April 24, 2018

Daily Observations:

Asian stocks steadied after hitting 2-week lows on Tuesday as investors paused to assessed markets following a heavy sell-off in recent sessions and waited to see if the dollar’s rally was sustainable. The Dollar Index earlier climbed to a 3-month high, while the benchmark 10yr yield pared recent gains after nearing the key 3% mark last night.

US Dollar Jumps, 10yr Yield Approaches 3%:

The US dollar strengthened, with the Dollar Index gaining to its highest level since January partly on the back of rising Treasury yields, as the benchmark 10yr yield got within half a basis point of the 3% mark before paring losses, a key mark that some observers see as potentially opening the door to much higher levels. The correlation between the dollar and 10yr yield has turned positive after dipping into negative territory in recent months for the first time since 2016.

US Stocks Mixed as Investors Eye Earnings:

Wall Street ended mixed on Monday as concerns about soft smartphone demand weighed on tech stocks and pulled the Nasdaq lower while earnings optimism protected against deeper losses. Tech stocks dragged on both the S&P 500 and the Nasdaq ahead of a big week of earnings for the sector. Chipmaker shares dropped after the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co Ltd, cut its full-year revenue target due to softer demand for smartphones.

Analysts expect earnings growth at S&P 500 companies of nearly 20% in the first quarter, the strongest showing in 7 years, according to Thomson Reuters data. Google parent Alphabet Inc was up slightly in volatile after-hours trading following its earnings release; the company reported a 73% jump in profits in the first quarter.

Quarterly results are expected this week from 181 S&P 500 companies, including technology heavy-hitters Facebook Inc, Microsoft Corp, Amazon.com Inc and Intel Corp.

US Softens Russian Sanctions:

The US softened its position on sanctions against Russian metals giant United Co. Rusal, sparking a record plunge in aluminum prices. For the first time, the US Treasury discussed a path for lifting the sanctions on Rusal, saying it would provide relief if Oleg Deripaska relinquished control. It also extended the deadline for companies to wind down dealings with the Russian aluminum producer by almost 5 months.

Aluminum prices fell as much as 9.4%, the most ever. The move comes on the heels of comments from US Treasury Secretary Steven Mnuchin that he’s considering a trip to China amid an ongoing trade dispute with Beijing.

Poloz Sticks to Cautious Approach in Raising Rates:

Bank of Canada Governor Stephen Poloz said over the weekend that he’s not worried about inflation temporarily rising above the 2% target this year, and the acceleration by itself isn’t sufficient to warrant an interest rate increase.

Poloz added that a tolerance for temporary movements is exactly why the central bank uses a 1-3% range for inflation and doesn’t mechanically raise rates when price growth surpasses the 2% mark.

Trade & Debt Risks May Hamper Chinese Growth:

China’s leaders are signalling concern that growth in the world’s second-largest economy could slow due to trade and financial risks – and that they’re prepared to tweak policy to avoid a sharp deceleration, economists said.

Hard work is needed to meet this year’s economic targets amid an increasingly complicated geopolitical situation, according to a statement released by state media Monday following a Politburo meeting led by President Xi Jinping. Though growth remained robust in the first quarter, forecasters still see the economy slowing this year as trade tensions with the US and the campaign to clean up the financial sector remain as downside factors.

As the Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging, investors are interpreting the change in tone as a signal that the government may ease off tightening measures if warranted.

Australian Inflation Below Target:

Australian CPI rose less than forecast last quarter, prompting speculation the central bank is likely to keep interest rate on hold for the rest of this year. Quarterly CPI rose 0.4%, less than the estimated 0.5%; annual CPI lagged expectations as well, rising 1.9% instead of 2.0%.

The data reflect Governor Philip Lowe’s view that inflation will only gradually return to the midpoint of the RBA’s 2% to 3% target amid weak price growth that’s affecting much of the developed world. Policy makers are banking on a record-low cash rate to boost hiring and tighten the labor market, which should in time spur wage growth and inflation. Traders are pricing in only about a 1-in-3 chance of the RBA tightening at the end of this year.

Weekly Thematic News:

Cyber Security:

A cyberattack that US natural gas pipeline owners weren’t required to report has lawmakers taking a closer look at how the industry is handling such threats, raising the prospect of tighter regulation.

