Category: zerohedge

Authored by MN Gordon via EconomicPrism.com,

On Christmas Day 2018, roughly one year ago, President Trump provided the following market analysis:

“I think it’s a tremendous opportunity to buy.  Really a great opportunity to buy.”

If you recall, the U.S. stock market was in freefall when Trump made these utterances.  Between September 20, 2018 and Christmas Day 2018, the S&P 500 dropped 19.78 percent – within a hairline of an official bear market.  What’s more, the S&P 500 was at a 20 month low.

The Donald, however, proved himself a “very stable genius.”  For he pinpointed to the day, to the minute, the bottom of the late-2018 swoon.  From Christmas Day 2018 to Christmas Day 2019, the S&P 500 rose over 36 percent.

Of course, hindsight’s always 2020.  Buying the dip one year ago now seems so obvious.  But, at the time, it required heavy conviction and intestinal fortitude.

Naturally, it’s easy to know the right thing to do after something has happened.  Perhaps Trump deserves a Nobel Memorial Prize in Economic Sciences for his prescient market call.  More likely, he knew he had an ace up his sleeve…

After calling the CEOs of the six largest banks on December 23, 2018, Treasury Secretary Steven Mnuchin convened a Christmas Eve call with the President’s Working Group on Financial Markets – i.e. the Plunge Protection Team (PPT).  The purpose of the call was to discuss coordinated “efforts to assure normal market operations.”

Make of it what you will, 2019 was a fantastic year to buy the S&P 500.  But what about 2020?

Sights On 2020

Today, with perfect 20/20 vision, we set our sights on the year ahead.  After all, the New Year’s nearly here.  What better time than now to peer out 12 months through our proprietary prism and report back what we discover?

On first glance, we see new dreams, new directions, and new delusions just over the horizon like swirling storm clouds interspersed with warm radiant light.  We see opportunities and contretemps.  We see doom and despair.  And we also see hope and redemption.

Make no mistake, 2020 will be the year that everything happens precisely as it should.  Some good.  Some bad.  Each day shall unfold before you with reciprocal imbalance.  You can take that to the bank.

But what else?  What are the essential insights we should take with us as we set out to make another pass around the sun?  What about stocks, the 10-Year Treasury note, gold, and everything else?  Will collateralized loan obligations (CLO) be roiled by mass corporate defaults?  Are we fated for complete social distortion?  Will this be the year to fight the Fed?

Today we attempt to answer some of these questions with humility and modesty.  Predicting the future, like Fed monetary policy, is primarily guesswork.  But unlike the Fed, we acknowledge our limitations.

Our methodology is rudimentary.  We eschew popular forecasting techniques – including trend lines and data driven models – for a conjectural approach.  First, we ingest all matters of fact and fiction.  Then, through gut check filtration and biased interpolation we arrive at precise, unequivocal answers.

But before we get to it, a brief disclaimer’s in order.  This proviso from King Solomon should suffice:

“A fool also is full of words: a man cannot tell what shall be; and what shall be after him, who can tell him?” – Ecclesiastes 10:14

With that out of the way, we sharpen our pencils and face our limitations.  This year we’ve done something extra special – and we’ve done it just for you.  After much laboring and teeth grinding we’ve distilled what will come in 2020 down for you to it’s very essence.  What follows, for fun and for free, is one essential insight for the year ahead.

Vision 2020: One Essential Insight for the Year Ahead

The late Marty Zweig, in his book Winning on Wall Street, which was published in 1970, included the following observation:

“The monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

You see, even 50 years ago the secret was out.  The stock market’s loosely rigged by Fed policy.  Falling interest rates, and more recently quantitative easing (QE), inflate financial assets.  Rising interest rates, and quantitative tightening, deflate them.

Zweig is also credited with taking this observation and simplifying it in a way that Wall Street zealots can repeat with mindless refrain:

“Don’t Fight the Fed.”

Without question, this is sage advice…most of the time.  Anticipating and front running Fed policy works great, except for the occasions when it doesn’t.  Then it works incredibly bad.

For example, on January 2, 2001, the S&P 500 opened at 1,320 and the federal funds rate was at 6.5 percent.  On January 3, 2001, the Fed began cutting the federal funds rate and continued all the way down to just 1 percent on June 25, 2003.  Yet, over this same time the S&P 500 lost over 26 percent.

Similarly, on September 17, 2007, the S&P 500 opened at 1,484 and the federal funds rate was at 5.25 percent.  On September 18, 2007, the Fed began cutting the federal funds rate and continued all the way down to practically 0 percent on December 16, 2008.  Yet, over this same time the S&P 500 lost over 38 percent.

Note, these examples do not capture the full peak to trough of these bear markets.  The durations provided are aligned with respective Fed rate cutting cycles.  The point is, following the refrain, “Don’t Fight the Fed,” during these periods was absolutely disastrous.

