The market has managed to erase all losses made yesterday with Europe set to open up 0.6%/0.7%.

The resilience is very surprising and mainly due to better macro data. The Middle East situation is far from resolved. On one hand Iran has pledged to retaliate, on the other the US is sending 3,500 soldiers to Kuwait. Interestingly, Iran has created a network of influence and proxies during the recent 20 years. It’s quite clear that Saudi Arabia, Israel and United Arab Nations are fierce opponents of Iranian while, on the opposite side, the supreme leader Ali Khamenei is able to exert a strong influence over Syria, Iraq, Lebanon, Afghanistan and Pakistan. It is very likely that Iran will attempt to strike US targets in Middle East.

The South China Morning Post announced this morning that a Chinese trade delegation is expected to arrive in Washington on January 13 and sign the phase one deal on January 15 at the White House. Chinese executives have not confirmed yet.

In terms of market direction, we would be considering the positioning (quite heavy as shown below), valuations (stretched) and of course the Macro and geopolitical noise. We should be waiting for the details for the Phase 1 to be published and we will continue to watch for the short-term economic data (ISM, auto sales, FOMC minutes, Fed speakers)

Macro-wise, positive set of data in Asia, Europe and US yesterday, is pointing towards some Macro stabilization as we repeatedly discussed in our previous updates. Interestingly, China was the only country easing over January cutting 50bps in its reserve requirement ratio.

As far as Asia is concerned, PMIs were on average more positive than expectations in December. China’s PMI stayed flattish (50.2 vs 50.1 consensus), beating expectations for a decline after the November surge. The Caixin PMI Manufacturing/Services fell in December, but stayed well above 50.

The PMIs of South Korea, Taiwan and Thailand rose above 50. Malaysia’s increased to 50. India and the Philippines saw the faster pace of expansion in the manufacturing sector. While Jibun Bank Japan Manufacturing PMI came slightly lower than forecast, 48.4 vs 48.8 consensus (still below 50).

In Europe, we continued to see a divergence between services strength and lagging manufacturing in December. The Euro Aggregate Service PMI climbed up to 52.8 vs 52.4 consensus, a four-month high, while Composite PMI up to 50.9 vs 50.6.

German, British and Italian Services PMIs were higher than previous month/consensus, with the strongest Germany activity growth for four months, and the first increase in overall new business since August. German Business confidence in the services sector rose to the highest since April, with employment rising. In-line results for France.

In US, better Services and Composite PMIs in December, respectively 52.8 vs 52.2 consensus and 52.7 vs 52.2 prior month. Again and again, the divergence with the manufacturing sector is wider after the US ISM was released on Friday, falling to a multi-year low reading of 47.2, the lowest level since the Great Financial Crisis in 2009.  Still US Q419 GDP growth is tracking 2.8% (a decent number).

Today some important Macro data:

  • 11:00 Consumer Price Index European Union (inflation)
  • 16:00 US Durable, Capital Goods and Factory orders
  • 16:00 US ISM Non-Manufacturing

In terms of positioning, the weight of Systematic strategies is as we know nearly fully invested on equities. It is estimated that a drop of 2% on the S&P could generate a material equity supply on the markets of roughly 25bn$. It is a self-fulfilling process and it could help putting market into selling pressure for a while until they drop their weight to a more neutral stance.

The chart below show the expected flow over 5 days from Systematic strategies as per Morgan Stanley estimates.

On top of this, we should also consider that Buy-side positioning on the S&P has reached a record-high level.

A final note on Spain as Socialist and Podemos have moved closer to form a Government.

Last Sunday, acting Prime Minister Pedro Sanchez failed to win enough support in a first parliamentary vote on Sunday, part of a process that should still allow him to form a government with help from Catalan separatists today as Sanchez needs to win the endorsement of the 350-seat chamber.

While Sanchez didn’t have the numbers to ensure the required parliamentary majority on Sunday, he looks to be on track to win today decisive vote when he only has to have a simple majority of votes cast. This should lead to a formation of a Government.

While this is a potential positive news for Spain, there is a stock-specific risk are the Government might implement higher taxes for Spain as whole and headlines so far suggest banks and oil companies are most at risk of specific tax measures.