Spot values at a glance:
Asian equities extended gains and volatility receded as the prospect of war between the US and North Korea cooled. Safe haven assets such as gold, Treasuries and the yen fell. Fed official William Dudley signalled another rate hike this year is on the cards and suggested the central bank will announce its taper plans next month.
- US Defense Secretary Jim Mattis warned it would be “game on” for war if North Korea fired missiles that hit the U.S. or its territories, including the Pacific island of Guam.
- In a joint commentary in the Wall Street Journal, Mattis and Secretary of State Rex Tillerson said “the US is willing to negotiate with Pyongyang,” but appeared to reject China’s “suspension-for-suspension” proposal, in which North Korea would halt further nuclear and missile tests in return for the US and South Korea stopping joint military drills in the region.
- According to the Wall Street Journal, Kim Jon Un has decided not to launch a threatened missile attack on Guam, citing Pyongyang’s state media reports Tuesday, but warned that he could change his mind “if the Yankees persist in their extremely dangerous reckless actions”.
- The US’s top general, Marine General Joseph Dunford, reassured South Korea that President Donald Trump is making a diplomatic solution to tensions with North Korea his priority, as administration officials continue their efforts in tamping down fears of an imminent nuclear war.
- Federal Reserve Bank of New York President William Dudley said it isn’t unreasonable to expect the central bank to announce plans in September to start trimming its balance sheet and said he supports another interest-rate increase this year if the economy evolves as he expects. He added that a political debate over the debt ceiling is unlikely to have a “big impact” on that timetable because the central bank could announce the start of the program but delay the actual date.
- The US dollar broadly gained on the back of Dudley’s hawkish comments and amid an improving risk tone in markets following a weekend of calming rhetoric between the US and North Korea. The Bloomberg Dollar Spot Index advanced 0.3% in New York, while the widely-watched Dollar Index rebounded off the 93 handle to close 0.4% higher at 93.411.
- US yields broadly gained as well amid fading risk-off mood; the benchmark 10yr Treasury yield rose 2bps to 2.24%.
- The spread between US and German 5yr government note yields have continued to narrow amid tepid inflation, according to Bloomberg News. US consumer prices rose just 1.7% in July from a year earlier, a fifth month of below-forecast data and down from as high as 2.7% as recently as February. At the same time that inflation in the US underperforms the Fed’s expectations, European growth and inflation are firming up. The US-German spread, which reached 2.61 percentage points in December, will likely “converge” toward its half-decade average and reach about 1.5 percentage points before the end of the first quarter of 2018.
- US equities rallied, with the S&P 500 Index rising 1.0% for the first time in 3 months as geopolitical tensions eased. The Dow Jones Industrial Average rebounded 0.6% back to the 22,000 handle, while the Nasdaq Composite jumped 1.3% to reverse last Friday’s selloff.
- US stock buybacks this year are down 20% from a year ago, according to Societe Generale global head of quantitative strategy Andrew Lapthorne. Ultra-low borrowing costs had encouraged large firms to issue debt to buy back their own stock, thereby providing a tailwind to earnings-per-share growth. “Perhaps over-leveraged US companies have finally reached a limit on being able to borrow simply to support their own shares,” writes Lapthorne. Repurchase programs account for the lion’s share of net inflows into US equities during this bull market.
- Foreign Affairs Minister Chrystia Freeland laid out Canada’s core objectives for North American Free Trade Agreement negotiations that begin this week and signalled the country won’t accept “just any deal’’. Among Canada’s 6 main goals is a desire to make NAFTA more current to capitalize on a digital revolution and make it “more progressive’’ through stronger labour and environmental protection.
- China’s economy posted its worst showing this year as curbs on property, excess borrowing and industrial capacity began to bite.
- Industrial output in July gained 6.4% year-on-year, slowing from June’s 7.6% rise and the median estimate of 7.1%.
- Retail sales over the same period gained 10.4%, compared to 11.0% in June and 10.8% expected by analysts.
- Fixed-asset investment in urban areas rose 8.3% from a year ago, slower than the prior gain of 8.6% and the expected rise of 8.6% as well.
- Japan’s second-quarter GDP data has put the nation at the top of the growth table among G-7 advanced economies. The strongest domestic demand in years helped drive Japanese GDP to a sixth consecutive quarter of expansion, elevating hopes for a sustainable recovery in an economy.
