Georgia on my mind

The first week of the new year brings plenty of potential volatility, meaning those looking to ease gently into 2021 are likely to be disappointed. The US state of Georgia's double-senate runoff election tomorrow looms as the week's critical event risk. The result will determine whether the Republicans or Democrats will control the Senate, with the Democrats needing to win both seats. The result will have profound implications for the United States.

A win by the Democrats will leave them in control of all three legislative bodies and potentially an unfettered legislative path. If the Republican's win just one seat, they will control the Senate and will almost certainly make the incoming President Biden's life as difficult as possible. That almost certainly means no more fiscal stimulus and imperil any other initiatives that President Biden wishes to make. The Democrat's poor performance at the November election will be thrust back into the spotlight. 

As usual, polls have the result as too close to call. An excellent place for the industry to be given their equally appalling performance over the past two national elections. A Republican win should be market's positive initially, with equities rallying and the US Dollar falling as financial markets breath a collective if selfish, sigh of income tax relief. Conversely, a Democrat victory should have precisely the opposite effect. Any equity sell-off post a Democrat victory should not last for more than a few days, as unlimited zero per cent money from the Federal Reserve trumps all.  

Ray Charles had Georgia on his mind, as should we all this week as a key volatility source. Further complicating the picture is that a close election (as the polls suggest) mean that a clear result may not emerge on Wednesday Asian time. The counting and recounting could drag on for days. You have been warned. 

OPEC+ meets virtually for the first time today to review production cut targets, the first meeting of their new monthly cycle. Oil markets are resilient this morning, but it remains to be seen if the recent rally in prices loosens OPEC+ discipline and unity. Large Dollar signs in front of members have previously been too tempting an apple for OPEC+ members to resist. Russia, in particular, is apparently keen to increase quotas, although they won't be alone. It is also very likely that OPEC+ will reach no decision today, and the meeting will drag on like an American election. When the well is capped though, I expect discipline to hold this month with no increase in production in January. Assuming oil prices are here or higher next month, and that vaccine rollout accelerates, all bets will be off for the next meeting in February.

The week has plenty of entertainment elsewhere though. US ISM Manufacturing is released tomorrow, the FOMC Minutes on Wednesday and European Union CPI and German Factory Orders on Thursday, along with US ADP Employment and Initial Jobless Claims. Although the week's data calendar is the show with everything, much of it will be drowned out by the noise from the Georgia States senate elections and President Trump's Twitter account. The week concludes with Friday's US Non-Farm Payrolls, with new jobs expected to fall to 100,000 after retreating yet again to 245,000 last month. Overall, the data should show that manufacturing across Europe and the US remains resilient, but Covid-19 is eroding employment gains. That said, I expect the markets to yell "vaccines," and quickly move on.

Today is Purchasing Manager Index (PMI) Monday, being the first Monday of the new month. The pan-Asian releases today have mostly shown continued improvements to their December manufacturing PMI's. Australia, Japan, Malaysia, Taiwan, Thailand, Vietnam and Indonesia all climbed further into expansionary territory. Malaysia and the Philippines at just above 49.0, are also close to moving into expansion territory. 

Only China's Caixin PMI slightly disappointed. It fell from 54.9 to 53.0 in December but remains well above the 50.0 expansionary marks. The Caixin index contains a heavy SME weighting which usually lags the SOE-heavy official NBS PMI's. China should get a pass mark this time, with the rest of Asia showing a continued path of improvement and resilience. That reinforces my view that Asia will outperform in 2021, leading the world out of the pandemic recession.

Despite the doom and gloom in the press last week, the UK quietly slipped out of the European Union on January the 1st without incident. Admittedly with the EU and the UK on New Year's breaks, we have yet to see if thousands of trucks back up on both sides of the English Channel, or if supermarkets start running out of fresh produce. I highly doubt that the EU wishes to put Britain under an effective naval blockade and remain of the opinion that the doom-mongering is overdone until presented with evidence to the contrary. That probably explains Sterling's resilience this morning. 

Both the EU and Britain are grappling with an escalating Covid-19 situation and have more important fish to fry. Germany has indicated it will extend lockdowns, as has the United Kingdom; a pattern inevitably to be repeated across the continent. Things are likely to get worse in the EU and Britain before they get better with Covid-19. Britain appears better placed to improve sooner, having been far more proactive on vaccine production and rollouts if anything. Another reason not to sell Sterling at the moment.

Japan is finally joining South Korea and Thailand in at least mulling a more active response to its Covid-19 situation. That is weighing on Japan stock markets today. In Japan, governments move slower than a calving iceberg in the Antarctic. After an interminable period of vacillation and denial, it appears to be considering Tokyo's request for a state of emergency in the city and surrounding prefectures. Tokyo's potentially belated partial lockdown will weigh on Japanese equities this week, but not currency markets which are a Dollar story.

