The US-Iran crisis appeared to unwind as last week went on, which supported the broader risk-on tone to markets; Brent plummeted over 5%. The de-escalation of trade tensions between the US and China coupled with recent global economic green shoots also lent some support. The yield on the 10-year UST rose 3bps to 1.82% and the dollar bounced ~0.5%. Meanwhile, the renminbi was up 0.8% against the dollar (total return) and equity markets continued their upward assault, with the likes of the S&P Index spiking to all-time highs.
Following the stellar performance across our strategies last year and recent tensions in the Middle East, we rotated out of holdings in sovereign and quasi-sovereign Saudi Arabia paper. We reinvested funds into more defensive A1 positions in Asia and A3 bonds offering attractive risk adjusted returns in LATAM, for example. There was plenty of news out of the Middle East, away from the demonstrations in Iran. Haitham bin Tariq al-Said was named as successor following the passing of Oman’s much liked Sultan Qaboos bin Said. The transition was said to be smooth with Sultan Haitham promising to continue on the same path of peaceful coexistence, whilst overcoming economic challenges. Of note, we do not hold any paper issued out of Oman.
All eyes this week will be on the Phase 1 US-China trade deal, due to be signed in Washington this week. It appears that markets are not too concerned about the fineries of deal, as confidence has largely been supported by the broader de-escalation; we await January 15. US corporate earnings releases led by major banks today should give some clues as to where sentiment lies. Following a mixed US non-farm report, which pointed to muted wage inflation in December, on Tuesday we will have US inflation prints; where the market is looking for core inflation to remain stable at 0.2% mom and 2.3% yoy. US PPI and the Fed’s Beige Book releases follow on Wednesday, when we will also hear from Dallas Fed President Kaplan from the Economic Club of NY. Thursday’s retail sales numbers from December will be monitored closely. Housing starts, industrial production and consumer sentiment readings will be released on Friday.
Across the pond, following a majority Common’s vote, the House of Lords will vote on PM Johnson’s Brexit deal, starting Monday. Meanwhile, Labour party candidates will be pushing to achieve at least 22 nominations in the run to succeed Jeremy Corbyn as leader of the party; the deadline was 14:30 this afternoon. Sterling may come under further pressure following the weak economic data releases this morning, which may lend to the BoE’s policymakers, e.g. Silvana Tenreyro and Gertjan Vlieghe’s, statements that they would support a rate cut if data continues to point to the downside. UK inflation readings on Wednesday will therefore be of interest, as will Friday’s retail sales readings.
Elsewhere, China trade data is due on Tuesday morning. German GDP numbers on Thursday, followed by CPI prints on Thursday will be watched closely. China’s Q4’19 GDP numbers will be of interest, as will retail sales, industrial production and fixed asset prints on Friday.