Markets love it when a plan comes together

Even the A-Team's "Hannibal" Smith would be impressed at how well the financial markets buy everything, sell the US Dollar plan is coming together as the year ends. US 10-year yields eased slightly overnight, equities are moving higher, along with precious metals, commodities and energy, and currency markets spent the overnight session clubbing the greenback harder than a harp seal harvest.  

Although the US Dollar has been grinding lower throughout the week, it is interesting that currency markets have waited until the year's penultimate trading session to press the accelerator. Part of that is probably down to the UK approval of the Astra Zeneca/Oxford University Covid-19 for immediate use. The Astra Zeneca vaccine is a potential game-changing accelerator in the Covid-19 battle, being producible rapidly in massive amounts, and storable at room temperatures, instead of environments that mimic the South Pole in the middle of winter. 

Although not as effective at first sight as the supremely engineered mRNA vaccines from Pfizer and Moderna, it doesn't have to be. Russia won World War 2 in part through the use of the T-34 tank. It was cheap and mass-produced, and its crews were often ill-trained, but it wasn't a bad tank at all. It was revolutionary in some respects. Produced in volume and at a modest price, it overran the much more technically advanced German Panzers through sheer weight of numbers. The Astra Zeneca vaccine could well be the T-34 of the Covid-19 war, or if you are British and a bit patriotic about it, the Hurricane to the mRNA Spitfire.

I am firmly in the corner of a lower US Dollar and higher asset prices everywhere in 2021, propelled by the US twin deficit and central banks keeping interest rates at lower for longer. However, currency markets popping the champagne early has raised two points of concern. Firstly, the wizened experience of 30+ years in the show with everything but Yul Brunner, suggests that financial markets throw the kitchen sink at the group-think theme of the year in the first weeks of January. 

Unfortunately, the first directional move of the year is usually the wrong one, resulting in a very painful correction, before regular service resumes after convalescence in profit & loss hospital. Beware of running with the herd towards the watering hole January. That cool water often has a salt-water crocodile in it.

Secondly, next Tuesday sees the double senate runoff in the US state of Georgia. Thankfully, polling is light thus far as the statistical boffins continue to lick their wounds from another drubbing at the US elections in November. Those few that have been conducted suggest that it is too close to call. The election is important because if the Democrats win both seats, they will assume control of the House, the Senate, and the Presidency. Conversely, if the Republicans win only one of the two seats, the status quo remains. 

Markets have been pricing in the second scenario as an absolute certainty, with another two years at least of Mitch McConnell tempering the perceived fiscal largesse of a Biden presidency. That is evidenced by his "no realistic path to quickly pass the Senate" comments last night over the Presidential wishes for $2,000 stimulus cheques. Should the Democrats win both seats on Tuesday though, a rather nasty shock could hit the markets. With the world long everything and short the US Dollar to the eyeballs, a Democrat win would raise the spectre of higher taxes and a strong move to the left in America. That could provoke a sharp correction in what is perceived as a sure-thing, one-way trade. 

In the bigger scheme of things, it won't materially change my 2021 outlook. Vaccines will inspire a global recovery; central banks will leave rates a zero even if inflation rises to fund exploding government deficits everywhere. And the search for yield in a zero per cent world flooded with unlimited free money for the world's central banks, means the K-shaped recovery, asset price inflation scenario seems a certainty. January though, could keep investors honest. Sometimes plans only last as long as the first engagement.

None of that will bother Asia today, with China's official Manufacturing and Non-Manufacturing PMI's retreating ever so slightly to 51.9 and 55.7 respectively. China's international major export markets' woes (Covid-19), likely explains the slight easing in the Manufacturing number, with Non-Manufacturing exports also easing slightly. Both numbers remain in solid expansion territory signalling that China will continue leading the world out of the 2020 recession into 2021.

With Japan and South Korea closed, and Australia, New Zealand and Singapore markets on half-days, activity in Asia is likely to fall quite rapidly this afternoon. The reduced liquidity today will leave financial markets vulnerable to headline shocks, so making your way to the side-lines is a wise strategy.

Equities mixed after positive Wall Street session

Wall Street enjoyed a modestly positive session overnight with the S&P 500 closing 1.13% higher, the Nasdaq rising 0.15%, and the Dow Jones climbing 0.24%. Japan and South Korean markets are closed today, but China's expansionary PMI data, combined with a positive New York session, has lifted China stock markets. The Shanghai Composite and CSI 300 are both 0.80% higher, and Hong Kong has risen by 0.50%.

