August 16, 2017

Daily Observations:

Asian equities were mixed on Wednesday, as index gains in Tokyo, Hong Kong and Seoul were contrasted by declines in Shanghai, Sydney and Singapore. The US dollar continued to gain in strength, on the back of better-than-expected retail sales numbers. Treasuries sank overnight ahead of the release of the Fed’s latest meeting minutes due later today.

Geopolitics:

• South Korean President Moon Jae-in reserved the right to veto any military action against North Korea in a speech Tuesday, a statement that contrasts sharply with US President Donald Trump’s threat to unleash “fire and fury”. Moon’s remarks came after US Defense Secretary Jim Mattis warned that it would be “game on” for war if Kim Jong Un struck America with missiles.

US:

• US retail sales advanced in July by the most this year, with widespread gains from department stores to building materials outlets. Retail sales rose 0.6% month-on-month, compared to 0.3% in June and better than the median estimate of 0.3%. Sales excluding autos gained 0.5% over the same period, improving upon the 0.1% rise in the month prior and exceeding the 0.3% expected.
• The Empire State manufacturing gauge jumped to 25.2 in August, from 9.8 last month, and exceeded the consensus estimate of 10.0. This month’s reading was the highest level in nearly 3 years. Manufacturers in the region reported a jump in new orders and said they were taking longer to deliver goods.
• The import price index in July gained 0.1% from a month ago, matching expectations. Export prices over the same period rose 0.4%, more than the 0.2% expected.
• US business inventories rose 0.5% to register its biggest increase in 7 months in June, improving upon May’s 0.3% gain and bettering the expected gain of 0.4%.
• On Tuesday, US President Donald Trump said there was “blame on both sides” for the deadly violence at a white supremacist and neo-Nazi rally in Virginia that resulted in the car-ramming killing of a counter-protester. An alleged member of one of the right-wing groups was charged with murder. Trump defended his decision to wait before specifically condemning racist groups. Many of corporate America’s leaders joined Merck CEO Kenneth Frazier in stepping down from White House advisory councils following Trump’s hesitation. A poll average from Real Clear Politics shows Trump’s net approval rating falling to -20.4 percentage points, its lowest level since the inauguration.
• US Treasuries extended losses after retail sales last month exceeded forecasts, boosting speculation the Fed might raise rates again this year. The benchmark 10yr Treasury yield gained 5bps to 2.27% in New York.
• The strong retail sales numbers pushed the USD broadly higher as well, with the Bloomberg Dollar Spot Index rising 0.4% to close at its highest in 3 weeks. The Dollar Index briefly gained above the 94 mark.
• US equities were mostly flat, with the Dow Jones Industrial Average (+0.02%) and the S&P 500 Index (-0.05%) largely unchanged. The Nasdaq Composite shed 0.11%.
• The latest 13F filings, of which hedge fund managers disclose their holdings, were released on Monday and indicated that smart money may be starting to pull away from the FAANGs. The filings showed that Ken Griffin’s Citadel sold 3.4 million shares of Apple, the majority of its stake, while Viking Global Investors, led by Andreas Halvorsen, disposed of 9.6 million shares of Facebook, or most of its holding. Those moves are probably not enough to change anyone’s broad views, but it should be noted that the group has stumbled recently.
  
• According to a Bank of America Merill Lunch survey, which polled 202 clients earlier this month, a net 46% of respondents (a record high) say equity markets are overvalued. The survey also found that average cash balances remain steady at 4.9% globally, above the average of 4.5% over the past 10 years. They’re especially pessimistic in Europe, where cash weightings in portfolios rose to 5.3%, the most since March 2003. Another point to note is that only a net 33% of investors think corporate profits will improve over the next 12 months, down 25 percentage points from January and the lowest level since November 2015. “Investors’ expectations of corporate profits have taken an ominous turn this year,” Michael Hartnett, the firm’s chief investment strategist, wrote in a note accompanying the report, “which is a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones. Further deterioration is likely to cause risk-off trades”.
  

Canada:

• Canada’s benchmark home price fell by the most in nearly a decade last month as Toronto led a fourth-straight decline in sales. The nationwide benchmark home price declined 1.5% to C$607,100 from June, the largest drop since the previous recession. In Toronto, the country’s largest city, the price fell 4.7% on the month, following cooling measures imposed in April which included a foreign buyer’s tax to stem what officials called unsustainable price gains.
  