Clearly, there are occasions to fight the Fed.  And 2020 is one of them.  Hence, our essential insight for the year ahead is this:

Fight the Fed in 2020.

No doubt, in the year ahead the Fed will further its extreme and reckless policies of cutting the federal funds rate, injecting funny money into the system via not-QE, and whatever other harebrained schemes the PPT can dream up to sustain elevated stock market indexes.  But what worked so well will in 2019 will fail spectacularly in 2020.

Policy makers are humans too.  They’re likely to miss the mark from time to time.  By our estimation they already have.  With this as our premise, we predict the following for 2020:

The S&P 500 will close out the year down precisely 32 percent.  The yield on the 10-Year Treasury note will rise to 3.19 percent.  And gold will sparkle to a new all-time high, eclipsing $1,900 per ounce.

Here’s to a healthy and prosperous New Year!

Manufacturing surveys from ISM and Markit have decoupled in the last few months (the latter rising, the former falling) but Markit’s PMI slipped back in December and expectations were for today’s ISM data to print slightly higher but still in contraction (sub-50).

However, the situation was considerably worse, ISM Manufacturing printed 47.2 in December (below the 49.0 expectation and 48.1 prior). This is the fifth straight month of contraction…

Source: Bloomberg

The deterioration was driven by the weakest gauges of new orders and production since April 2009. The data show American factories remain plagued by pullbacks in business investment at home, softer demand throughout the world and, until recently, an escalating trade war between the U.S. and China.

• Production fell to 43.2 vs 49.1; lowest level since April 2009

• New orders fell to 46.8 vs 47.2

• Employment fell to 45.1 vs 46.6

• Supplier deliveries rose to 54.6 vs 52.0

• Inventories rose to 46.5 vs 45.5

• Customer inventories fell to 41.1 vs 45.0

• Prices paid rose to 51.7 vs 46.7

• Backlog of orders rose to 43.3 vs 43.0

Overall, inputs indicate:

(1) supply chains began to stress in December and

(2) companies remained cautious that materials received would be consumed by the end of the fourth quarter.

Prices increased for the first time since May 2019, an inflation signal that The Fed is not expecting:

“Starting to see suppliers try to pass on costs associated with tariffs. Uncertainty on the trade front continues to keep agricultural markets on the defensive.”

But, despite the tumble, ISM’s Fiore is hopeful…

“Global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase-one trade agreement between the U.S. and China. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Transportation Equipment is the weakest. Overall, sentiment this month is marginally positive regarding near-term growth.”

This is the lowest ISM print since June 2009. Year-over-year, ISM Manufacturing looks dismal – at levels that have historically lined up perfectly with US recessions…

Source: Bloomberg

Better pay attention though as US equity markets have more than priced in a dramatic rebound in Manufacturing…

Trade Accordingly.

When we first reported the news of Qassam Suleimani’s assassination, one of the first things we showed was the placement of US naval ship around the globe, emphasizing the location of aircraft carrier CVN 75 “Harry Truman” which is currently located just off the Straits of Hormuz in the Gulf of Mexico (and may or may not have been instrumental in the Baghdad airport strike that took out Suleimani).

So why was one of the only two US carriers currently deployed in immediate proximity to the Straits of Hormuz?

Simple: the tiny strait represents the most important choke point for global energy flows, with roughly third of all seaborne traded oil flowing through the Strait daily…

… and is also why speculation is rife that if an enraged Iran really wants to retaliate against the US, its primary goal may be to shut down the strait (even if Iran ally China would strenuously object), which in turn would result in a worst case scenario for the global economy, potentially sending oil as high as $150 according to to Capital Economics, and tipping the world into recession.

Below we repost a fast take from CapEcon on its views on “Soleimani’s death and the threat of US-Iran war”:

Soleimani’s death and the threat of US-Iran war

The assassination of Qassem Soleimani, a major figure in the Iranian regime, in a US airstrike last night has significantly raised the chances of an outright conflict between the US and Iran. We’ve previously estimated that a US-Iran war could shave 0.5%-pts or more off global GDP, mainly due to a collapse in Iran’s economy but also due to the impact from a surge in oil prices.

It’s extremely difficult to know how events will play out from here. But Iran’s Supreme Leader has promised “tough revenge” for the death of Mr. Soleimani. This could come via numerous channels, including attacks on US embassies in the region, assaults on neighbouring US allies (such as Saudi Arabia) or even strikes on US military facilities in the Gulf.

Clearly, the major concern for the world economy is that events spiral out of control and the US launches a full-blown military assault on Iran. We would direct clients to a Focus published last year for a discussion of the possible geopolitical and economic implications of a direct conflict between the US and Iran. We won’t go into all the details here, but there are few key points worth reiterating.

