Asia Morning: Asia Enters the Holding Pattern

Prepared by Jeff Halley, Senior Market Analyst

It’s one of those dreaded announcements that passengers, especially near the end of a long haul flight, don’t want to hear.  We all know the story.  You have sat for long, arduous hours in an economy seat that seems to get smaller each year; behind the sets of new-age parents on the annual holiday migration home. The ones who are periodically spraying aromatherapy fragrances, yet outsource the disciplining of their feral children to tablet computers or the surrounding passengers.

The captain announces over the speaker, apologetically, that due to weather (North America), congestion (Heathrow), strikes (anywhere in France), or one centimetre of snow or some leaves on the taxiway (Heathrow again), the aircraft will have to enter the holding pattern and “wait” for clearance to land. The bar has closed, but those unruly Australian, Russian and Scandinavian passengers down the back, determined to maximise the value of their airline tickets, had drunk it dry anyway; having had their duty free booze confiscated by the cabin crew earlier.

In moments like this, even a “brace, brace, brace” call is more appealing; as an increasingly impatient little Jemima or Justin in front of you, kicks the chair and moves it back and forth for the 25th time. On number 13, you ended up with tepid airline coffee on your clothes, and you now smell of it.

Financial markets are suffering a similar fact. Crammed into economy, entering the holding pattern, and awaiting an uncertain trade-deal arrival time. The chronic headline fatigue that is the lot of financial markets in recent times is threatening a case of deep-blame thrombosis. In years past the markets could have amused themselves with other macro-economic distractions to pass the time. But Brexit is a localised issue, not a global one, and ten years of zero interest rate central bank monetary policy has killed volatility. At least in an aeroplane, time in the holding pattern is limited by the amount of fuel on board. Politics suffers no such performance limitations sadly.

Markets have seized on China’s falling export data as a sign that the global economy is wilting, ignoring spectacular US data last Friday and that China’s imports increased well above forecast. Someone somewhere on the Mainland is busy making something. The fatigue syndrome of the previous two days probably has as much to do with the world being max long the FOMO global recovery trade, i.e. long equities, as worries over China’s economic health. Another effect of the ZIRP-decade is that the global economy is now a two-horse game; the US and China, with the rest of us merely satellites whose fate is now inextricably tied to both.

Markets are unlikely to get much relief from the FOMC and ECB policy announcements either. It will be steady as she goes from both as the FOMC basks in the light of last Friday’s Non-Farm Payroll and earnings data. Meanwhile, the ECB will insist that they are not the “English Patient,” and that there is light at the end of the tunnel, but will maintain their “loose” monetary bias.

We thus circle back to the US-China trade negotiations, which sadly remain global markets only game in town. December the 15th is approaching quickly, and I still believe that an interim trade agreement is possible, but maybe not probable before then. Given the tortuous path that has been walked to even get to this point, I dread to think of what will be required to reach a comprehensive one. An interim trade agreement, it should be noted, only keeps the lights on in the global economy, and even that is not guaranteed. With monetary policy reaching its limits in so many parts of the world, the phrase “every man for himself” could well be a theme of 2020.

Equities

Wall Street faded overnight as stale long positioning was reduced. China’s export data took the blame, but the real culprit is the information vacuum from the US-China trade negotiations as the next US tariff date approaches. The S&P 500 fell 0.32%, the Nasdaq fell 0.40%, and the Dow Jones fell 0.38%.

The negative tone started in Asia yesterday and is set to continue today as even the eternal optimists of Wall Street timed out. The Nikkei is down 0.15% with the Straits Times 0.10%, although the Kospi has edged 0.20% higher in early trading. In Mainland China, the Shanghai Comp. is lower by 0.25%, and the CSI 300 is down 0.30% with the Hang Seng 0.25% lower.

Australia’s All Ords has fallen by 0.28% despite copper hitting record 4-1/2 month highs overnight. NAB Business Confidence sunk to zero as the domestic economic malaise of the lucky country shows no sign of responding to successive RBA rate cuts unless you own a house.

Currencies

Currency markets sank back into their stupor overnight, perhaps saving their strength for Friday morning in Asia as the UK election results hit the market. The US dollar was mostly unchanged against the major currencies, although both the Canadian Dollar and Mexican Peso managed small rallies, as the successor agreement to NAFTA enters the home straight on Capitol Hill.

The nervousness of the equity market has failed to make an impact on regional currencies today, being almost unchanged against the US dollar. With China’s Inflation Rate released, the region’s major data points have now passed, and we expect regional currencies to stay moribund as we await news on the trade front.

Oil

Oil gave back a small part of its gains overnight but continues to consolidate near the top of its recent ranges. Brent crude fell 0.40% to $64.05 a barrel, and WTI also fell 0.40% to $ 58.90 a barrel.

The recent production cut announcements by OPEC+ and Saudi Arabia, along with the backwardation of both futures curves, appears to be enough, for now, to support prices, without giving upward momentum to further gains. Like the rest of the street, that will probably require some positive developments on the trade negotiation front. The longer that doesn’t happen; however, the higher the chance that longs lose patience and we experience a potentially sharp downward correction.

Both Brent and WTI are unchanged in Asia this morning thus far.

Gold

Gold was almost unchanged overnight, climbing 0.10% to $1461.50 an ounce. It remains solidly in the middle of its longer-term $1445.00/$1480.00 range, although it has been unable to stage even a modest recovery from Friday’s sell-down.

Gold’s fate remains out of its hands, awaiting events elsewhere to dictate its next move. If no trade agreement materialises this week, gold may see some haven buying into the week’s end.

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