August 18, 2017

Daily Observations:

Asian stocks remained in the red following a terrorist attack in Spain, coupled with political uncertainty mounting in the US as speculation mounted Gary Cohn, the White House’s economic advisor, might resign. Safe haven assets such as gold and the yen maintained gains.

Terrorism:

• 5 suspected terrorists were shot dead by police and 6 civilians were injured in a town south of Barcelona, hours after 13 people were killed and more than a 100 were injured when a van rampaged down the city’s iconic Las Ramblas avenue. Witnesses said it hit a speed of about 80km/hr, throwing people into the air.

US:

• Industrial production in July rose 0.2% from a month ago, slowing from the 0.4% gain in June and missing out on the median estimate of 0.3%. The capacity utilization rate last month remained at 76.7%, in line with expectations.
• The Philadelphia Fed
• The S&P 500 Index suffered its biggest selloff in three months, falling 1.5%, amid swelling political turmoil that’s seen US President Donald Trump seemingly lose the support of Corporate America, with stocks ending at session lows. All eleven sectors were negative on the day. The Dow Jones Industrial Average fell 1.2% while the tech-heavy Nasdaq Composite slumped 1.9%.
• The slump in equities and jump in volatility were sparked by rumours that top White House economic advisor Gary Cohn, Goldman Sachs’ former chief operating officer, would be exiting Trump’s team. Cohn was reportedly upset with the president’s response to the deadly violence at a white nationalist rally in Charlottesville, Virginia last weekend.
• According to a Bloomberg Intelligence research note, events of the day forced investors to simultaneously consider the consequences of Cohn’s departure for Trump’s economic agenda and who could take his place as the front-runner to run the Federal Reserve once Chair Janet Yellen’s term expires Feb. 3. It would have also added more uncertainty ahead of the imminent debt ceiling and budget debate that risks adversely impacting US financial conditions.
• The US dollar gained overnight, with the Bloomberg Dollar Spot Index rising 0.2% and the Dollar Index maintaining above 93.50. After rising and falling in the past year with the prospects of the US president’s economic agenda, the greenback appears to be reverting to its frequently held role as a refuge during times of turmoil, especially with Trump’s comments on racial politics in the past week.
• According to a Bloomberg article, investors increasingly see Trump’s continued fumbling as a big problem for the prospects of his pro-growth agenda. The recent rise in Trump’s disapproval rating and the dollar’s value, as seen in the chart below, makes that apparent.
  
• US Treasury yields fell overnight; the benchmark 10yr yield gave up 3bps to close at 2.18% in New York, its lowest close in 7 weeks.

Canada:

• Manufacturing sales in June fell 1.8% month-on-month, reversing from a 1.3% rise in May, and falling by more than the consensus forecast of -1.0%.

Europe:

• The euro took a big hit Thursday after the European Central Bank seemed to express some concern that the common currency had become a bit too strong. Specifically, an account of the Governing Council’s July meeting released Thursday showed that “concerns were expressed about the risk of the exchange rate overshooting in the future”.
• Jurien Timmer, Fidelity Investments director of global macro, said on Bloomberg Television that the remarks suggest the ECB may be a bit jealous of the Fed, which has been able to increase rates and still see a decline in the dollar. Either way, this may be a sign that the ECB is drawing a line in the sand regarding the euro, and marking an escalation in the so-called currency wars. No central bank wants to see a rapidly appreciation currency at the same time it’s trying to propel growth.