First, the resulting collapse in Iran’s economy could knock as much as 0.3%-pts off global GDP – equal to our estimate of the damage from the US-China trade war. The impact on the other MENA countries would ultimately depend on whether they get directly caught up in the conflict. Past experience suggests that they could actually come through relatively unscathed – many of the Gulf countries recorded rapid growth during the First Gulf War.

Second, and more importantly for the rest of the world, oil prices would surge. In response to last night’s events, oil prices have risen by more than 3% today to $68pb. But if Iran tried to close off the Strait of Hormuz, we’ve previously estimated that Brent crude would jump to $150pb. This would push up inflation across the world – by as much as 3.5-4.0%-pts in the OECD countries.

Central banks in the developed world would probably look through this. But in EMs, those countries where higher oil prices exacerbate balance of payments strains or an inflation problem would probably hike interest rates. Turkey would be a prime candidate, but India would face strains too.

Third, there would also be indirect effects via a hit to sentiment and possible disruption to shipping routes. Our central scenario is that the global economy will bottom out in the early part of this year and recover thereafter. But the outbreak of war between the US and Iran would put the recovery on ice.

In terms of financial markets, equity and bond markets across the Middle East would probably come under pressure. But we suspect that dollar pegs in the Gulf would remain intact. At a global level, a dent to risk appetite would cause risky assets to suffer – equities would fall and EM currencies would weaken – and safe haven assets to rally.

Tesla posted 112,000 vehicles delivered in the fourth quarter, beating out Wall Street’s expectations of 106,000 vehicles delivered. Shares of the automaker are up about $10 in pre-market trade as Wall Street reacts to the news, which seems to be adding fuel to the ongoing short squeeze fire that has seen Tesla shares rocket over the last several months. 

The “beat” allowed Tesla to meet its year end delivery target, which had stood ambitiously at between 360,000 and 400,000 total vehicles delivered for 2019, according to CNBC. This marked a 45% to 65% increase from 2018. 

The company’s delivery number is widely watched, as it is the closest way for analysts and investors to get an idea of how the company’s sales are tracking.

The company said it delivered 92,500 Model 3 cars in and 19.450 Model S and Model X vehicles during the most recent quarter. Wall Street had estimated 87,900 Model 3, 9,800 Model S and 9,300 Model X vehicles.

Earlier this week, Elon Musk made an appearance at the company’s Fremont car factory and delivery center to help “cheer on” employees and meet with Tesla cultists waiting in line to pick up their cars. Customers who had their car delivered this year still qualified for a $1,875 tax credit that they would not qualify for if their car was delivered in 2020. 

Also worth noting is Tesla’s use of the term “cash deliveries”, which it started using in the 3rd quarter but has yet to define. This makes it tough to tell if deliveries are comparable to previous quarters. 

The company delivered more cars than it produced in the third quarter, manufacturing 96,155 cars and delivering 97,000 vehicles. 

Agence France-Presse (AFP) is reporting China on Friday has requested restraint from all sides, “especially the United States,” after the U.S. killed Iranian General Qasem Soleimani in an airstrike at Baghdad international airport.

“China has always opposed the use of force in international relations,” Chinese foreign ministry spokesman Geng Shuang said at a daily press conference. “We urge the relevant sides, especially the United States, to remain calm and exercise restraint to avoid further escalating tensions.”

Shuang said the international community must respect Iraq’s independence and territorial integrity. 

He urged both sides to abide by the principles of the U.N. charter and the “basic norms of international relations.”

Secretary of State Mike Pompeo tweeted on Friday morning that he spoke with “Chinese Politburo Member Yang Jiechi to discuss @realDonaldTrump ‘s decision to eliminate Soleimani in response to imminent threats to American lives. I reiterated our commitment to de-escalation.”

I spoke today with Chinese Politburo Member Yang Jiechi to discuss @realDonaldTrump‘s decision to eliminate Soleimani in response to imminent threats to American lives. I reiterated our commitment to de-escalation.

— Secretary Pompeo (@SecPompeo) January 3, 2020

Last week, Iran, China, and Russia held a joint war drill in the Indian Ocean and the Gulf of Oman as a deterrent against U.S. forces. 

The U.S. Department of State tweeted Friday that all U.S. citizens must “depart Iraq immediately.” 

#Iraq: Due to heightened tensions in Iraq and the region, we urge U.S. citizens to depart Iraq immediately. Due to Iranian-backed militia attacks at the U.S. Embassy compound, all consular operations are suspended. U.S. citizens should not approach the Embassy. pic.twitter.com/rdRce3Qr4a

— Travel – State Dept (@TravelGov) January 3, 2020

Earlier, we reported that Iran is preparing for war by positioning fighter jets on its border and placing its ballistic missile bases on high alert.

