress on financial reforms. PBoC said banking system liquidity is at a relatively high-level to absorb factors including maturing reverse repos, PBoC confirmed that the RRR effective today releases over CNY 800bln of long-term funds (Newswires)

US

White House Trade Advisor Navarro said there will be an anchor of growth closer to 3% in 2020. (Fox)

Fed's Williams (Voter, Neutral) states that low global interest rates are here to stay and should lead Central Bank members to renew their inflation goal commitments. (WSJ)

UK/EU

UK PM Johnson urged European Commission President von der Leyen to conduct intense trade negotiations within weeks. The EC President will be meeting with UK PM Johnson on Wednesday. (FT/Newswires)

France has warned that the US will face retaliation from the EU if it attempts to impose “highly disproportionate” trade tariffs in response to digital tax against tech-giants. (FT)

Acting Spanish PM Sanchez has lost the first round of voting (166 for vs.165 against, 18 abstentions, 1 no-show) to support the formation of government. An absolute majority was needed to win the round (176 out of a possible 350). The second round will be conducted on 7th January and requires a simple majority – which is Sanchez likely to obtain. (RTE/Sputnik)

Austria’s Foreign Ministry has been targeted by a “serious cyber-attack” which the ministry suggests could have been conducted by a “state actor”. (BBC)

ECB’s Lane (Dove) said underlying EZ inflation measures are moving higher but remain too low. (Newswires)

EZ Markit Services Final PMI (Dec) 52.8 vs. Exp. 52.4 (Prev. 52.4); Comp Final PMI (Dec) 50.9 vs. Exp. 50.6 (Prev. 50.6)

-        PMI data suggest the euro area will struggle to have grown by more than 0.1% in the closing three months of 2019

-        Business optimism about the year ahead has also improved to its best since last May, suggesting the mood among business has steadily improved in recent months, via HIS

-        German Markit Services PMI (Dec) 52.9 vs. Exp. 52.0 (Prev. 52.0); Comp Final PMI (Dec) 50.2 vs. Exp. 49.5 (Prev. 49.4)

 

UK Markit/CIPS Services PMI Final (Dec) 50.0 vs. Exp. 49.1 (Prev. 49.0); Composite PMI Final (Dec) 49.3 vs. Exp. 48.6 (Prev. 48.5)

-        With manufacturing and construction output also subdued in December, the latest PMI surveys collectively signal an overall stagnation of the UK economy at the end of 2019.

EQUITIES

European bourses are subdued this morning (Stoxx 50 -1.3%), as geopolitical tensions in the Middle-East weighs on price actions at present. An update on the Iranian situation is available in the Commodity section below. Indices are all in negative territory at present in Europe, with US futures painting a similar picture as well; price action this morning has seen the Dax and Stoxx 50 futures test key levels to the downside, with the Dax having convincingly given up the 13000 mark and the Stoxx 50 testing the 3700 handle on multiple occasions. In terms of sectors, it’s a similar story to Friday, with all sectors in negative territory aside from Energy which continues to benefit from the inflated oil prices; which is, in turn, assisting oil names such as BP (+1.8%) and Shell (+1.2%), and is helping to stem some of the FTSE 100’s losses  - although, the bourse is firmly in negative territory. Turning to other notable movers, at the other end of the spectrum from the outperforming oil names, flight names such as Ryanair (-4.4%) and Air France (-3.8%) are weighed on by the crude market. Elsewhere, Metro AG (-5.0%) are suffering after a downgraded at JP Morgan, while ASML (-3.5%) are afflicted on reports that US President Trump’s Administration implemented a campaign to prevent the sale of the Co’s technology to China; do note, this reportedly began in 2018 and as such the significance and current situation may well have changed given the US-China trade war.

