Happy New Year!

We start today a new challenging year with a positive tone as European markets are set to open up 0.6%/0.8% thanks to some positive news in China which had its best start to a year since 2015, CSI300 index +1.5%.

The People Bank of China cut its required reserve ratio for lenders by 50bps, injecting an extra $115Bln liquidity into markets. So far, the required reserve ratio is 13% for big banks and 11% for smaller ones. With this move, China is lowering the lending rates to the real business in an attempt to revive the real economy. Interestingly, the December Manufacturing PMI came in line with expectations at 51.5. Further data, PMI Services and Composite, are expected on January 6.

US-China “phase one” deal still in focus after Trump announced 15 January White House signing ceremony. Also, Trump said “phase two” negotiations to be held in Beijing.

China has temporarily blocked planned listings between the Shanghai and London stock exchanges. It seems that politics, including Britain’s stance on Hong Kong protests, was behind the suspension of the Shanghai-London Stock Connect plan.

Thousands of people protested outside the US embassy in Iraq, after the US responded to last week attacks, where an external US contractor died, with air strikes targeting an Iran-backed militia. The situation seems to be de-escalating although Trump is not helping the peace-keeping with his tweets…

Let’s see some final stats about 2019 which has been a great year for investors. In focus, the US Hedge Fund industry tracked its best year since 2013, delivering an average overall return of 8.5%.

In Equities stellar gains, 34% in NASDAQ and 28% in S&P500, 25% in Eurostoxx (Italy and Greece best markets), 36% in CSI300 (China), 15% in Topix (Japan), speak to the wonders of cheap money.

Best US Sector: Semiconductors +97%, Technology +45%

Worst US Sector: Retailers -28%, Drug Retailers -14%

Best EU Sector: Financials +39%, Materials +37%

Worst EU Sector: Telecoms flat, Oil&Gas +6%

In Fixed Income, robust performance for bulls and bears on duration and corporates. So far there are $11 Trillion negative yielding debt worldwide, the lowest level since June 2019 (was $17 Trillion in August).

In Developed markets Govies, US 10-year yields down by 80 bps, over 1% in Italy and Portugal, almost 3% in Greece and 20bps even in Japan. In EU and US, Investment Grade and High Yield credit spreads compressed with valuations soaring to lofty levels.

Also check the chart below the massive squeeze of USD-denominated Emerging Market debt, with the widest nominal yield compression.

YTD change in yields across assets

As far as Commodities are concerned, the Bloomberg Commodities Index, up 6% with a staggering performance of precious metals such as Gold +19% and Silver +13% while WTI oil delivered a 36% gain, jumping 20% during the latest quarter.

In the FX market, the top performers were currencies backed by some yields current account surpluses, and inflation-targeting central banks. The Canadian dollar was the top G10 currency (more than 4% gain). Even the Turkish Lira, universally reviled, produced near double-digit returns for dollar investors thanks to the magic of carry and the Ruble gained 11% against the dollar. Interestingly, the USD Bloomberg Index lost 85bps in 2019, slumping almost 3% in the last quarter while the EUR appreciated in the same period. Also, to note, the strong correlation between the EUR currency and the 10-year bund yield.

EUR/USD (black) vs 10-year bund yield (red)

On Macro, the global outlook improved during H2 2019. The global current activity indicator (CAI) stands at 2.7% in November/December, modestly above the average of the prior six months, probably just below potential trend growth.

Global Growth – GDP (light) vs Current Activity Indicator (dark)

Although US disappointed in the recent weeks (temporary effect), US Q4 GDP is tracking at a solid 1.8%, and the most leading sector of the economy, residential investment, is rebounding strongly from the setback of 2018 and early 2019. Also, the European Current Activity Indicator edged up 0.5% in December on a reduced pace of contraction in Germany where production remains weak but more leading survey indicators such as ZEW and IFO expectations have moved up sharply. Indeed, the Emerging Market Current Activity Indicator is hovering around its highest level since July 2019, with a significant rebound from a low base in India and Turkey, moderate improvement in China, Brazil and Russia, and ongoing weakness in Mexico and South Africa.

Today we expect the following Macro data:

-European, German, French, Italian, UK Manufacturing PMI in December

-US, Canada Manufacturing PMI in December


-US ISM Manufacturing (very important) in December

-FOMC Minutes

Today all markets open with the exception of Switzerland, Russia and Japan.