Financial Markets will be ramping up into full gear during the first full week of the New Year, following a festive holiday rally in US equities that alluded to global trade optimism and Brexit concerns coming to a cheerful end. However, this risk positive mood may be coming to a huge halt given the sounding off of war drums from Iran after last week’s killing of their leading Iranian commander, Qassem Soleimani, in a US drone strike in Iraq.
Threats of Iranian retaliation from this airstrike has provoked a “flight-to-safety” response among investors, with the Japanese Yen (JPY), the yellow metal (Gold), and other safe haven assets remaining bid for this week’s open. Ironically, the tensions between the US & Iran are not the only geo-political strain weighing on investor mood. Also, North Korea’s Kim Jong Un is inciting controversy, and Turkey is also sending troops to Libya, which adds a deeper element of confusion or complication in the global economy.
But, despite this conundrum of events, markets may still have a resolve to follow the long-term “technical” roadmap, as economic data begins to roll in for the new year. For this week of trading, all eyes with be on Middle East war rhetoric, and the US Non-Farm Payrolls report, along with key data out of the Eurozone, China, Canada, and Japan. With the year 2020 being the beginning of a political “election” year for the US, and talks of global growth slowing down, there is a possibility that this week’s economic data may underwhelm market expectations, leading to a possible corrective phase in the short-to-mediate term.
The single currency (euro) ended 2019 with a more positive tone than that year’s beginning, and it is nowhere near where it started on last year. Easing trade tensions across the pond, have supported a weaker US dollar and a stronger euro, which was also enhanced by the positive economic developments in the Eurozone economy.
On this week of trading, the Final Services PMI report for December, along with the Sentix Index for January, which are scheduled to be released on Monday, could further add to the solid growth picture in the EU. On Tuesday, November retail sales for the region and flash inflation estimates for December will provide further clarity on Eurozone growth. There will also be more business surveys on Wednesday, with the economic sentiment indicator, which is expected to move up to 101.5 for December.
The ECB (European Central Bank) was cheerful about inflation data on last month, when both the headline and core measure of inflation ticked higher. For this week, the region’s headline inflation rate is forecast to have increased from 1.0% y/y to 1.3% y’y in December, while the core readings are expected to remain unchanged.
Also, coming under investor’s radar will be industrial data out of Germany. On Wednesday and Thursday, Eurozone Industrial Orders data and Production Figures are scheduled to be released, respectively. Both readings are due to show constructive growth for November after contracting in October. Any failure to meet the market’s anticipation will put into question the legitimacy of a Eurozone economic recovery, and possibly undermine the single currency’s attempt to break higher. The Final important Eurozone indicator for the week will be the publishing of the ECB policy meeting minutes on this Thursday.
Since the US-China trade dispute is partially settled, and out of the way, analysts will focus on whether the US Economy will gain some positive traction & momentum, or remain slump for the new year. One thing’s for certain, with the escalating tensions between US & Iran, as well as the slew of high tier data for the upcoming week, investors will definitely remain cautious as the future health of the US economy remains uncertain.
First up, are the US Trade Balance and Factory Orders data from November, which are scheduled to be released on Tuesday, with the US ISM Non-Manufacturing PMI report. After two months of consecutive declines, October factory orders increased by +0.3% m/m, and it is expected to stay on course for November, with an increase of +0.2% m/m. The US ISM Services data is expected to have increased from 53.9 to 54.5 for December.
But, the main highlight for this week of trading will be the US Non-Farms Payrolls Report for December, which will be released on Friday, with the headline figure projected to report 165,000 jobs were added to the US Labor Market. If this reading comes in line with analyst’s expectation, this would represent a slowdown from November’s 299,000 jobs print, which could have been the result of holiday hiring, as well as the end of the GM (General Motors) strike. The US unemployment rate is expected to remain at 3.5%, while average hourly wages are also forecast to hold steady at 3.1% y/y.
If better-than-anticipated readings are released in this month’s Labor Report, it may still not provide a significant boost to the greenback, considering both the Federal Reserve & Trump Administration have stated their attempts to not raise rates but, the latter, preferring a weaker dollar. On the other contrary, any disappointment with the Non-Farm Payroll reading could exacerbate the downside pressure that the greenback has already been facing through the end of 2019.
During the final quarter of 2019, the Aussie managed to pare some of the losses from the third quarter to only end the year slightly in the negative against the US Dollar. However, there are signs that this relief rally could exhaust and lead to a deeper sell-off if this week’s economic data is uninspiring.
For today (Monday), the Australian economy will release their AIG Manufacturing Report for December, followed by November Building Approvals on Wednesday, with Australia Trade Balanace & Retails Sales Numbers released on Thursday & Friday, respectively. Since the Australian economy heavily relies on exports to China, this will mean that investors will be paying close attention to Chinese inflation data due to be published on Thursday. The US and China agreed to a “Phase One” trade deal so any pickup in Chinese PPI in the coming months could be due to this agreement, but it is too early to notice any impact this fresh development will have on the Aussie for this week’s December reading.
The minutes from the recent Federal Open Market Conditions meeting confirmed that most of the board believe that the FED has things under control in terms of monetary policy. However, the pending talks of war in the Middle East, could not have come at a worse time for the central bank, as oil prices continue to rise, which will in-turn apply unnecessary pressure on inflation in the US. With that being said, there is subsequent expectation that commodities will rally higher on price pressures, with oil targeting the $70/barrel handle, and Gold (XAU/USD)eyeing the $1,600/oz zone, as risk aversion becomes the common play for this new trading week.
UPDATE: A barrel of Brent oil is changing hands above $70 for the first time since May.
The black gold is currently trading at $70.06, representing a 2.13% gain on the day, having risen by 3.56% on Friday.
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Marvin Perry has been an active trader within the Forex market since 2010. He attended the University of Illinois in Urbana/Champaign, and graduated in 2002 with a double major in Cell and Structural Biology and Chemistry. He currently serves as an FX instructor & Quantitative Analyst for the Forex Anatomy Private Trading Community called "The Lab", where he conducts live weekly trading webinars & instruction on Fundamental Analysis & Inter-Market Interpretations of dynamic asset classes and their influence on currencies.