US stocks are bouncing back after the worst start to the trading year since 2016 after the manufacturing sector surprisingly remained very strong in December. The headline ISM reading jumped to 60.7 the highest level since August 2018, higher than the consensus estimate of 56.8 and prior reading of 57.5. All the regional surveys painted a different picture, so the strong ISM reading was a big surprise. If the US economic recovery follows the Chinese playbook, manufacturing could really accelerate higher once the US gets a better handle on COVID.
The biggest risk event of the month is finally here, and Wall Street appears to be comfortable with the possibility that Georgia could deliver a blue wave. Some investors are also feeling confident that Republicans will end up winning at least one seat tonight (or tomorrow morning). The new Democrats that voted in Biden might like the idea of having a divided government and will either possibly vote for Republicans Perdue and Loeffler or just not vote for the Democrats Warnock and Ossoff. All the polling pretty much shows both races are coin flips, but normally they exaggerate Democrats election day representation. Republicans will need a strong turnout and if the Northern Georgia congressional districts show high voter turnout, financial markets will begin to further price in a Republican victory.
The Electoral College certification is not truly a risk event, but it will draw tremendous press. President Trump doesn’t have the votes to overturn the election. He has been rejected at almost every accusation and has practically no chance of staying in office.
The big story overnight was the NYSE announcement that they will no longer delist the three Chinese telecom giants. China Telecom, China Mobile, and China Unicom all surged over 5% on the delisting reversal. The NYSE U-turn appears to suggest that the big three telecom giants do not meet the Office of Foreign Assets Control FAQ 857 requirements, thus rebuking the Trump administration’s accusation the companies are tied to China’s military.
Crude prices jumped after reports that the Russians and Saudis reached a compromise that appears to have steady production in February. The Saudis will take one for the team and make a voluntary oil production cut in February. Both Russia and Kazakhstan were pushing for an output increase and may have gotten a total hike of 75,000 barrels in February and March. It is all about OPEC+ today, as oil prices ignore some downbeat COVID headlines that include Germany extending lockdown to the end of the month and the FDA advising against some measures of altering the timing and changing the dosage of vaccine shots.
WTI crude tested the $50 level on expectations that the Saudis and Russians have made a deal on February output and after the US ISM manufacturing report rose to the highest level since 2018. Factory activity was still healthy in December and that is a good sign for the economy once we get beyond the holiday COVID spike.
Barring any OPEC+ surprises, oil will take its next queue from the dollar’s reaction to the Georgia Senate runoff races. With dollar bearish bets near the highest levels in a decade, a huge covering of those positions could happen if Republicans keep control of the Senate which should trigger weakness across commodities across the board.
Gold’s longer-term outlook remains bullish, but the Georgia election uncertainty and the fate of the Senate will keep prices in limbo. The chance of a blue wave is there and that could trigger a huge plummet for the dollar that sends gold skyrocketing towards the $2000 level. The likely outcome for Georgia is for the Republicans to win at least one of the races and that could provide some short-term headwinds for gold.
Gold prices gave up most of its early gains after US stocks turned positive following the best ISM manufacturing report in two years. The virus situation is taking a backseat, but global lockdowns will be the theme in January and that should prevent any significant weakness in gold. The next 24 hours will be very noisy for gold and investors will likely be buying every major dip.
The reflation trade that will drive gold prices higher might take a while longer to happen if Republicans hold onto the Senate, but that is somewhat expected.
Bitcoin is the new asset class that many institutional investors feel will revolutionize the financial system. The simple bullish macro argument appears to be firmly in place for Bitcoin, but it is obvious that price action will remain volatile. Outlandish calls for Bitcoin to rise to $50,000, $100,000 or $200,000 just got its biggest endorsement from JPMorgan’s strategists, a goal for the largest cryptocurrency to potentially reach $146,000 in the long-term.
Bitcoin is higher today as trading volumes skyrocket to a record high, but there is some caution in the air. One of the biggest drivers for Bitcoin has been the dollar’s fall and the Georgia election could provide a massive reversal if leveraged and real account money managers need to cover their massive bearish greenback bets.