Several days ago, we noted how approximately 4,000 US troops could be deployed to the Middle East in the near term. 

As for the de-escalation, let’s hope that’s the case. Otherwise, the world is on edge for a possible counterattack by Iran.  

 

Authored by Charles Hugh Smith via OfTwoMinds blog,

If you believe you’ve front-run the herd, you’re now in mid-air along with the rest of the herd that has thundered off the cliff.

We’re awash in financial charts, but only a few crystallize an entire year. Here are the two charts that sum up everything you need to know about the stock market in 2020.

Put another way–these are the two charts you need to ignore or rationalize away–unless you’re a Bear, of course, in which case you’ll want to tape a printed copy next to your wall of curled Post-It notes for future reference.

These charts show that all the potential gains from a thee-year advance (2019-2021) in P-E multiples and stock valuations have already been front-run in a mere three months. This is a key dynamic in the diminishing returns on Federal Reserve stimulus. This is an important point that few seem to observe.

Once market participants observed how the Fed’s QE (and “Not-QE”) have pushed stock multiples and valuations higher again and again, they now front-run the “guaranteed” gains. Market dynamics being what they are, this manic buying in anticipation of years of future gains compresses all future buying into the three months of manic front-running.

In effect, all the potential gains of three years of Fed stimulus (QE and “Not-QE”) have already been skimmed in the three months since the Fed launched “Not-QE”. 2019’s nearly 30% gains in stock valuations wasn’t the result of soaring operating income or profits; it was all multiple expansion based on front-running the Fed’s stimulus.

While the Fed generated 3 years of gains from each of its previous QE stimulus programs, now all the gains have been taken in only three months: that’s the acme of diminishing returns: now that the Fed brought three years of buying forward into one quarter, what’s going to push a blow-off top in stocks even higher for the next two years?

If you answer “$60 billion a month in Fed stimulus,” you’ll get your head handed to you on a platter, as all the gains from “not-QE’s” $60 billion a month have already been front-run.

Another point few seem to notice is that as the stock market has ballooned in value, the Fed’s QE is diminished as a percentage of market valuation. In other words, the Fed’s stimulus is increasingly nothing more than signal noise, as depicted in this chart showing the Fed’s $60 billion per month “not-QE” in relation to the $33 trillion stock market.

As recently as February 2016, total market cap of U.S. stocks was less than $19 trillion. The value of U.S. stocks have risen by almost 75% in a mere four years, yet the Fed’s QE is supposed to have the exact same effect in an $33 trillion market as it did in an $18.9 trillion market?

And this assumption is based on what, other than magical thinking?

Speaking of magical thinking, take a look at Apple’s operating income, which has actually declined while its price per share doubled from $145 in January 2019 to $293 in January 2020. Other than mass delusion or Martian Mind Control, the only possible explanation for the doubling of the value of a company whose operating income is at best stagnant is the same dynamic: punters have front-run all the potential gains of the future to double Apple’s share valuation in one year.

All those analysts predicting a billion Apple Watch sales to recession-impoverished consumers and Apple eating Disney’s lunch because Apple has squandered millions on entertainment “talent”–you’re joking, right? Every attempt to replace declining iPhone revenues with “services” or “wearables” in an exercise in magical thinking.

Look at the chart, people: Apple’s operating income is at best flat. How the human mind spins stagnation into another $500 billion in valuation can only be understood as Pavlovian front-running, which can also be understood as the herd thundering off the cliff.

If you believe you’ve front-run the herd, you’re now in mid-air along with the rest of the herd that has thundered off the cliff, awaiting gravity to accelerate the herd into a fatal collision with the sharp rocks at the bottom of the cliff.

As for rationalizing away these charts–be my guest. But please don’t think magical thinking is a substitute for detached observation and realistic assessment.

*  *  *

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The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

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*  *  *

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Secretary of State Mike Pompeo spoke to Fox News and CNN on Friday morning about the White House’s rationale to take out Iran’s top elite general, Qasem Suleimani, saying “there was an imminent attack” in the works and “imminent threats to American lives” which had to be stopped.

Describing a “major attack” the IRGC Quds Force cheif was allegedly plotting, Pompeo said, “What was sitting before us was his travels throughout the region, his efforts to make a significant strike against Americans.” He added, “There would have been many Muslims killed, Iraqis, people in other countries as well.”

“It was time to take action,” Pompeo asserted, while also citing “dozens and dozens” of attacks by Iran and its proxies over the last few months. The US top diplomat also referenced “an American killed on Dec.27” — in reference to the US contractor slain during an alleged Iraqi Shia militia rocket attack on a Kirkuk base the prior Friday. 

It was now the time to “take action to restore deterrence” after Trump had shown immense restraint in the face of a series of attacks on US personnel and interests, Pompeo explained. 

Yet Pompeo also emphasized during the Fox segment, “We don’t seek war with Iran.”

