Asia Morning: Safe Haven 101 Price Action Continues

The return of Japan from an extended New Year’s break and the effective start of the New Year for the rest of the world’s markets has been a  busy one this morning. Haven assets remain solidly in demand across the board in the Asian morning. Equities have sunk, gold and oil have rallied, Japanese Yen and Swiss Francs are higher, as are US Treasuries.

The driver, of course, is relations between Iran and the US following Friday’s assassination of the Iranian Quds Commander in Bagdad. Things have not got quieter over the weekend, with President Trump tweeting that 52 targets in Iran are locked and loaded for destruction if Iran retaliates. Iran itself has announced it will remove all limits on uranium enrichment with numerous officials brandishing the revenge sabre.

In Iraq, an ostensive allay of the US but with a Shia dominated population and government like neighbouring – and the location of the assassination –  denounced the US actions. The Iraqi Parliament voted to remove all US troops from the country, supporting the government’s stance. All music to the ears of Tehran and Moscow. President Trump responded that the US would only leave if the Iraqis paid for a US airbase there. Japan and South Korea haven’t paid, I see no reason Iraq will either. Additionally, Iraq has said the US actions torpedoed secret detente negotiations between Saudi Arabia and Iran, that they had been brokering.

Israel meanwhile, has sent troops North to its border with Lebanon, fearing reprisals from well-armed and trained Iranian proxies there. Meanwhile, Turkish troops arrived in Libya’s capital Tripoli, to “advise” on the defence of the city. They will be facing “advisors” from the UAE, Russia and Egypt amongst, others assisting the other side.

Some may say its business as usual in the Middle East, where the political situation more complicated than the bitcoin algorithm, even on a quiet day. Philosophical musings aside, a severe escalation of tensions in the Middle East – or even outright hostilities – has the potential to easily subsume any benefits gained from the interim US-China trade agreement. With so much cash heavily invested in global recovery trade in the elusive search for yield, a downward correction in asset prices could be aggressive.  The price action of Friday and this morning suggest that early casualties will be emerging markets and regional Asia. Asia’s dependence on imported energy marks it out as an easy target for bears.

The world moved on quickly from the Saudi Arabian attacks last year, the pace of which still surprises me. Iran’s recorded civilisation dates back some 5,000 years. A fact often overlooked and is perhaps second only to China. Five thousand years teaches patience and Iran has plenty of that. An Iranian response may not come tomorrow or next week, but arrive it shall. Financial markets, this time around, would be well-advised not to allow complacency to set in too quickly. Expect cash to remain king for now, with downward pressure on developed-market sovereign yields to continue.

Middle East fears will likely subsume today’s data releases in Asia. This morning, we have already had a series of PMI’s from Australia, Japan, Hong Kong and Singapore. All showed an improvement over the previous month, suggesting that the nascent recovery is taking root across the region still. China’s Caixin Services PMI was released at 0945 SGT, and it fell to 52.5  from last month’s 53.5. That though is still comfortably in expansionary territory.

Friday’s US Non-Farm Payrolls book-ends the week from a data point of view, meaning that geopolitics will dominate market sentiment over the coming days.

Equity markets across the Asia-Pacific are an ocean of red this morning, following a Friday session on Wall Street that could not recover from Asia and Europe’s Middle East induced sell-off. S&P 500 e-mini futures are 0.70% lower with the Nikkei 225 1.98% lower, with Japan returning from a week-long holiday.

The Straits Times and Jakarta Composite are 0.50% lower with the South Korean Kospi falling 0.90%, as has Hong Kong’s Hang Seng and the Bursa Malaysia. Downunder, both Australia and New Zealand are 0.40% lower. China is showing some resilience with both the Shanghai Composite and the CSI 300 flat in early trading, suggesting that maybe some “national team” smoothing is around.

Equity markets across the region will continue to remain under pressure today. Potentially severe disruptions to energy and world trade will not play well, and neither will fast money’s move into haven assets.

Both CHF and JPY have continued to rally against the dollar this morning, climbing 0.15% to 0.9710 and 108.00 respectively. Trade sensitive AUD and NZD fell sharply on Friday as a proxy for China. AUD falling 0.60% to 0.6945 and the NZD falling 0.50% to 0.6660.

The haven Swiss Franc and Japanese Yen aside, it has been a story of US dollar strength as inflows into US treasuries supported the greenback. 10-year yields fell ten bps to 1.70%. The dollar showed strength across the board, most notably against emerging market currencies, with the Mexican Peso and South African Rand amongst the notable losers.

Regional currencies will continue to struggle against the dollar as fast money heads to the door, and the Iranian situation evaporates confidence in the global recovery trade. Expect that trend to continue throughout the week as investors move into cash, gold and US bonds.

Both Brent and WTI jumped by 3.0% on Friday, with the developments over the weekend causing both contracts to jump again in Asian trading. Brent crude has climbed 2.40% to $70.25 a barrel, and WTI has risen 2.0% to $64.30 a barrel, both 8-month highs.

The geopolitical situation means that Brent and WTI should consolidate above $70.00 and $64.00 a barrel in the near-term. Technical levels become somewhat meaningless in these circumstances. Needless to say, it is hard to see the situation de-escalating quickly this time as it did post the Saudi Arabia attacks. If anything, further threats by either side, have the potential to push oil even higher.

Intra-day prices moves are likely to be driven by headlines from the social media accounts of both sides.

If anything proves how nervous global markets are, and how serious the escalation between the US and Iran has become; it is gold’s price action in Asia this morning. Gold rose $23.0 to $1552.00 an ounce on Friday and has leapt an incredible $25.0 an ounce this morning. It is currently trading at $1577.00 an ounce, having traded as high as $1589.00 in panic post-open buying earlier.

It is hard to believe that gold was $100 an ounce lower just two weeks ago, and like oil, technical levels become a bit meaningless when geopolitics drives price action. It is clear where a lot of the fast-money is going that is rotating out of regional markets and currencies.

Gold should find some resistance around the $1600.00 an ounce regions. Thereafter, the charts open up, with no resistance of note until a series of daily tops at $1800.00 an ounce.

Readers will know that I am a reluctant gold bull, but that all bets are off in a crisis. Gold comes into its own in situations such as we face today. An increase in tensions could easily see $1600.00 breached and rapid progress higher. If by some miracle, the US-Iran situation rapidly de-escalates, gold’s retreat will be as swift as its ascent.