Increased volatility surrounding New -Year break
Market volatility increased on the final trading day of 2019 with a lack of liquidity and year-end asset allocation. The dollar dipped sharply to 5-month lows as European currencies made strong gains.
There was a reversal as market re-opened on Thursday with the dollar regaining ground and turbulence was then sparked by US actions in the Middle East.
US-Iran fears erupt to negate trade hopes
President Trump announced that the US-China trade deal would be signed on January 15th which initially supported risk appetite.
There was, however, a sharp reversal as Middle East developments dominated late in the week.
President Trump ordered a targeted attack on a convoy at Iraq’s Baghdad airport. The drone strike killed a key Iraqi militia leader and the Iranian military leader Soleimani. He was the head of the Quds overseas operation and an extremely important figure in the Iranian regime
The attack triggered a major escalation in Middle East tensions with fears over major retaliation by Iran.
Oil prices pushed sharply higher amid fears over supply disruptions and there were fresh fears over the global growth outlook.
The Australian and New Zealand dollars surrendered gains and the dollar recovered further against European currencies. In contrast, higher oil prices helped support the Canadian dollar. The main impact, however, was a renewed demand for the Japanese yen as USD/JPY dipped to 9-week lows.
Over the weekend, Iran announced a roll-back of all nuclear deal commitments, further increasing underlying tensions.
Consumer confidence data recorded a limited decline for December, although data had a little overall impact for much of the week
The manufacturing data had a larger impact with a fresh decline in the December release to 47.2 from 48.1 previously. This was below market expectations and the weakest figure for over 10 years.
The manufacturing data triggered fresh doubts over the US and global outlook, although the impact was stifled by a focus on US-Iran developments.
Federal Reserve officials continued to indicate that no changes in interest rates were likely in the short term, although geopolitical issues could be an important wild card.
The latest business confidence data failed to register an improvement in December’s final data, increasing reservations over the UK outlook, although January data is liable to be crucial.
Overall confidence in the outlook remained generally weak which limited underlying Sterling support, but volatility remained at elevated levels.
German inflation was slightly higher than expected for December at 1.5% from 1.1% previously, but global developments tended to dominate the Euro moves as it retreated from 4-month highs.
China’s business confidence data was mixed and failed to have a major impact. There was a limited easing of monetary policy which helped underpin expectations of economic stabilisation in 2020.
Tokyo markets remained on holiday which undermined market liquidity.