It's a concession Jim, but not as we know it

Financial markets have had to cope with something most usual over the past 24 hours in 2020, a procession of good news. The efficacy of AstraZeneca's Covid-19 vaccine gave markets a modest boost yesterday, and European, and UK manufacturing flash PMI's outperformed, even as services wilted under Covid-19 lockdowns. President-elect Biden's intention to appoint former Federal Reserve Chair, Janet Yellen, as Treasury Secretary was well received. Fiscal stimulus will definitely be on the table in the new administration, even if passing it through the Senate will be a monumental task. The Republican's probably shouldn't hand-wring over the state of the US Government's finances though; President Trump was running trillion-dollar deficits even before the arrival of Covid-19.

It was the US Manufacturing and Services Flash PMI's for November that surprised though. Both blew forecasts out of the water, with manufacturing rising to 57.9 and services rising to 57.7. That was a huge surprise, with services showing no damage from the resurgent waves of Covid-19 and subsequent state and city-based movement restrictions. The dollar index bounced around in a near 80-point range, with its almost unchanged finish belying the intra-day volatility.

The PMI's were enough to lift equities into positive territory with the great post-Covid-19 rotation trade in evidence, as the Dow Jones outperformed the Nasdaq. The US economy continues to defy the riders of the apocalypse, an impressive result given the grip the pandemic has on the country. Hindsight may well lay that state of affairs as the feet of the Trump administration, whose laissez-faire growth over graves approach to managing the pandemic, may have laid the foundations for an even more robust recovery in 2021, once vaccines become widely distributed.

Based on the above, Asian markets were primed for a positive start. That momentum has been boosted again though by President Trump instructing the General Services Administration (GSA) to start providing Biden's team with transition resources. It came, coincidentally, a few hours after Michigan state certified its election results in favour of Mr Biden. Although no concession has been formally announced, denied in fact, it appears that President Trump has conceded the writing is on the wall. 

The GSA news will be markets positive for Asia. Markets love certainty and the move by Trump overnight partially removes ambiguity over the Presidential succession. A Biden administration is expected to be much less isolationist, with hopes that the US will reengage on global trade and improve relations with China. All positives for Asia as the factory of the world economy. Tokyo markets leapt higher this morning as the news hit the wires, and I expect much the same from the rest of the region today. The cold hard reality is that a President Biden will likely face a hostile Republican-dominated Senate. The legacy of another poor election effort by the Democrats. Getting stuff "done" in this environment will be challenging. But that is a story for 2021, and not for today.

The only blot on the copybook is how much of a scorched earth the outgoing Trump administration will leave. China markets will struggle to buy into the euphoria of the indirect concession today, as the Trump administration prepares to ban 89 Chinese companies associated with the Chinese military. Their nascent commercial jet sector appears to be the primary target. Given that most of the vital systems are American and European, and sitting on thousands of Boeing and Airbuses already in China, it may be shooting American suppliers in the foot as well. 

Still, if Western high-tech manufacturing companies weren't so desperate to sell their souls for rock n' roll to do business in China, they probably wouldn't find so many remarkably similar reverse-engineered products coming back at them in the years ahead. My sympathy levels are low.

I suspect the Trump administration will leave a few more international relations and trade "gifts" for Mr Biden to deal with before January 20th.

The data calendar is light to non-existent in Asia today, with some volatility seen in New Zealand after the Finance Minister announced he intended to ask the Reserve Bank to include the housing market in it policy considerations. That sent the New Zealand Dollar soaring as monetary policy outlooks were quickly reassessed. Overall, the day will be dominated by the positive sentiment from movement on the US Presidential transition, and vaccine progress.

Asia equities higher except China

The decision by President Trump to allow the release of transition funds by the GSA was interpreted as a concession in any other words. That has given renewed momentum to the rally seen on Wall Street overnight, which was dominated by the vaccine rotation trade. The S&P 500 0.56%, but the Nasdaq only rose 0.22%, while the Dow Jones outperformed, climbing 1.0%.