And also appearing on CNN’s “New Day,” the Secretary of State underscored that President Trump’s decision for the targeted strike on Suleimani’s convoy along the Baghdad Airport perimeter overnight “saved American lives”. 

“We don’t seek war with Iran,” Pompeo says on Fox News this morning. pic.twitter.com/RR0ZShLkDb

— Jennifer Jacobs (@JenniferJJacobs) January 3, 2020

“I can’t talk too much about the nature of the threats. But the American people should know that the President’s decision to remove Soleimani from the battlefield saved American lives,” Pompeo told CNN.

The IRGC general had been “actively plotting” in the region to “take big action, as he described it, that would have put hundreds of lives at risk,” according to Pompeo.

I spoke today with Chinese Politburo Member Yang Jiechi to discuss @realDonaldTrump‘s decision to eliminate Soleimani in response to imminent threats to American lives. I reiterated our commitment to de-escalation.

— Secretary Pompeo (@SecPompeo) January 3, 2020

Pompeo didn’t cite specific evidence or ‘proof’ of his claims, but said the decision making at the White House was driven by a US intelligence based assessment, according to CNN.

Meanwhile, the region and the world is bracing for a promised coming “severe retaliation” from Iran’s leadership, itself still in shock and mourning over the death of the most visible military commander in Islamic Republic’s recent history. 

Authored by Richard Breslow via Bloomberg.com,

It’s only the second trading day of the year and geopolitical events have already caused a sea change in market emotion. Whether it lasts remains to be seen. In past years, it was a major subject of conversation why events such as we’ve seen today didn’t have lasting effects on asset prices. It’s a sample of only one, yet where we go from here could be an early lesson in how to approach investing in the short-term. Is it different this time around?

The explanation for this phenomenon of markets seemingly not responding to disruptive events going on around them, of course, was central bank reaction functions. They were reliable and quick in making sure financial conditions were supported. Risk takers knew they always had the Fed on their side. Traders will listen to all official communications and speeches with rapt attention to try to assure themselves this remains the case. We might be back to a time when economic numbers are not the key driver of asset-price direction.

The first instinct of traders, albeit in an Asian market that still doesn’t have the benefit of Japan being open for business, was to assume it would be straight back to that same old paradigm of central-bank support. Early European trading didn’t try to disabuse them of that notion. Fed Funds futures traders are already crowing about having been more right than the FOMC’s dots about being on perma-hold. Here we go again.

We can’t know ex ante who will end up being right. There will be no shortage of market-moving events still to come. And that’s only the known unknowns. That’s another important thing to take away from the less than two days of trading that has already taken place. Extrapolation this early in the season is a very dangerous conceit.

On Day One, every tradable asset in the world made a new year-to-date high or low. Much too much was made of that accomplishment. Yet, I kid you not, there was no shortage of people assuring us that we could divine some new, and seminal, market intent from what transpired. Stocks up big. Bonds up, too. Very familiar territory.

So far today, there’s been all sorts of discussion about how far these allegedly “meaningful” reversals could go. And how long they might last. The takeaway should be, from a strictly trading perspective, nothing that happens this week means anything for the long haul. Trade. Or watch. But, please, please, don’t conclude. Anyone who was quaking in their boots about having missed the first leg up in equities should buy some now that they are being presented with a redo. Or stop always giving up trade location by chasing the market after every nice-sized move. It’s way too early to let yourself be psyched out by a little volatility.

I doubt there are any medium-term, or longer-term, quantitative models that have been overly concerned by this price action. Nothing that has happened so far will affect their asset allocation recommendations. Of course, their human masters might be tempted to meddle. This is important to remember. The models were probably happy, from a risk-forecasting perspective, with their positions at year-end and remain willing to stay the course. They just don’t try to sell the highs or buy the lows.

Crucially, it will take a lot to get them to bail on a global lower-for-longer rate environment. And why, if and when that really does change, it will be such a big deal. Speeches and analyst notes notwithstanding. The presumption is, if a central bank does something, it is more likely to do the same thing again the next time. Economists tend to do the same thing. They are playing the odds. And portfolios, lots of big ones, are structured to reflect that fact.

This is why, for all our understandable interest in stocks and the dollar, at the end of the day, it’s rates that will be the ultimate arbiter of where things go.

Having tweeted a patriotic US flag last night following the actions to assassinate Soleimani…

pic.twitter.com/VXeKiVzpTf

— Donald J. Trump (@realDonaldTrump) January 3, 2020

President Trump’s first direct tweet (he has retweeted numerous comments from others) since the attack is a clear jab at the Democrats over their actions (or lack of them) on Iran’s death-dealers…

“Iran never won a war, but never lost a negotiation!”

Iran never won a war, but never lost a negotiation!