UK:

• Retail sales excluding auto fuel gained 0.5% month-on-month and 1.5% year-on-year, exceeding forecasts of 0.1% and 1.2% respectively.
• A UK trade deal with the EU after Brexit is desirable but not essential, the Institute of Economic Affairs (IEA) said, in support of Prime Minister Theresa May’s repeated assertion that no deal is better than a bad deal. Britain should walk away from talks on a post-Brexit trade deal if the EU offers bad terms that lead to a protectionist and costly agreement, the IEA added. Instead, it said the country should trade with the EU under World Trade Organization rules, seeking a policy of zero tariffs while brokering free-trade agreements with major trading partners including the US.
• The UK is preparing to give further details of its approach to Brexit next week when it lays out positions in at least 3 different areas that it wants to negotiate with the European Union. Prime Minister May’s government will publish 2 papers on Monday with more expected in the following days, as Britain and the EU gear up for a fresh round of divorce talks at the end of the month, according to people familiar with the plans.

China:

• China home prices rose in fewer cities in July, adding to signs the property market is cooling. New-home prices, excluding government-subsidized housing, gained from the previous month in 56 of 70 cities tracked by the government, compared with 60 in June, the National Bureau of Statistics said earlier today. Prices fell in 9 cities and were unchanged in 5.

Precious Metals:

• Spot gold maintained gains after earlier gaining by as much as 0.3% to $1,289.68/Oz amid ongoing concern for US President Trump’s administration and as a terrorist attack in Barcelona boosted haven demand.
• The short-term support at $1,270/Oz looks to hold for the time-being, as some consolidation is expected between it 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 failed to maintain above its 200-day moving average around the $17/Oz handle, falling 0.7% to $16.9025/Oz earlier today

Oil

• Crude oil futures recovered from its lows to close 0.7% higher at $47.09/bbl in New York, yet still remains on course for a third weekly drop as US output rose to 2-year high and as Chinese refining slowed, signs that the world’s 2 biggest consumers may stymie OPEC-led efforts to trim a supply glut.
• US production gained the most since June, according to government data on Wednesday, blunting the largest decline in stockpiles since September.
• Oil processing in China dropped by the most in 3 years during July, according to figures from the National Bureau of Statistics on Monday.

USDSGD:

• Spot 1.3654
• USDSGD declined 0.2% to 1.3641 as the currency pair continues to consolidate between the 1.3600 and 1.3700 handles.
• The key resistance lies at the 1.3700 level, a convincing break above may lead to further upside with the next resistance lying at 1.3860.

AUDUSD:

• Spot 0.7896
• AUDUSD pared an earlier decline, which saw the currency pair fall by as much as 0.6% to 0.7870, to recover back to the 0.7900 handle.
• According to Bloomberg, a look at bond markets shows that investors have been signalling for a while that the Aussie’s climb to a 2-year high last month might have been overextended. The extra yield that local 10yr notes offer over similarly dated US Treasuries peaked at just under 50bps in mid-July, but the currency kept on appreciating.
  

USDCAD:

• Spot 1.2664
• USDCAD bounced off the 1.2600 handle overnight, rising 0.4% to register a session-high of 1.2691 earlier today.
• The 1.2800 resistance target remains.

USDCNH:

• Spot 6.6845
• The PBOC weakened its reference rate by 0.05% to 6.6744 per US dollar earlier today.
• USDCNH remained little changed earlier, as the currency pair heads for its first weekly gain in six amid a strengthening US dollar and signs of weakness in China’s economy this week.

USDJPY:

• Spot 109.44
• USDJPY extended its previous day’s decline, falling 0.8% earlier to 109.30 amid increased safe-haven buying, following a terrorist attack in Spain and rumours that top White House economic advisor Gary Cohn might resign.
• USDJPY retreated from the 111 handle, falling 1.0% to 109.67 earlier on weakening expectations for the Fed’s third rate increase later this year.
• The key support remains at the 108 handle, last tested in April. The pair has largely ranged between 109 and 115 for most part of the last 5 months. A breakout in either direction could lead to a sustained move that could last until the end of the year.

GBPUSD:

• Spot 1.2887
• GBPUSD looks set to snap a 4-day losing streak, rising 0.3% to 1.2899 earlier today. The pair has been supported around its 100-day moving average of 1.2868.
• The next key support below resides around the 1.2800 handle.