Asia Morning: Cake By The Ocean

US markets are closed today for Martin Luther King Day, and this will likely take the edge of activity in Asian markets as the week starts. That didn’t stop Wall Street setting another set of record highs following robust manufacturing and housing data along with the JOLTS Jobs Openings.

That doesn’t mean the week will not be without drama with the European, Japan and Canadian central banks all announcing rate decisions this week. All are likely to remain unchanged with the European Central Bank (ECB) decision commanding the most attention. Post the US-China trade agreement; the ECB may well say that the outlook is brighter for Europe, but probably won’t say that’s because the US and China have done all the heavy lifting to achieve it. That remains a speciality of Europe since the GFC; get the central bank to ease regularly to keep the lights on while impotent European governments sit impotently on their austerity hands and hope the rest of the world works the whole thing out.

Speaking of carbon footprints in the sand, the great and good of the world assemble in the winter resort of Davos in Switzerland this week. Champagne and canapes in the snow are preferable than cake by the ocean. All that sunshine, heat and UV, driven by global warming, just wouldn’t be good for the complexion, unless you are Christine Lagarde or Donald Trump. Over 50 world leaders, associated ministers, billionaires, CEO’s and a general who’s who of wealthy people will assemble to ruminate over inequality, climate and what to do about all those pesky poor people. Personally, I would invite a lot of poor people from around the world and ask them. Most of whom have never tried champagne or prawn sandwiches or experienced running water, let alone hot.

The week promises many sound-bites that will keep financial markets fed and watered. I suspect the amount of global warming hot air generated will achieve little though, apart from making the world’s elite feel a little less guilty about being elite. The week’s highlight will almost certainly be the US President Donald Trump addressing the forum and perhaps meeting, yet again, his miniature nemesis, Greta Thunberg. Both events should be worth the price of admission.

China has surprised markets this morning by holding both the 1-year and 5-year loan prime rates steady at 4.15% and 4.80% respectively. We had been looking for another 20 basis points to be snipped of both benchmarks. The unchanged decision is perhaps reflecting confidence by the PBOC after last week’s trade agreement and on track official GDP numbers. The PBOC could well be joining the “wait and see” club of global central banks, although I suspect its trigger finger is more twitchy than most.

The PBOC will likely concentrate on ensuring that there is adequate cash in the system ahead of the Chinese New Year holidays, which starts this Friday the 25th of January. Mainland China markets will be closed all of next week with most of Asia also closed to lesser degrees as well.

Japan releases Industrial Production data at 1230 today for November. The YoY number will show what a tough 2019 it has been for Japan, expected to print at -.80%. The MoM number, however, should show a marked improvement to -0.90% from the previous months -4.50%. Still negative, but tracking in the right direction, as the slow but sure recovery in Asia continues. Most eyes though will be on the Bank of Japan rate decision mid-week.

Oil markets could be in for a busy day in Asia with the rebel Government in Eastern Libya, closing the oil terminals under its control. For context, although the Eastern alliance has been besieging the capital Tripoli in the West, an unusual arrangement happens with Libyan oil revenues. The revenues are directed to the National Oil Corporation of Libya, which in turn funnels them to the government in Tripoli. Thus, the Eastern rebels are not cutting off their noses, despite their faces. Closing the ports is a none too subtle negotiating tactic as ceasefire talks get underway in earnest. The net effect has been to take 800,000+ barrels a day of production of world markets. Although OPEC can easily cover the shortfall in time, the short-term impact has been to see oil move over one per cent higher in early Asian trading.

Equities

Another day, another new set of record closes on Wall Street on Friday. The S&P 500 rose 0.39%, the Nasdaq rose 0.24%, and the Dow Jones rose 0.17%.

Asia hasn’t fully embraced Wall Street’s Friday rally, with Asian stock markets mixed this morning. Some lingering disappointment that China did not cut the Loan Prime rates sees the Shanghai Composite edging 0.20% higher, Taiwan up 0.35% while the Singapore, Jakarta and Kuala Lumpur have all fallen 0.15%.

The Nikkei 225 is up 0.25% with South Korea’s Kospi leaping 1.0% in early trading. Australia’s All Ordinaries is 0.30% higher with the return of violent protests in Hong Kong sapping the Hang Seng, which is down 0.10%.

With the US on holiday today and Chinese New Year upon us at the week’s end, we expect volumes to be below average in Asia this week.

Currencies

Bright US data saw US Treasury yields move higher on Friday which, in turn, broadly supported the US dollar. The greenback gained against major currencies with EUR/USD falling back below 1.1100 and GBP/USD retreating to hover at 1.3000.

USD/CNH continued its post-trade-deal grind lower on Friday though, falling 200 points to 6.8680 as currency markets pencil in an accelerating China recovery. USD/CNH has edged lower again this morning as China’s lending rates remained unchanged. USD/CNH is sitting at 6.8610, just above the daily support region between 6.8500 and 6.8600. A daily close below 6.8500 would imply further CNH strength to 6.8000. Further gains from there will become more challenging until we see more positive evidence from China’s economic data.

Oil

Oil has moved higher today after Libya’s rebels closed the exporting ports under their control, removing 800,000 barrels per day of supply from the world market. Other producers in time will easily meet that and if the port closures drag on. In the short-term, however, it is mildly positive for oil prices.

Brent crude has moved 0.75% higher to $65.10 a barrel this morning, and WTI has climbed 0.60% to $58.85 a barrel. Brent crude has support at $63.50 and WTI at $57.50, but neither of those support regions looks in danger of giving way in Asia.

With the US on holiday, oil volumes will be muted globally with Libya expected to dominate the headlines. Libya is not Saudi Arabia, though, and we expect any bullish reaction to run out of steam by the mid-week.

Gold

Gold rose modestly on Friday, climbing 0.25% to $1556.55 an ounce, supported by weekend risk hedging by financial markets. It has drifted slightly higher again in Asia, rising to $1556.85 an ounce.

Today’s US holiday will most likely torpedo trading volumes in Asia as well, with gold consolidating in a broader $1545.00 to $1562.00 range. The next significant move in gold is unclear, with strong cases to be made either way. With the week-long Chinese New Year holiday starting on Friday though, gold should remain supported on dips during the Asian time zone this week. Regional investors adding risk hedges to their portfolios ahead of the long break.

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