Gloves come of Malaysian equities

The first full trading day of the year has seen strong pan-Asia Manufacturing PMI's and post-Covid optimism mostly lift markets across the region, with some notable exceptions. As the world's centre for surgical glove manufacturing, that post-Covid future has seen glove manufactures sold heavily today, pushing the KLCI down 1.70% today. Investors appear keen to lock in profits after a mighty rally in those stocks in Malaysia throughout 2020.

Japan's Nikkei 225 has retreated by 0.60% this morning as the central government considers Tokyo's state of emergency request to control their increasing cases of Covid-19. South Korea's Kospi has leapt by 2.40% today after the central bank announced that employment would form part of its consideration for monetary policy settings from now on.

Mainland China's Shanghai Composite has climbed 0.90%, with the CSI 300 climbing 1.20% after PMI's today across China and Asia stayed, or rose further into, expansionary territory. The delisting in the US of three Chinese Telco’s, with the threat of more Chinese companies to follow, has had no perceptible effect on sentiment in China. Hong Kong has also risen strongly, coat-tailing the Mainland 0.85% higher.

Taipei has risen 1.30%, with Singapore climbing just 0.20% after uninspiring GDP data this morning. Jakarta and Manila are 0.80% higher, with Bangkok retreating 0.70% on Covid-19 and lockdown fears. With no new Covid-19 cases reported in New South Wales today, and robust manufacturing PMI data from across Asia, Australian stocks have also risen. The ASX 200 and All Ordinaries are leaping 1.30% higher today.

Although equities are strong today and should remain so in Europe, where manufacturing PMI data should also show improvement and resilience, US equities will be facing the reality of the Georgia elections tomorrow. That is likely to take the wind out of Wall Street's sails, and I would expect that gains in Asia will be harder to come by in the next few days until the result of the Senate runoff is clear.

The US Dollar retreats

The US Dollar is on the back foot in Asia today, following strong manufacturing PMI's from across the region, raising economic recovery hopes. The dollar index has fallen 0.27% to 89.69, with support at 89.50 nearby—a daily close below 89.50 openings up further losses to 89.00 initially.

That has seen the Euro, Sterling and Yen all grind higher versus the greenback today to 1.2250, 1.3695 and 120.95 respectively. Sterling has hit a 19-month high this morning, with 1.3800 its first technical target from these levels. USD/JPY is flirting with monthly support at 103.00 today, with Covid-19 restrictions from the central government, should they occur, potentially sparking more Yen repatriation flows. USD/JPY could fall to 101.00 in the coming weeks. 

Asian currencies are rallied by around 0.25% versus the greenback today, and the commodity-based Australian and New Zealand Dollars are also 0.30% higher. That leaves most of the Asia-Pacific at or very near rec3nt highs against the US Dollar. 

I would sound a note of caution from here though. Markets will ignore the Georgia elections tomorrow in the US at their peril. A Democrat win is likely to see a sharp correction higher by the US Dollar, exacerbated by the world being universally short the greenback. Investors should probably wait for the election dust to settle before committing heavily to new dollar short positions.

Oil awaits OPEC+

A weaker US Dollar and more vaccine approvals appear to have inspired oil prices to move higher in Asia, boosted by robust regional manufacturing PMI data. Brent crude has risen 1.15% to $52.05 a barrel, and WTI has rallied 1.70% to $49.00 a barrel. 

OPEC+ meets today to decide on the next stage of production cuts, the first of its monthly cycles of meetings to manage production targets more dynamically. Markets would appear to be pricing that oil production targets will be held unchanged this month. However, if discord emerges, and the meeting drags on over more than one day, oil prices could correct lower from here until the situation becomes more evident. 

That said, the technical picture for both contracts is bullish. Brent crude is now just below resistance at $52.50 a barrel, with a daily close above targeting gains to $54.00 a barrel. Support lies at $50.50 and then $49.50 a barrel. WTI looks set to test resistance at $49.30 a barrel, which will target $54.50 a barrel. Support is at $47.50 followed by $46.00 a barrel. 

There is plenty of event risk in the week ahead even without OPEC+. Pullbacks from these levels could be rapid and quite deep, although it would take a huge move, probably caused by OPEC+, to upset the underlying bullish uptrend.

Gold rockets higher in Asia

Today, gold appears to have caught a Bitcoin tailwind after Bitcoin moved some 15% higher to 34,000 over the New Year Holiday. That has seen gold leap 1.20% to $1921.50 an ounce today. Putting gold and Bitcoin in the same asset class seems intellectually dubious at best, but I have never been one to argue with momentum and FOMO.

There was likely more than a few stop-losses activated one gold cleared $1900.00 an ounce, and with liquidity still lower than usual, that has accelerated the rally. The move higher leaves gold well clear of $1900.00 an ounce, which now becomes support and an intra-day pivot. That is followed closely by the 100-day moving average at $1895.00 an ounce. Gold's next target becomes the November high at $1965.00 an ounce, although I expect some sellers to emerge before that at $1930.00 an ounce. 

With gold hitching its wagon to the Bitcoin-mania for now, investors should monitor any sudden dips in the cryptocurrency, as that may see gold follow suit.