Boeing (BA) - Co. are reportedly evaluating plans to increase debt to boost finances which have been afflicted by the 737 Max's grounding; Co. are also considering deferring some capital expenditure, and reducing R&D in an attempt to preserve cash., WSJ . FAA and Boeing (BA) have confirmed that they are currently reviewing a wiring issue on the 737 Max, which has the potential to cause the craft to short-circuit; FAA has flagged the wiring issue as being potentially catastrophic. FAA are expected to announce a formal decision in February regarding whether pilots will be required to undertake compulsory simulator training prior to flying the 737 Max. (Newswires)

FX

GBP/EUR - The Pound was already benefiting from broad Dollar weakness amidst escalating US-Iran tensions and in wake of last Friday’s dire manufacturing ISM, but Cable derived some independent impetus from the final UK services PMI that beat consensus in contrast to manufacturing and construction, albeit only reclaiming the 50 level on post-GE relief that did not factor in the preliminary survey. Cable is hovering just shy of 1.3175 compared to lows circa 1.3064, and Eur/Gbp threatening 0.8500 bids even though the single currency also gleaned encouragement from largely firmer than forecast or flash Eurozone services PMIs and a more upbeat than anticipated Sentix index. Indeed, Eur/Usd is inching towards 1.1200 vs sub-1.1160 and further from very early 2020 lows under 1.1125.

CHF/CAD/NZD/AUD/JPY - Also firmer against the Greenback, as the DXY slips towards 96.500, with the Franc crossing 0.9700, Loonie eying 1.2950, Kiwi hovering around 0.6675 and Aussie back above 0.6950. However, the Yen is still finding 108.00 too tough to breach as Japanese markets return from their long New Year holiday and contacts suspect a major player is propping the headline pair.

NOK/SEK - More divergence between the Scandi Crowns, as Eur/Nok repels risk-off rebounds ahead of 9.9000 with the aid of oil’s ongoing rally, but Eur/Sek struggles to cap advances beyond 10.5000 and Nok/Sek extends its advance towards 1.0700 after breaking strong chart resistance below 1.0500.

EM - Risk aversion has prevented many regional currencies from taking advantage of general Buck underperformance, but the Rouble is also getting a boost from Brent and Rand has managed to overcome more Eskom power issues to bounce back above 14.3000 on what appears to be mainly technical grounds.

FIXED INCOME

Having failed to build on or even retest initial Liffe peaks, UK bonds have subsequently erased all and more of their best gains to a 132.00 intraday low (-23 ticks vs +39 ticks) on the back of an unexpected recovery in the services PMI to the 50 break-even level, and the gradual reversal seems to have been contagious as Bunds also retrace more ground to 172.13 (+1 tick vs +48 ticks). However, US Treasuries remain on a more even keel ahead of the final Markit PMIs and mindful of the rather bleak manufacturing ISM not to mention the deteriorating situation between the US and Iran.

COMMODITIES

WTI and Brent prices remain elevated on Iranian-US tensions, with prices higher by just shy of a USD 1.0/bbl at present; as crude prices have drifted off of their overnight highs as sentiment continues to deteriorate but the ferocity of newsflow has reduced as mourning proceedings are underway in the Middle-East for Soleimani. Weekend reports highlight that Iran has finalised a retreat from the nuclear deal, and will not be complying with any of the restrictions set out within this; additionally, Iraqi parliament has voted to begin developing plans to end the presence of US troops in the country. For reference, an analysis piece which outlines the impact on oil prices from the ongoing situation is available on the Newsquawk headline feed. The key views are JP Morgan believing that the stress on oil supply will be bearable, looking ahead focus is on whether the situation will disrupt supplies with UBS noting, at a minimum, US assets in the area are at risk – as is the broad infrastructure for oil supply in the region. Separately, ING posit that any substantial increase in crude prices could see US President Trump authorise use of the SPR, which currently has around 635mln barrels of supply. For reference, in 2018 the US consumed on average 20.5mln BPD, given this consumption rate this implies self-sufficiency for the US of roughly one month; excluding additional US production which last week stood at 12.9mln barrels and would significantly extended such a period of self-sufficiency. In terms of metals, spot gold is well supported on the aforementioned tensions with the precious metal having printed a high just over USD 1587/oz overnight, which is a 6-year high for the safe haven. Price action picked up once the USD 1557/oz mark was surpassed, with contacts noting a number of stops were likely present around this figure. Additionally, the yellow metal will be gleaning support from a softer dollar this morning, with the DXY having printed multiple fresh session lows throughout the session.

SocGen forecast Brent prices averaging USD 56.25/bbl in 2020; retain their bullish forecast for Gold with prices to average USD 1575/oz in Q3 2020. (Newswires)

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