2020 begins with a spike in risk

Mideast tensions have pushed Brent prices to USD70/bbl and Japanese yen below 108.
Philip Wee, Duncan Tan06 Jan 2020
    Photo credit: AFP Photo

    FX: Geopolitical tensions intact

    Following last Friday’s assassination by the US of Iranian Major General Qasem Soleimani, threats and counter-threats have continued. Iran has withdrawn from the 2015 nuclear agreement while Iraq has called for the withdrawal of US troops. Mideast tensions have led Brent crude prices towards USD70/bbl, up from just above USD60 a month ago.

    A flight to safety has led the Japanese yen below 108 against the USD for the first time since October this morning. Futures are pointing to a 0.4% fall in US stock indices tonight. Weaker risk appetite drove the Australian dollar below 0.70 again; the Oz was also hurt by fallout from the devastating bushfires. The euro and the British pound are still weighed by their weak economies. The Eurozone and the UK have called for the US to de-escalate tensions in the Middle East. Iran has demanded the United Nations to condemn the US and reserved the right to defend itself. The last thing markets want is a move from a tit-for-tat tariff war to saber-rattling in the Gulf.

    Rates: No repo flare-up around the year-end turn

    US SOFR printed 1.55% on Dec 31 and 1.54% on Jan 2, vs the December month-average of 1.55%. In fact, funding needs were so subdued that the final operations of 2019 were quite undersubscribed. Thus far, the impact of US-Iran tensions on rates markets have been muted, though oil prices are up by 3-3.5%. Significantly higher oil prices, having risen 20% over the last 3 months, could have important implications for the global inflation outlook.

    Looking ahead, many investors seem resigned to poor return prospects, primarily because of the impressive showing across most assets in 2019. A large portion of the valuation gains in 2019 were ultimately a takeback of the steep losses in 4Q of 2018. Valuation metrics like SP500 P/E ratio and US IG spreads are today still some distance below the recent highs in early-2018.

    Philip Wee

    FX Strategist - G3 & Asia

    Duncan Tan

    FX and Rates Strategist - Asean

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