The transition news has seen all three US index futures contracts jump higher, with the Nasdaq 100 climbing 0.50%, and the S&P 500 e-mini and Dow futures leaping 0.80% higher. That has green-lit Asia to follow suit with the Japan starring. Playing catch-up after a holiday yesterday, the Nikkei 225 have jumped 2.60% higher, hitting highs not seen since 1991. I should note though, that the Nikkei remains far from its all-time highs at just shy of 40,000 set in 1989, before Japan plunged into three lost decades of deflation. Retail participation has increased markedly in Japan in recent months, and its price action in recent times reflects the arrival of the FOMO herd so prevalent in American markets.  

In South Korea, the Kospi is 1.0% higher, with Bangkok climbing an impressive 2.60%. Singapore has climbed 0.70% and Jakarta by 0.60%. Malaysia is lagging, falling 0.55%, weighed down by political concerns, rising Covid-19 cases, and the heavy weighting of rubber industry and glove manufactures, none of which are likely to outperform in a post-Covid world. In Australia, the pro-cyclical ASX 100 and All Ordinaries have climbed by 1.10%.

Greater China is the regions underperformer today. Taipei has fallen 0.10%, but the Mainland's Shanghai Composite is 0.12% lower, with the Shanghai 50 down 0.65%. The CSI 300 is down 0.70% with Hong Kong almost unchanged, up just 0.10%. The underperformance of Taipei reflects geopolitical nerves as the Trump administration continues to actively engage with the island state, raising China's ire. A substantial weighting in technology means the rotation into cyclical seen elsewhere will bypass it. China markets themselves continue to reflect concerns about the apparently imminent blacklisting of 89 China companies with ties to the military. With no clarity from the Biden camp over its future engagement with China, markets domestically are left to contend with the Trump administration which seems intent on making life as difficult as it can for China in its last weeks.

The outperformance by Thailand, Japan, Singapore and Australia today suggests that the cyclical rotation trade, powered by vaccine promise, is back to the front of investors’ minds. Europe should also open higher today for much the same reasons, although the carnage wrought by Covid-19 on domestic consumption will temper those gains.

Currency markets struggle for direction

Currency markets were whipsawed last night, with the dollar index trading in a near 80 point range before closing almost unchanged. The Dollar was boosted by impressive PMI data, but reversed course as Biden announced key cabinet appointments and then as Trump allowed the GSA to release transition funds to the Biden team. The dollar index ranged between support and resistance at 92.00 and 92.80, before finishing the session, just 0.16% higher at 92.50. 

Much the same price action was seen in the Euro and Sterling. EUR/USD ranged between 1.1800 and 1.1900 before closing midrange at 1.1840. Sterling ranged between 1.3270 and resistance at 1.3400 before closing 0.30% higher for the day at 1.3330. Markets continue to price in a 100% certainty that a Brexit trade deal with Europe will be signed. That has supported the Euro and notably the GBP. GBP/USD should quickly test and move through resistance at 1.3500 if a breakthrough is achieved, initially targeting 1.3800 and 1.4000. 

The session has also been notable for a rotation out of haven currencies such as Yen and Swiss Francs, with both sold heavily overnight, and into pro-cyclical commodity currencies. The Canadian and Australian Dollars rose strongly overnight and into Asia's session. USD/CAD has fallen 0.27% to 1.3050 this morning and looks set to test support at 1.3000 and 1.2930. AUD/USD has risen 0.40% to 0.7315 today, reversing its modest losses overnight. It looks set to test resistance at 0.7340, which opens the path to further gains above 0.7400.

The New Zealand Dollar has outperformed in the pro-cyclical space. It has risen 0.70% today to .6970, boosted by Finance Minister statements on the property market that have been interpreted as hawkish. The Kiwi looks set to test 0.7000 imminently, although the Reserve bank may have something to say if the rally accelerates from there. 