- Stronger consumption at home is seen as key to maintaining momentum, and achieving more progress toward the BOJ’s still distant 2% inflation goal. Exports had been doing most of the heavy lifting as Japan’s economy grew in recent quarters, but the figures for the 3 months through June show domestic demand was a bigger contributor to the 4% annualized growth.
- Australia’s central bank renewed its focus on mounting household debt, even as the outlook for the nation’s economy improved, according to the minutes of this month’s policy decision where interest rates were left unchanged.
- The RBA had noted that there remains a “need to balance the risks associated with high household debt in a low-inflation environment”, and that better hiring this year meant “forecasts for the labour market were starting from a stronger position”. The central bank reiterated GDP growth was expected to rise to around 3% in 2018 and 2019, supported by low rates; faster growth in non-mining business investment is expected.
- The main change is one of emphasis after the RBA removed the labour market and added household balance sheets, where debt is currently at a record 190% of income, to its key areas of concern alongside the residential property market.
- Spot gold retreated 0.6% yesterday and extended its fall by another 0.6% to $1,272.92/bbl earlier today as geopolitical tensions dissipated and following hawkish comments yesterday by Fed official Dudley.
- The short-term support at $1,270/Oz may hold for the time-being, as some consolidation is expected between said level and the psychological $1,300/Oz resistance.
- The precious metal has recently broken above a key downward multiyear trendline, in play since 2011. An upward move above the $1,300/Oz handle should confirm the break and signal the start of a new long-term upward trend.
- Silver for immediate delivery retreated as well, falling back below its 200-day moving average and was 0.9% lower at $16.8570/Oz earlier.
- Crude oil futures expiring in September held near its lows earlier today, following last night’s 2.5% tumble to $47.49/bbl in New York as fears of falling oil demand in China overshadowed news that Libya’s crude supply was disrupted.
- China’s oil refining dropped the most in 3 years in July, while crude output retreated from the highest this year. Libya’s biggest oil field, Sharara, cut output by more than 30% because of security threats, a person familiar with the matter said.
- Crude inventories in the US probably declined by 3.6 million barrels last week, according to a Bloomberg survey before Energy Information Administration data Wednesday.
- Bitcoin, the world’s most popular cryptocurrency booked another round number milestone of US$4,300, after rising as much as 23% from Friday on optimism regarding adoption. Bitcoin has skyrocketed during each of the past two weekends. Shares of Nvidia Corp. and Advanced Micro Devices Inc., which sell graphics cards that facilitate the mining of digital currencies, also posted sizable advances of 8% and 4.3% percent, respectively.
- Spot 1.3627
- USDSGD bounced off its 1.3600 handle yesterday, and was 0.2% higher on the day at 1.3639 earlier.
- The support below lies at 1.3500, where the base of a double-top formation on the pair’s multiyear technical chart lies. However, a recovery back up to the resistance level of 1.3700 remains more likely especially with a firmer USD expected on the horizon.
- Spot 0.7868
- AUDUSD pared an overnight decline, gaining back to near its prior session close of 0.7875 to remain largely unmoved on the day following the release of the minutes of the latest RBA’s rate decision.
- From a technical perspective, continued support above the 0.7800 handle should lead to a retesting of the 0.8000 psychological level.
- Spot 1.2729
- USDCAD extended its rebound further above the 1.2700 handle, gaining 0.2% to 1.2732 earlier on the back of a stronger USD overnight, as well as crude oil price weakness.
- The 1.2600 handle is expected to provide support. The pair remains on track to extend its recent rebound higher towards the 1.2800 key resistance level.
- Spot 6.6814
- The PBOC weakened its reference rate for the first time in 6 days, by 0.13% to 6.6689 per US dollar earlier today.
- USDCNH however remained largely unchanged on the day.
- The previous key-support-turned-resistance of 6.7200 looks to provide a cap such that further currency pair gains may be limited.
- Spot 110.19
- USDJPY extended its rebound above the 110 handle, gaining 0.5% to 110.23, as investor demand for safe haven assets such as the yen dampened.
- The sharp rebound from the 109 handle may signal the end of the currency pair’s downtrend, in play since the start of July.
- Spot 1.2966
- GBPUSD extended its decline below the 1.3000 handle, falling a further 0.1% to 1.2954 earlier this morning on the back of a stronger US dollar.
- A break below the 3-week low of 1.2933 could pave the way for more downside for the currency pair, with the next key support residing around the 1.2800 handle.