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Josh Owens

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Cautious Optimism Returns On Trade Thaw And Fed Hesitation

NYC

Markets open up on trade optimism. Global markets posted strong gains on Monday on hopes that the U.S. and China are making headway on their trade standoff. The U.S. federal government remains closed, but the U.S. also posted blistering employment data for December, painting a strong portrait of the American economy. Meanwhile, the UK is nearing another crucial vote – scheduled for January 15 – on Prime Minister Theresa May’s Brexit package.

(Click to enlarge)

- 2018 was a forgettable year for many commodities, even as performances between specific commodities varied widely.

- Zinc was one of the worst off last year, with prices falling by more than 25 percent. Brent crude oil lost nearly 20 percent,
while nickel, copper and aluminum lost between 16 and 19 percent each.

- The outlook looks a bit better in 2019, not least because the losses over the past year provide more room to the upside. The possibility of a softer approach from the U.S. Federal Reserve (more on that below) has injected a sudden bout of optimism in the commodity space.   

Markets

Goldman Sachs says some U.S. equities could do well in 2019. Global financial markets are showing some signs of turbulence, but if investors are careful, there are some positive investments to be had. Goldman Sachs says that U.S. equities, hit hard over the past few months, are now undervalued. “Investors should own companies with ‘quality’ attributes,” Goldman analysts wrote in a note. “We recommend investors increase portfolio defensiveness” and highlight “stocks well-positioned to outperform during an uncertain economic environment.” Related: Is It Time To Buy The Stock Market Dip?

U.S. home to increased volatility. The Cboe Volatility Index (VIX), which measures volatility, shows that financial volatility in the U.S. has climbed higher than volatility measurements in Europe, Hong Kong and other emerging markets over the past month. “There have been a lot of concerns about a U.S. slowdown, the U.S. tech sector, how inflation affects profitability,” Ankit Gheedia, a strategist at BNP Paribas SA in London, told Bloomberg.

U.S. Fed softens tone. U.S. Federal Reserve Chairman Jerome Powell dialed back hawkish rhetoric on interest rates on January 4, suggesting that the central bank could hold off on more rate hikes. The more cautious tone sent equities soaring last week. “By delivering what traders wished to hear regarding policy flexibility, Chairman Powell managed to interrupt a self-feeding market selloff that risked contaminating economic fundamentals,’’ Mohamed El-Erian, chief economic adviser at Allianz SE, told Bloomberg. However, the strong job growth for December – in excess of 300,000 jobs – also bolsters the case for more rate hikes.

Commodities

Ethanol could be hit by government shutdown. The Trump administration has promised to allow year-round sales of 15 percent ethanol, which is currently prohibited in summer months because of smog concerns. The proposal was an effort to assuage concerns in the U.S. Midwest, where farmers have been hit hard by the trade war with China and the Trump administration’s waivers for oil refiners on ethanol blending requirements. However, the proposed rule change to allow year-round sales of 15 percent ethanol may not be completed in time for the upcoming summer due to the ongoing government shutdown.

Gold rally continues. The strong U.S. jobs report from last week, combined with the more dovish tone from the U.S. Fed, supported gold prices. “In the end, gold did achieve the end-of-year rally that we had long been expecting. It is continuing its upswing as the new year begins, climbing on Friday to a 6½- month high of nearly $1,300 per troy ounce,” Commerzbank wrote in a note on Monday.

Metals see support. The U.S. dollar weakened in the wake of the Fed’s shift in direction, and that is lending support to a range of metals. Meanwhile, looser lending requirements for major Chinese banks could provide some stimulus to the world’s second-largest economy. The thaw in U.S.-Chinese trade relations is also boosting sentiment. “In conjunction with firm stock markets around the world, which reflect increased risk sentiment among market participants, this is lending buoyancy to metals prices,” Commerzbank concluded. Aluminum was up to $1,880 per ton last week, and copper closed in on $6,000.               

Energy

Record LNG investment expected. A record amount of new LNG export capacity is expected to move forward this year, according to Wood Mackenzie. Companies could issue final investment decisions (FIDs) on more than 60 million tonnes per annum of LNG capacity in 2019, WoodMac says, or a three-fold increase from 2018 levels. China’s soaring demand for imported natural gas one of the key drivers of higher investment.

Flaring surges in Permian. Natural gas flaring in the Permian basin hit a rate of 209 million cubic feet per day in 2017, according to the FT and Rystad Energy. But that could jump to as high as 600 mcf/d by the second quarter of 2019. Oil and gas drillers are flaring roughly 3.5 percent of their gas product in the Permian, while flaring rates in the Bakken are even higher. That compares to flaring rates of less than 1 percent in Russia and the Middle East.

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Oil prices continue to rally. After hitting a low in late December, oil prices continue to grind higher. The OPEC+ cuts are taking effect and traders are growing more positive. “Momentum is coming back into the market from very depressed price levels,” Petromatrix strategist Olivier Jakob told Reuters. “We’ve had five consecutive days of price gains already, so what you have today is a continuation of that.”

Cryptocurrencies

Bitcoin posts gains. Bitcoin has rallied by 25 percent since touching a mid-December low. At the start of the week, Bitcoin rose above $4,000. The positions by traders are trending up, with “volatility in the right direction,” according to NewsBTC.

Bitcoin to make strides in 2019. Despite the bloodbath in cryptocurrency markets in 2018, the fundamentals and the technological progress in the crypto space was significant, according to Weiss Cryptocurrency Ratings. Weiss lays out an optimistic case going forward. For instance, Weiss predicts that Bitcoin will be increasingly trusted as a store of value, something that clearly was not the case in 2018. Weiss also predicts strong price gains this year.

Japan could approve crypto ETFs. Japan’s financial regulator could approve cryptocurrency ETFs, according to Bloomberg. Japan’s Financial Services Agency is still set to block crypto derivatives and futures, but is considering approval of ETFs. Bloomberg reports that Japan’s FSA is currently gauging industry interest.

By Josh Owens for Safehaven.com

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