— Donald J. Trump (@realDonaldTrump) January 3, 2020

This follows leading Democrats comments speaking from both sides of their mouths unable to praise Trump’s actions while admitting Soleimani was a very bad guy…

Biden – who trump is clearly taking aim at – said the following…

And Warren followed a similar line…

“Soleimani was a murderer, responsible for the deaths of thousands, including hundreds of Americans.

But this reckless move escalates the situation with Iran and increases the likelihood of more deaths and new Middle East conflict. Our priority must be to avoid another costly war.”

We can’t wait to see what Schumer and Pelosi say.

It has been a turbulent start to 2020 with markets soaring on the first day of trading of the new year and decade, only to tumble overnight after a U.S. air strike in Iraq killed a top Iranian commander, sharply escalating geopolitical tensions in the Middle East and denting risk appetite, sending world markets sharply lower and US equity futures down more than 1% overnight…

…. while safe havens such as gold jumped…

… and oil soared $3 a barrel with safe havens such as Treasurys and the yen jumping.

At 5am ET, Dow e-minis were down 347 points, or 1.2%. S&P 500 e-minis EScv1 were down 44 points, or 1.35% and Nasdaq 100 e-minis were down 139.75 points, or 1.57%, while world stocks were a sea of red. Looking ahead, focus will be on magnitude of the response from Iran and the subsequent response to any measure by other regional powers and of course the US.

Iran’s Supreme Leader Ayatollah Ali Khamenei vowed “severe retaliation” after Suleimani was killed in the air strike in Baghdad that was authorized by President Donald Trump and Iraqi President Barham Salih condemned the move, while China urged restraint to avoid further tensions. Iranian Supreme Leader Khamenei said harsh revenge awaits those who assassinated Senior IRGC Commander Soleimani and added that the killing will double motivation for resistance against the US and Israel.

Iranian Revolutionary Guard Corp officer said Iran will take revenge on the US for the death of Soleimani, while Iranian Foreign Minister Zarif tweeted “The US’ act of international terrorism, targeting & assassinating General Soleimani is extremely dangerous & a foolish escalation”, and added that US will bear responsibility for all consequences. Iran’s top security body is to meet to discuss the “criminal attack” against Senior IRGC Commander Soleimani, according to a spokesperson quoted by FARS.

Shares of oil majors Exxon Mobil Corp and Chevron Corp rose 1.3% and 1.2%, respectively, in early premarket trading as oil prices jumped more than 4%. Occidental Petroleum Corp and Schlumberger rose about 2% each, leading premarket gains among S&P 500-listed stocks.

The VIX Index soared from its Thursday close around 12.50 to as high as 16, its biggest one day move a closing basis since August.

The Stoxx Europe 600 Index dropped 1% though energy companies bucked the retreat after West Texas oil rallied more than 4%. The Middle East-focused oil markets saw the most dramatic moves, with Brent crude futures jumping nearly $3, or 4.5%, to $69.20 a barrel – also to the highest since September.

Earlier in the session, Asian stocks reversed early gains as risk-on sentiment quickly faded amid surging Middle East tensions. The MSCI Asia Pacific excluding Japan Index fell 0.2%. Oil stocks rallied, with a sub-industry index jumping 0.8% on a spike in crude. Hong Kong’s Hang Seng Index reversed a rally, dragged by large financial stocks like China Construction Bank Corp. and HSBC Holdings Plc. Australia’s S&P/ASX 200 managed to stay in the green. Japan remained closed for a holiday

“Geopolitics has come back to the table, and this is something that could have major cross-asset implications,” said Lombard Odier’s chief investment strategist, Salman Ahmed.

The flare-up could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” said Valentin Marinov, the London-based head of G-10 currency research at Credit Agricole SA. “Risk sentiment should remain fragile also because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”

The assassination of Suleimani derailed a bullish mood that pushed the S&P 500 to a record high Thursday. Traders had returned from holidays to the news that China’s central bank had moved to support the economy and President Donald Trump expected to sign the first phase of a trade deal with the Asian nation on Jan. 15. Beijing has yet to confirm the date.

As traders fled risk, gold hit the highest in four months and the yield on 10-year Treasuries looked poised for the biggest drop in three weeks as government bonds globally rallied. Data showing German unemployment increased by more than forecast compounded the cautious mood in Europe, and the euro extended losses as the DAX Index led equity declines.

In FX, the yen advanced to the strongest since November, and the Swiss franc hit its highest against the euro since September. The Bloomberg Dollar Spot Index extended gains in the London session, with the Swedish krona and Australian dollar leading losses; the Swiss franc strengthened against the euro. Yields on 10-year Treasuries touched the lowest since Dec. 12; money markets now almost fully expect the Federal Reserve to cut interest rates in January 2021, compared with an 80% probability on Thursday.

