- The US dollar erased its prior weekly decline last Friday, as optimism US President Donald Trump is close to pulling off a tax overhaul buoyed the greenback.
- The 200-week average, close to the 93 handle, has provided significant support over the past 3 weeks. The key resistance remains at 94.267 – a break above it will signal a major breakout of the downward trend channel, which has been in play since the turn of the year. To the downside, the DXY is likely to remain supported above 93.076.
- Investors will also keep a watchful eye over the Fed Chair search, after the dollar strengthened further Monday following Trump’s commented that he’s considering Stanford University economist John Taylor, seen as the most hawkish candidate, and Governor Jerome Powell for the top job at the Fed while indicating Chair Janet Yellen remains in the running.
- The benchmark 10yr Treasury yield rose sharply last week, and looks likely to test the all-important 2.40% again soon as market expectations continue to adjust to a somewhat faster pace of expected tightening from the Fed.
- The Fed’s willingness to look beyond near-term softness in the inflation data and act before inflation reaches its target has contributed to the move. Continued strong economic data coming out from the US has played a part as well.
- A breakout above 2.40% is likely to lead to a push back to the 2.60% region, last reached in March. To the downside, the 200-day moving average of 2.31% is likely to provide support over the near-term.
- Gold looks set to resume its downtrend, declining in 5 out of the past 6 weeks. The strong rejection of the $1,300/Oz could signal more pain for gold bulls, with a likely retest of its 2-month low of $1,260.67/Oz over the next couple of weeks.
- With a stronger US dollar and higher yields expected in the near-term, the bias continues to remain to the downside for gold. Safe haven demand has diminished recently as well, with things quietening down over at the Korean peninsula and as tax reform optimism continues to fuel investor appetite for
- Crude oil continues to fluctuate around the $52/bbl handle after failing to close above it on Friday for the fourth consecutive week. Futures were higher at the start this week though, after OPEC released a statement over the weekend indicating that the group and Russia had achieved a record-high level of compliance to output cuts during September.
- Geopolitical tensions in the Middle East have also helped to support prices this past week, with the conflict in Kurdistan still ongoing.
- The 6-month high of $53.11/bbl is the key resistance level to watch, while a decline back to $49/bbl, although unlikely, should not be ruled out yet.
Upcoming Key Events:
- Both the timeframe and shortlist of candidates for next Fed Chair are narrowing, as President Trump is expected to announce his decision before leaving for a tour of Asia on Nov. 3. His choice could significantly impact financial markets through either shifting expectations for interest-rate policy or financial-sector deregulation. However, it will have little impact on expectations for the next fed funds rate increase to occur in December. The blackout period ahead of the November FOMC begins Oct. 21.
- On the economic front, market participants will be keeping an eye out for this week’s data on durable goods orders, manufacturing and services PMI and 3Q GDP.
- The ECB is expected to announce its decision on whether it will reduce the pace of asset purchases. According to Bloomberg Intelligence, President Mario Draghi is expected to announce a tapering of stimulus by a third to 40 billion euros a month, beginning in January. Ahead of the meeting, survey data are likely to confirm momentum remains solid in the euro area, though the expansion has probably slowed.
- In the UK, 3Q GDP growth is likely to be sluggish at 0.3%, although analysts feel that the number won’t be weak enough to deter a BOE rate-hike in November.
- In Asia, China’s Party Congress continues, with a new Standing Committee due to be announced around midweek. China’s September property prices are expected to cool. Elsewhere, CPI data from Japan, Australia and Singapore will also be key points to watch.
- The Bank of Canada is expected to keep rates on hold at 1.00% this week, after last week’s unexpected decline in retail sales and subdued inflation economic releases.
Weekly Thematic News:
Auto-parts supplier shares jumped in Asian trading after Wall Street Journal reported that Tesla Inc. reached an agreement with Shanghai’s government to build a fully owned manufacturing facility in the city’s free trade zone. A Shanghai official in charge of electric vehicles denied the claim.
Tesla’s production plans in the largest auto market are closely followed by industry watchers and investors as China accelerates electric- and autonomous-car development and works on a timeframe to phase out conventional cars. People familiar with the matter last month told Bloomberg that Chinese authorities are considering a proposal to allow overseas carmakers to set up wholly owned EV factories in free-trade zones, a move that would give Tesla a greater range of options.
The Self-Driving Car US portfolio on iAdvisor has been one of the stellar performers over the past year, returning an impressive 44.3% from a year ago.
Caisse de Depot et Placement du Quebec, one of Canada’s largest pension funds, will scale back its high-carbon investments such as coal while boosting its renewable holdings in a bid to help fight climate change. Already among the world’s largest renewable energy investors, the Caisse is pledging to increase low-carbon investments by 50% over 3 years, according to a statement last Wednesday. This will represent more than C$8 billion in new investment, the Caisse said. By 2025, the Montreal-based fund manager will also aim to reduce its carbon footprint by 25% per dollar invested.
In a separate report, tech giants are beginning to get in on the act in the business of clean energy, with Amazon and Google leading the way. Amazon has bought more than 1.22 gigawatts of output to date from U.S. clean-energy projects, second only to Alphabet Inc.’s Google, with 1.85 gigawatts. In a statement made last Thursday, Amazon said that its 253-megawatt wind farm in Texas will deliver more than 1 million megawatt-hours of clean energy to the grid annually. It’s among 18 Amazon wind and solar projects in operation; the company has more than 35 projects in development.
Diversified Assets Bearish:
According to a Bloomberg report, a growing number of hedge funds are getting worried about the current unusual state of calm in markets, expecting that it may not last for long. Firms are rolling out new funds designed to protect investors from rising market turbulence, in spite of so-called long volatility strategies being one this year’s worst performers. In recent times, financial and economic bigwigs from Nobel laureate Richard Thaler to BlackRock Inc. Chief Executive Officer Larry Fink has warned that the unusual state of calm in markets may not last.
Indicators of expected swings in stocks, bonds and currencies have fallen toward multi-year lows, while valuations for just about every major risky asset class are climbing. That’s despite heightened uncertainty over US economic policy and the prospect of war with nuclear-armed North Korea. Thaler highlighted the dissonance in a Bloomberg TV interview recently, commenting that “we seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.”
Rather than positioning for a jump in volatility with hedge funds’ strategies, investors can opt for lower-fee ETFs linked to a downturn in equity indices such as the ProShares Short S&P 500, ProShares Short MSCI EAGE (Europe, Australasia & the Far East) and ProShares Short MSCI Emerging Markets. These inverse ETFs, which generally profit when its index constituents fall, are 3 of the 4 main components of the Diversified Assets Bearish portfolio on iAdvisor.