Although the ledger is open for the 2024 many are still on break and trading volumes remain light in most markets. The themes we carried over from 2023 remain very much in play. Three months in the Middle Eastern conflict looks to be expanding, with Biden dispatching Blinken, as an Israel offensive against Hezbollah will drag Lebanon into the conflict. A potential new front that the US says Israel cannot win and should not entertain. Plus, it could have a knock-on effect for others in the region currently sitting on their hands. The ramifications of opening another front, can only be viewed as negative for all especially the effects it would have on oil price and subsequent inflation pressures. The war in the Ukraine is definitely taking a second seat, lots of “fake news” about who has the edge, and any talk of a peace deal confirms a stalemate. Lots going on in the US Presidential election with Trump saying he will win the US presidency for the “third” time and US budget deficit hits a record high as US Congress gears up for a funding fight.
But in this report let’s take a deeper dive into the ramifications of Israel expanding the front into Lebanon. US President Biden has sent Blinken to Israel as its defence minister suggests the exchanges between the two over the border is “untenable” and that it may soon launch a military operation against Hezbollah in Lebanon, a Muslim majority state. The US and Hezbollah are adversaries. Biden is concerned that Israeli PM Netanyahu, may see an expanded front in Lebanon a key to his own political survival amongst the criticism that his government had over its failure to prevent the Palestinian Hamas attack of Oct 7. The suggestion is that if he does expand the front that as a trusted ally to the US, he will also get support. The US Defence Intelligence Agency has found that it would be difficult for the Israeli Defence Forces to win and an expanded front that potentially sees Iran, the third largest OPEC oil producer entering the conflict could see supply disruptions emerge for oil.
At the beginning of the conflict an expanded conflict sees a $15.00 - $30.00 risk premium to be factored into oil. The concern on this premium is the knock-on effect that it has on energy inflation and inflation. This week the US reports on the state of inflation for December and the year. US Fed Chair Powell in his final remarks for the year said inflation remains high and that the Board will be guided by the data to make appropriate monetary decisions. The market is a little ahead of itself on the expected interest rate cuts with the near-term projections of 5.6% reversing to 5.4%. With an inflation rate YoY coming in at the higher end of 3.3% from a December read of 3.1% expect to see some realignment on views to occur.
Further China later the same day reports on the state of inflation and the forecast is for the inflation rate YoY to continue to drop. Last November China’s inflation dropped by 0.5% which was steeper than the projected -0.2%. This was the fastest decline since November 2020. The forecast is for a fall of 0.7%. The PPI is also due, in November it dropped by 3.0%, a lot faster than the 2.8% expected and the 14th straight month of producer deflation. The economy continues to grapple with multiple headwinds, including mounting local government debt, property woes, and weak demand at home and abroad. All in all sending a clear message to the market that the economy is stalling and in need of more stimulus.
In summary, if US Blinken cannot persuade Israel to back down on its threats against Hezbollah and the conflict in the middle east broadens then this could reignite expectations on US inflation and influence the Feds expectations towards monetary policy. Combine this with weak economic demand in China and it should be a wary sign to equity traders that record equity highs cannot be sustained.
In other major economic data due out over the week we get a good read on how the EU is faring, EU Economic Sentiment, Consumer Expectations and Retail Sales should provide a good read on the state of EU. Then on Tuesday we have CPI in Japan, which is expected to be a little softer and locally we have Retail Sales and, Building Permits. Interesting to note that Building Permits for both the YoY and MoM are expected to be negative. The most important focus will be the inflation data at the end of the week in the US and China.
On the position front, we are happy to hold onto … in Dow (37,660), Nasdaq (16,822), and SPI (Average 7564). In the currencies … the AUD/USD (US0.6770). Commodities, in bullion market … Silver (US23.19) with a … in Gold (US2046).
Trade Focus
Fundamentals:
US Equities: We continue to trade from …
Technical Analysis:
From a technical perspective the momentum indicators have been …
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