In commodities, WTI and Brent are significantly firmer this morning, currently trading with gains in excess of $3/bbl and have eclipsed their overnight highs. In terms of the crux of the newsflow, overnight the US assassination of Iranian Military General Soleimani sparked significant upside for the complex and a broad risk-off tone. Subsequently, the Iranian Government has stated the response to this is not far away and will be strong.

Moving to metals, where spot golds action is also dictated by the risk-off geopolitical news. The yellow metal BRIEFLY just eclipsed the USD 1550/oz mark and of note is the 2019 high at USD 1557.11/oz; it is worth caveating that the USD is also experiencing a safe-haven bid this morning which will be hindering the precious metals progress.

Market Snapshot

• S&P 500 futures down 1.1% to 3,223.50
• STOXX Europe 600 down 0.7% to 416.66
• MXAP down 0.04% to 171.85
• MXAPJ down 0.2% to 556.75
• Nikkei down 0.8% to 23,656.62
• Topix down 0.7% to 1,721.36
• Hang Seng Index down 0.3% to 28,451.50
• Shanghai Composite down 0.05% to 3,083.79
• Sensex down 0.5% to 41,439.23
• Australia S&P/ASX 200 up 0.6% to 6,733.50
• Kospi up 0.06% to 2,176.46
• German 10Y yield fell 5.8 bps to -0.281%
• Euro down 0.2% to $1.1149
• Brent Futures up 3.6% to $68.60/bbl
• Italian 10Y yield rose 0.2 bps to 1.243%
• Spanish 10Y yield fell 5.2 bps to 0.393%
• Brent Futures up 3.6% to $68.60/bbl
• Gold spot up 1.3% to $1,548.28
• U.S. Dollar Index up 0.1% to 96.94

Top Overnight News from Bloomberg

• A U.S. airstrike in Iraq ordered by President Donald Trump killed one of Iran’s most powerful generals, sending global markets tumbling as Iran’s Supreme Leader threatened “severe retaliation”
• Gold rose to a four-month high after the U.S. airstrike, while silver, platinum and palladium all advanced; Oil jumped toward $70 a barrel in London
• The Federal Reserve may drop a hint on plans for the repo market in minutes of its December meeting, plus what it would take to shift the view among officials that interest rates are on hold all year
• Just as the world economy was stabilizing after its worst performance in a decade, a U.S. airstrike in Iraq that killed one of Iran’s most powerful generals is a jolting reminder of how fragile the outlook remains
• German unemployment rose at the end of 2019, signaling that Europe’s biggest economy remains mired in uncertainty as manufacturing contracts and the government resists calls for fiscal stimulus
• Spain is set to finally get a new government after the acting premier, Pedro Sanchez, persuaded a Catalan separatist party to help him take office for a second term.

Asian equities failed to benefit from the rally seen by global peers in which the major bourses on Wall Street headed into the close in fresh record territory. Tech-giant Apple briefly surpassed the USD 300/shr milestone for the first time, whilst chip names were bolstered by AMD’s +7% surge after a 45% price target boost by analysts at Instinet. In overnight trade, US equity futures alongside regional bourses saw downside which coincided with reports of North Korea’s official newspaper warning of “immediate and powerful” strikes against threats and with sentiment dampened by concerns in the Middle East. Japanese markets remained closed amid an extended New Year holiday, whilst ASX 200 (+0.7%) was bolstered in early trade with all sectors initially in the green and with the heavily weighted financial sector leading the gains. Similarly, South Korea’s KOSPI (U/C) also saw early upside with heavyweight chipmaker SK Hynix advancing over 3% as semiconductor names piggy-backed on Wall Street’s stellar chip performance – similar gains were seen in TSMC shares at the Taiwan open. Hang Seng (-0.3%) was originally kept afloat by energy giants benefitting from the sudden rise in oil prices before the index conformed to the overall risk appetite, whilst Shanghai Comp (U/C) traded somewhat lacklustre following a net weekly liquidity drain of CNY 550bln by the PBoC.

Top Asian News

• Top Iranian Commander Killed in U.S. Airstrike in Iraq
• Here’s What You Need to Know About Asia Stock Markets Today
• Hong Kong Dollar Surges to Strongest Since 2017 as Shorts Unwind
• How Qassem Soleimani Helped Shape the Modern Mideast: QuickTake

European bourses are subdued this morning by the risk-off tone given geopolitical events in the middle-east which has dominated price action thus far (more information available in the Commodity section below, as well as the Newsquawk headline feed). Bourses are in negative territory across the board with no notable laggard; however, the FTSE 100 (-0.3%) is holding up somewhat better than its peers gleaning assistance from the upside in Energy names given the crude complex’s action, for instance BP (+1.7%), Shell (+1.4%). Additionally, at the tope of the FTSE 100, is Fresnillo (+2.4%) shining alongside other mining names given the safe-haven bid in gold today. In terms of sectors, unsurprisingly given the aforementioned newsflow, energy names are the only sector in positive territory; with the remaining sectors experiencing broad-based losses. In terms of individual movers, and sticking with the geopolitical tensions, flight names including Air France (-7.8%), Lufthansa (-7.0%) and easyJet (-3.5%) suffering on the higher oil prices. Aside from the crude-related movers, tobacco names are firmer this morning following on from the FDA’s issuance of new guidance. While UK gambling names were subdued at the open on reports that the gambling commission is considering a ban on VIP schemes in Britain; for reference, a number of the relevant Co’s are heavily dependent on such schemes.

