December is not going to go out quietly
I think the market could be starting to feel the same
Even with Trump’s lieutenant quickly walking back this week’s trade talk bombast, still, his propensity to stir the headline pot suggests it won’t be a quiet end of the year for investors.
However, judging by recent equity and bond market flows, investors do appear to reduce risk and protect their gains for the year likely respecting December market tumult from years gone by.
Spec traders appear to be running things close to their chest. Bond traders are showing an inclination to run small shorts while equity traders seem just as happy to job and then revert the headline risk via small clips on short term horizon views.
Equity market positioning
As we move deeper into December, positioning is one of the critical factors that could influence markets. More prominent macro names have been running long speculative positions through the recent period of equity strength. And given that they hold more significant exposure in the US than they do in EU equities, the risk is for a more pronounced US equity market sell-off in the absence of a trade talk positive December, is real.
The US Dollar amid global equity allocations
But assuming things carry on as status quo, so what could this mean for the dollar? At first blush and given global equity market allocations, there shouldn’t be much of a US positive position squeeze. And since foreign investors tend to under hedge their US asset risk, they are probably long their fill of US dollars even more so as the US data is showing early signs of curdling into 2020.
New Zealand Dollar
RBNZ announced the new bank capital buffers earlier, with a phase-in period over seven years. The longer duration than the previously expected five years was taken positively by the market, which had feared that a shorter implementation period would force the RBNZ to remain in an eternal dovish stance. RBNZ Governor Orr subsequently came out and claimed that the central bank is now “in a hold phase.” Whether that means until February or beyond remains to be seen, but the market immediately scaled back on easing expectations. traded from 0.6525, cleared the 200dma pivot at 0.6543, but technical indicators are looking a bit scary with the market way overbought, so I would think the market needs to shed some excessive baggage before we move higher again
Following yesterday’s weaker-than-expected Australian GDP, retail sales also came out weaker today. The market dumped and but soon ran into demand for both. The Aussie healthy current account surplus is cushioning the economic blows.
The Malaysian Ringgit
The Ringgit got a significant boost from the 4 % bounce in the Oil price overnight and continues to trade on a more welcome note on the back of trade talk calm. Also, the weaker US economic data so far released this week has kept the US dollar on its back-foot heading into tomorrow’s crucial NFP. After the soft ADP (NASDAQ:) prints, downward revision to the NFP headline are also weighing on US dollar sentiment.
Given uncertain macro conditions heading into 2020, there is a strong case for investors to hold gold as critical asset allocation, but the significant risk is a comprehensive trade deal, better growth, and higher rates which remain the essential factors of downside position squeeze
But in the current environment where uncertainties remain high, and rates are low, especially with equities at all-time highs, fortunately, many investors now recognize golds necessity in the current climate.
I still expect gold to trade through 1600 supported by my views that trade war will linger, and the economic drag from tariffs will force the Fed to cut interest rates 2-3 times in 2020 and weaken the dollar. All enormous positives for gold
As mentioned, the critical risk on this view would be a comprehensive trade deal with a significant chunk of tariffs rolled back that would stimulate trade flows and economic growth, cause the Fed to raise rates and strengthen the dollar. In this case, it wouldn’t make sense to own gold as the economic outlook would be much brighter, and the cost of owning haven assets like gold becomes much higher.
Ultimately when it comes to glittering gold appeal, it’s all about the opportunity cost of risk-free asset returns as measured by the real 10y Treasury yield. As such a higher bond yield are hugely negative for gold
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