UK:

• UK inflation in July slipped 0.1% month-on-month and rose 2.6% year-on-year, worse than the 0.0% and 2.7% changes expected. Core CPI rose 2.4% from a year ago, lower than the median estimate of 2.5%.
• The inflation data provide further evidence of the difficulty the BOE faces in preparing the ground for higher borrowing costs against the backdrop of worsening economic indicators and continued uncertainty about Britain’s exit from the European Union. Economists in a Bloomberg survey this month cut their forecasts for growth this year and next.

China:

• China is once again the top foreign owner of US Treasuries after boosting its holdings to $1.15 trillion in June, its fifth straight monthly increase, to surpass Japan. As China buys US government debt, domestic corporates are also issuing more of their own, bringing borrowing out of the shadows in the process.
• The IMF warned that Chinese debt is poised to surge to almost 300% of GDP by 2022 while upgrading its near-term growth forecast for the world’s second-largest economy.

Australia:

• Second quarter wage price index rose 0.5% quarter-on-quarter and 1.9% year-on-year, both in line with expectations.

Singapore:

• Singapore home sales rose 35% in July, as more new projects were launched. Developers sold 1,108 units last month, compared with 820 in June, according to Urban Redevelopment Authority data released Tuesday. A total of 692 new units were offered, up from 159 in June, the data showed.
• Property prices have dropped for 15 straight quarters, the longest slide since the data were first published in 1975. An index tracking private residential prices fell 0.1% in the three months ended June 30 from the previous quarter. Home values have dropped 12% from their 2013 peak.

Precious Metals:

• Spot gold pared most of its overnight decline, of which an intraday low of $1,267.39/Oz was reached, to gain back above the $1,270/Oz handle ahead of minutes from the Fed’s most recent meeting due for release tonight.
• 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 looks set to decline for the third straight session, falling by as much 1.8% to $16.5832/Oz overnight. The 50-day moving average lies at the $16.50/Oz handle.

Oil

• Crude oil futures expiring in September extended its rebound from the $47/bbl handle, gaining 0.5% to $47.77/bbl earlier today as industry data showed US crude stockpiles extended declines during a period of seasonally strong demand.
• Inventories dropped by 9.2 million barrels last week, the American Petroleum Institute was said to report. If that decline is replicated in government data later today, it would be the biggest since September.
• Meanwhile, output from Libya is rebounding as its biggest oil field boosted production and a port reopened.

USDSGD:

• Spot 1.3679
• USDSGD gained 0.2% to 1.3689 and looks set to rise for the third straight day.
• The key resistance around 1.3700 is likely to be tested soon.

AUDUSD:

• Spot 0.7830
• AUDUSD declined by as much as 0.4% in the session to 0.7808; the pair has since recovered back to 0.7830.
• Market participants will keep an eye out for July’s Australian jobs report tomorrow, as well as the Fed’s minutes of its most recent meeting due tonight.
• From a technical perspective, continued support above the 0.7800 handle should lead to a retesting of the 0.8000 psychological level.

USDCAD:

• Spot 1.2762
• USDCAD extended its rebound further above the 1.2700 handle, gaining 0.3% to 1.2778 earlier on the back of a stronger USD overnight.
• The pair remains on track to extend its recent rebound higher towards the 1.2800 key resistance level.

USDCNH:

• Spot 6.6975
• The PBOC weakened its reference rate for the second day in a row, by 0.13% to 6.6779 per US dollar earlier today.
• USDJPY rose by as much as 0.1% to test the 6.7000 handle earlier today. The previous key-support-turned-resistance of 6.7200 may cap further currency pair gains.

USDJPY:

• Spot 110.65
• USDJPY extended its rebound above the 110 handle, gaining 0.4% to 110.85, following a stronger USD overnight on the back of positive retail sales numbers.
• The sharp rebound from the 109 handle may signal the end of the currency pair’s downtrend, in play since the start of July. The short-term resistance of 111 should be tested soon.

GBPUSD:

• Spot 1.2868
• GBPUSD sank 0.7% yesterday and extended its drop by a further 0.2% to 1.2846 earlier today following yesterday’s weaker-than-expected inflation data, thus reducing expectations of a rate hike by the BOE.
• The next key support resides around the 1.2800 handle.