Top European News

• U.K. Consumer Credit Grows at Weakest Pace in Six Years
• U.K. Construction in Longest Slump Since Financial Crisis
• Commerzbank Buys Comdirect Shares From Petrus, Holds >90%

In FX, the Dollar revival from turn of the year and decade lows continues, as the DXY inches above 97.000 from sub-96.500, and the latest rebound has been fuelled by safe-haven demand amidst heightened US-Iran tensions following an airstrike reportedly sanctioned by President Trump targeting and killing an IRGC general. Technically, a clear breach of the big figure could see an extension or further retracement to Xmas Day lows of 97.344 ahead of 97.350, 97.500 and the high of December 27 (97.552) before the index slumped on all round Greenback selling.

• JPY/XAU/CHF – The Yen and Gold are both still bucking the overall trend and outperforming due to their status as ultimate ports of security in a storm, though Usd/Jpy has bounced from circa 107.91 and Xau/Usd could not sustain momentum through the psychological 1500/oz level as the Buck built on gains more broadly, while chart watchers will be aware that support lies at 107.89 for the Dollar and last year’s Bullion peak was 1557.11. Elsewhere, the Franc remains somewhat betwixt and between, with Usd/Chf firmly elevated towards the upper end of a 0.9690-0.9743 range in stark contrast to Eur/Chf that is looking at 2019 lows within a 1.0825-55 band.
• CAD/EUR/NOK/SEK/AUD/NZD/GBP – All victims of the aforementioned return to risk aversion, albeit to varying degrees as the Loonie and Norwegian Krona glean some protection/support from the spike in oil prices to trade back over 1.3000 vs the US Dollar and close to 9.8500 against the Euro respectively. However, the single currency has unwound more of its appreciation vs the Greenback and is now testing the 21 DMA (around 1.1128-30) having fallen below the 200 DMA (1.1142), while the Swedish Crown is back under 10.5000 in Euro cross terms and Antipodes even further away from recent pinnacles against their US counterpart, with Aud/Usd and Nzd/Usd sub-0.6950/0.6650 respectively. Finally, and fittingly in terms of current G10 rankings, Cable has given up more ground and another round number at 1.3100 in wake of a much weaker than forecast UK construction PMI.
• EM – Widespread losses on the risk-off positioning, but again the pain for Turkey’s Lira has been more apparent after stronger than expected CPI data, the inflated cost of crude and ongoing geopolitical concerns all nudging Usd/Try closer to the 6.0000 handle.

In commoditis, WTI and Brent are significantly firmer this morning, currently trading with gains in excess of USD 3.0/bbl at present, and have eclipsed their overnight highs. In terms of the crux of the newsflow, overnight the US assassination of Iranian Military General Soleimani sparked significant upside for the complex and a broad risk-off tone. Subsequently, the Iranian Government has stated the response to this is not far away and will be strong. Looking ahead, focus will be on magnitude of the response from Iran and the subsequent response to any measure by other regional powers and of course the US. Elsewhere, today’s other focus point for the crude complex is the delayed EIA weekly metrics, although their impact on price action could be diminished given the geopolitical factors; nonetheless, expectations are for a headline draw of 3.288mln barrels, which is slightly smaller than the previous draw of 5.474mln barrels. Moving to metals, where spot golds action is also dictated by the risk-off geopolitical news. The yellow metal has, at best, just eclipsed the USD 1550/oz mark and of note is the 2019 high at USD 1557.11/oz; it is worth caveating that the USD is also experiencing a safe-haven bid this morning which will be hindering the precious metals progress. Elsewhere, iron ore hit its highest level for around 5-months as restocking continues ahead of the China New Year, as China produces around half of the global steel supply; support also stems from Brazil’s Iron ore exports posting a decline for the month of December. Foreign oil companies have reportedly evacuated employees who are US citizens from Iraq’s Basra., Company Sources; note this will not affect their production.

US Event Calendar

• 10am: Construction Spending MoM, est. 0.4%, prior -0.8%
• 10am: ISM Manufacturing, est. 49, prior 48.1
• 2pm: FOMC Meeting Minutes