January 3, 2020 / 9:12 AM / 17 days ago

Daily Briefing: New year rally, end of

(Reuters) - Well well, the vaunted New Year rally didn’t last very long — one day, to be precise.

A man stands in front of a screen displaying inside the Bombay Stock Exchange building in Mumbai, India, January, 3, 2020. REUTERS/Francis Mascarenhas

The U.S. air strike that killed a senior Iranian general and sinister pronouncements such as "the game has changed" (U.S. Defense Secretary Mark Esper) and "severe retaliation" (Iran's Ayatollah Khamenei) are making the Middle East look a lot more dangerous.

A woman walks past an anti-U.S. mural on the former U.S. embassy's wall in Tehran, January 03, 2020

Brent futures have surged more than 3% and the currencies of Asian oil importers, such as the South Korean won, Indian rupee and Philippine peso, have fallen 0.5% to 0.8%. The Turkish lira is down 0.3% this morning to its lowest since May. The hardest hit seems to be the ultra-liquid South African rand, down 1.2%

Safe-haven assets are climbing higher, with the yen rallying half a percent to the dollar to a two-month high and the Swiss franc strengthening against the euro to its highest since early September. The dollar index is flat, holding above recent six- month lows.

Bunds and Treasuries have caught a bid, too. Ten-year German yields are back at pre-Christmas levels, falling from the seven- month highs touched early on Monday, and U.S. 10-year yields have fallen 5 basis points to three-week lows this morning. Gold is up around 1%.

However, world stocks are still near record highs and Asian stocks have lost only 0.15%, possibly boosted by the big energy and gold shares in Australia. Losses are bigger in Europe where markets are opening some 0.6% lower. U.S. equity futures are down 0.8%, portending a selloff on Wall Street, which had hit record highs last night.

The fear now is another big conflict and surging oil prices will snuff out the fragile economic stabilisation that data hinted at in recent weeks.

Euro zone factory activity contracted for the 11th month in a row, data showed on Monday, but final PMI readings in Europe have mostly been above expectations. So were PMIs in big emerging economies.

The exception is Britain where data remain pretty awful, unsurprisingly, helping push sterling below $1.31 this morning. In the United States, figures on Monday showed jobless claims edging lower last month.

December’s U.S. ISM manufacturing index later today will be crucial. The indicator has not kept pace with other business surveys, so a healthy number here would be positive for markets — if it weren’t for the complication of the Iran-U.S. tensions flareup.

The Fed will also release tonight the minutes from its December meeting, and we’ll get preliminary German inflation.

European markets are opening 0.5% to 0.8% weaker and investors are rotating into defensive sectors. Oil shares are, of course, rejoicing, with the European energy index up 0.7% — the only sector to gain this morning.

There is some rare good news for a UK retailer, with Next rising 2% to 5% after it reported fourth-quarter sales that beat forecasts and raised its fiscal-year profit outlook.

In contrast to Next's numbers, the Nordic region's largest sports retailer, XXL, said fourth-quarter sales fell. Its shares are down 15%.

Spain's Cellnex is called 1% higher by traders after the telco tower operator agreed to buy OMTEL for around 800 million euros from Altice and Morgan Stanley Infrastructure Partners.

Emerging markets have been sucked under by a wave of risk aversion, with MSCI’s EM stocks index down 0.2% On currencies, South Africa’s rand fell 1.2%. The South Korean won fell 0.8%’ South Korea is one of the world’s largest crude buyers.

The Philippine peso skidded 0.7% to mark its worst level in nearly a month. Bond spreads have widened, with Gulf Eurobonds in focus.

— A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own —

Reporting by Sujata Rao, editing by Larry King

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