Elsewhere in the region, the picture is more pessimistic. In Singapore, Indonesia and Malaysia, investors appear to be taking risk positioning of the table ahead of the New Year break. That has sent Singapore and Kuala Lumpur down 0.60%, with Jakarta falling by 1.0%. Taipei has eased by 0.15%.

Australian markets are also suffering as year-end squaring of positions, and ongoing concerns about the impact of Sydney's Covid-19 outbreak have eroded sentiment. The ASX 100 has fallen 1.55%, and the All Ordinaries has fallen by 1.35% as markets Downunder move towards an early close.

Although China markets and US index futures have moved higher today, I would expect European exchanges to follow the pattern in regional markets ex-China. That means investors are likely to reduce exposures over the holiday period, and I expect European markets to move gently lower this afternoon. 

The US Dollar sell-off accelerates overnight

The US Dollar sell-off accelerated overnight with both the major and commodity currencies tracing substantial gains versus the greenback. What appears to have woken the currency market from its slumber on the year's penultimate session is the UK's approval of Astra Zeneca's Covid-19 vaccine. As described above, it is potentially a game-changer for many parts of the world where approvals will surely follow quickly. That gave a boost to the global recovery trade, which should see a continued global rotation out of defensive US Dollar positioning and into recovery orientated markets.

The dollar index fell 0.35% to 89.68 overnight, breaking support at 89.75. It has eased a further 0.03% to 89.65 in Asia, albeit with forex volumes muted int he region. A weekly close below 89.75 tonight suggests further losses to its 2018 low at 88.25 in January. Potential risks to this outlook are outlined above, notably the Georgia Senate runoff on Tuesday.

Elsewhere, EUR/USD rose 0.35% to 1.2285, an 18-month higher. Vaccine hopes propelled GBP/USD one per cent higher to 1.3620. The technical picture suggests further gains to 1.2400 and 1.3800 in the coming week. Australasian currencies continue to be the forex markets favourite recovery plays, with AUD/USD rising 1.0% to 0.7685, NZD/USD capping a stellar week by rising 0.70% to 0.7205 overnight. Both have advanced by 0.20% this morning with the AUD/USD breaking major resistance at 0.7630 overnight.

In Asia, regional currencies have traced modestly higher, with volumes impacted by the early closure of markets, either officially or unofficially. The Chinese Yuan, Thai Baht, Singapore Dollar are all 0.05% higher. The Malaysian Ringgit is today's outperformer, USD/MYR falling 0.60% to 4.0105 today. The Ringgit is now 1.10% higher for the week, supported no doubt by firmer oil prices this week. As a primary beneficiary to the global recovery next year, I expect the Ringgit to strengthen further to 3.8500 in Q1, as long as oil prices remain firm.

Oil firm on US Crude Inventories

US official Crude Inventories fell by a much larger than expected 6.50 million barrels overnight. Combined with a weaker US Dollar and vaccine-driven recovery sentiment, that kept both Brent crude and WTI anchored to the top of their ranges. Brent crude rose 0.70% to $51.90 a barrel, and WTI rose 0.45% to $48.30 a barrel. With Asian markets in holiday-mode, oil prices are unchanged regionally today.

Assuming that the Georgia Senate elections on Tuesday pass without incident, the technical picture suggests that Brent crude is poised to break resistance at $52.50 a barrel, extending gains to $54.00 a barrel initially. Similarly, WTI seems set to rise through $49.50 a barrel targeting a move that could extend above $54.00 a barrel in January. Only a fall by Brent through $49.00 a barrel, and WTI through $46.00 a barrel suggests a rally delay.

Gold fails at its 100-day moving average

The fall by the US Dollar overnight saw gold extend its rally, rising an impressive 0.86% to $1894.50 an ounce. However, once again, it failed to break through its 100-day moving average at $1896.00 an ounce. Failing at the third attempt in two-weeks appears to have provoked some position reduction amongst investors, with gold retreating 0.30% to $1889.50 an ounce in thin Asian trading.

Nevertheless, gold remains close to its two-month highs and appears to be consolidating ahead of an expected break higher. Assuming the US Dollar remains weak next week, and the Georgia Senate runoff springs no surprises, gold should target $1910.00 an ounce. Once cleared, the road lies open for further gains over the coming weeks to $1975.00 an ounce. Support remains at $1875.00 an ounce, followed by $1855.00 an ounce.