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Last week’s news

• There was a major escalation of U.S – Iran tensions last Friday with U.S officials confirming a drone attack on a vehicle convoy at a Bagdad airport which killed Qassem Soleimani, an Iranian major general in the Islamic Revolutionary guard corps and Abu Mahdi Al-Muhandis, an Iraqi-Iranian military commander. Iran has since vowed revenge against America and has stated that they no longer consider themselves bound by the 2015 nuclear agreement negotiated with the U.S. and other world powers.
• On reports of the death of the Iranian general, Oil spiked +5%, with the S&P 500 posting its biggest loss in a month. A search for safehaven assets drove Gold, JPY, CHF and Treasuries higher. The Euro also remained elevated against most of its peers (ex-CHF & JPY) including the USD which is traditionally regarded as having a higher beta to risk-off environments than the former. Oil-linked currencies such as CAD and NOK are in a tug-of war between the risk-off environment and the benefit from higher oil prices.
• China has announced its new top official to be based in Hong Kong, Luo Huining, considered as “strongman” who is intending to restore order after almost seven-months of social unrest. On Sunday, there were reports of police firing tear-gas in response to a gas bomb attack on the police station, which saw a dozen people arrested.
• Hundreds of properties across the south-east of Australia were destroyed as temperatures soared and strong winds exacerbated the catastrophic wildfires on Saturday. It was one of the worst-days in the three-month long crisis. Dozens of small communities in rural NSW and VIC have had their towns destroyed with fires growing that hot and large that they generated dry thunderstorms and fire-tornados.

Looking ahead

• The U.S Dollar Index lost 2% in December, largely attributed to a better risk tolerance (U.S-China phase one confirmation) and stabilisation of world data particularly in Europe and Asia. However, new geopolitical risks arising from both the middle east and North Korea regions, are likely to support the USD in the short-term, despite recent U.S forward indicating data points (PMI’s) hinting to a slow down.
• USDJPY may test its October low of 106.48 as risk-off grips markets after a U.S airstrike killed a top Iranian commander in Baghdad. The pair fell 0.5% to 108 on concerns other nations may be drawn into the conflict between the U.S and Iran. The market is seemingly pricing an escalation of tensions with gold hitting a 6 year high on Monday of $1,567.26 an ounce.
• It is seemingly clear that Australian business activity over the last 2-3 months has been significantly impacted by the scale of the bushfires, with retail sales directors acknowledging a slowdown and tourism industry leaders making a specific point that less people are travelling domestically over the festive period. We’ll see Retail Sales for November and Westpac’s Consumer confidence Index for January, which should provide insights into how the RBA could assess the impact of the bushfires next month.

Key market events this week

• EUR German Factory Orders MoM (Nov) – Wednesday
• AUD Trade balance (Nov) – Thursday
• AUD Retail Sales MoM (Nov) – Friday
• CAD Housing Starts MoM (Dec) – Friday
• EUR France Industrial Production MoM (Nov) – Friday
• US Initial Jobless Claims (Jan) – Friday