The Chinese Yuan is unchanged at 6.5820 today, after a neutral fixing by the PBOC. Regionally, the picture is mixed, with the Baht, Rupiah and Ringgit falling against the US Dollar. Meanwhile, the Korean Won and New Taiwan Dollar have risen against the Dollar. The counterintuitive nature of the price movements suggests that the market was already positioning for more good news on the vaccine front, and that profit-taking is dominating flows today. Overall, though, my view is unchanged, and I expect Asian FX to strongly outperform into the end of the year in well into 2021.

Oil testing multi-month highs

Oil prices staged another strong move higher overnight, propelled by the AstraZeneca vaccine news, impressive US PMI data, and the expectation that OPEC+ will extend production cuts next week. That saw Brent crude rise 1.55% to $45.80 a barrel, and WTI rise 1.0% to $42.85 a barrel.

The news that Trump has permitted the release transition funding to the Biden camp has further boosted prices in Asia. Markets have interpreted that as a concession, rightly or wrongly. With a Biden Presidency perceived as more international trade-friendly, markets have assumed that consumption in 2021 will rise again. Brent crude has risen 1.50% to $46.45 a barrel this morning, with WTI also climbing 1.50% to $43.50 a barrel.

The rallies in Asia have left both contracts just shy of multi-month highs with no sign that upward momentum is waning. Nor is either contract's relative strength index (RSI) in very overbought territory, a key indicator for market corrections. The rapidly tightening contango on Brent's calendar spread curve is also price supportive. 

Brent crude is testing its July to September highs at $46.50 a barrel. A daily close above $46.50 implies further gains to $48.50 a barrel with only a fall back through $44.90 a barrel suggesting further bullishness is misplaced. WTI is testing its July to September highs around $43.50 a barrel with its next target being the $48.00 a barrel region. Only a retreat through $42.00 a barrel changes that outlook.

With OPEC+ due to meet on Monday, where they will almost certainly expend the production cut targets, oil prices should remain broadly supported. As is the want of OPEC+, nothing can be taken for granted, and if they break ranks, an ugly correction lower will ensue. The arrival of three commercially viable Covid-19 vaccines is changing the picture for the world in 2021, and with momentum so strong, it would be foolish to say the rally in oil prices is near an end. I also remain confident that not even OPEC+ would shoot themselves in the foot next week.

Gold is in trouble

Gold failed at trendline resistance at $1876.00 an ounce overnight and proceeded directly lower without passing go. Gold finished the overnight session 1,80% lower at $1838.00 an ounce and has fallen another 0.75% to $1824.00 an ounce this morning. 

After recovering from my initial shock that I called gold correctly for a change, several things have become apparent. The gold market remains seriously long and wrong, with speculative dip buyers of the November 9th capitulation throwing in the towel after gold moved through $1850.00 an ounce. The arrival of a third vaccine candidate to the market is causing material reassessments to the growth trajectory of the world economy in 2021. In this respect, gold's haven role has diminished. The overnight PMI data from the US suggests that despite its vaccine woes, it is more resilient then even the author has expected, and thus may not need as much monetary and fiscal support as previously thought. Finally, with a formal US Presidential transition now likely, a large source of financial market uncertainty has been removed, especially as a Biden administration is perceived as more trade friendly.

Although gold should still benefit from the US Dollar debasement likely to be seen throughout all of 2021, if US yields are nearing their lows, gold will struggle. We can probably put talk of $3000.00 an ounce in the cupboard and leave it there. Gold needs a “Trump-special” to get out of trouble from here.

Gold will probably recapture $2000.00 an ounce at some stage in 2021, but it may go there via lower levels. In the short-term, gold has resistance at $1850.00 an ounce, with an initial target of $1796.60 an ounce, the 200-day moving average. That is followed by $1720.00 an ounce and possibly the $1680.00 regions.