At least 7 pipeline operators from Energy Transfer Partners LP to TransCanada Corp. said their third-party electronic communications systems were shut down, with 5 confirming the service disruptions were caused by hacking.

Though the cyberattack didn’t disrupt the supply of gas to homes and businesses, it underscores that energy companies from power providers to pipeline operators and oil drillers are increasingly vulnerable to electronic sabotage. It also showed how even a minor attack can have ripple effects, forcing utilities to warn of billing delays and making it more difficult for analysts and traders to predict a key government report on gas stockpiles.

This isn’t the first time hackers have had oil and gas pipes in their sights; the Congressional Research Service reported intrusions targeting pipeline communication systems back in 2012. A web attack could “disrupt pipeline service and cause spills, explosions, or fires – all from remote locations,” the service said in a report.

With cybersecurity becoming an increasingly important component of businesses and national security, cybersecurity industry growth is expected to continue expanding at an exponential rate. Investors can choose to park some money in this growing trend by buying into the Cybersecurity US portfolio on iAdvisor, which has returned 32.7% from a year ago as of Monday.

Solar Energy:

Interest rates are rising, making debt much more expensive for capital-intensive industries across America. But there’s at least one exception: the solar business.

While the cost of borrowing has been increasing since 2016, some banks are taking a smaller cut to win deals from solar developers. Loans of 7 years or longer can be obtained for 137.5 basis points over Libor, down from as much as 200 basis points last year. Even the higher-rate loans for residential projects are getting cheaper.

More than $200 billion has been spent in the U.S. on utility-scale solar farms and residential systems over the past decade. Many projects were funded when interest rates were near zero in the years following the financial crisis. After a dropoff in the past two years, installations are expected to increase in 2019 and 2020, according to Bloomberg New Energy Finance.

Investors looking to invest in the solar energy space can purchase the Solar Energy US portfolio on iAdvisor, which has outperformed all 28 portfolios over the last year, returning 57.2% as of Monday.

FX Updates:

USD/SGD:

Spot: 1.3238

USDSGD reached a 7-week high last night, on the back of solid USD strength. The pair breached its 100-day moving average of 1.3230 for the first time since last October. A move above the key resistance of 1.3340 would confirm the breakout of the currency pair’s downward trend channel which has been intact since Jan 2017.

AUD/USD

Spot: 0.7599

AUDUSD sank to its lowest level this year, extending its decline by as much as 2.8% over the past 3 sessions. The strong close below the key support of 0.7650 is likely to lead to more bearish bias for the AUDUSD, with the longer 2-year uptrend on the verge of being broken. The next support of 0.7500 is expected to be tested soon.

USD/CAD:

Spot: 1.2839

USDCAD gained to a 3-week high earlier today following broad gains in the US dollar, and dovish comments by BOC Governor Poloz over the weekend. Poloz said he expects the inflation rate to be above the central bank’s 2% target in 2018, but he is comfortable with that as long as the long-term trend is steady.

USD/CNH:

Spot: 6.3122

USDCNH traded higher Tuesday, nearing a 1-month high of 6.3253 and gaining above its 50-day moving average on the back of USD strength. In addition, the PBOC today weakened its fixing for the fifth consecutive day, its longest run since early December.

USD/JPY:

Spot: 108.77

USDJPY approached its 100-day moving average of 109 earlier following dovish comments made by BOJ Governor Kuroda, who expressed his concerns regarding the economy’s low inflation rate which could in turn delay policy normalization.

Being a safe haven asset, demand for the yen was further dampened following reports that North Korea was ready to end all nuclear test programs.

Following its breakout above the 108 level, the next resistance of 110.50 is expected to be tested over the coming weeks.

GBP/USD:

Spot: 1.3938

It was a fairly volatile past couple of weeks for GBPUSD as the pair retraced from its post-Brexit high of 1.4377 reached last week to a 5-week low of 1.3918 earlier today. The pound’s recent slip could be attributed to recent inflation data which showed CPI at its weakest in a year, in addition to recent dovish remarks by BOE Governor Carney, indicating that a May rate-hike was not the nailed-on certainty investors had previously thought it was.