August 22, 2017

Daily Observations:

Asian equities rose amid low trading volumes as investors reassessed positions ahead of a key meeting of central bankers in Jackson Hole this week. The US dollar and crude oil held onto overnight losses, while gold pared most of its advance earlier today.

Geopolitics:

• North Korea warned the US on Tuesday it will face “merciless revenge” for ignoring Pyongyang’s warnings over annual military drills with South Korea. The isolated nation said it would be a misjudgement for the US to think that North Korea will “sit comfortably without doing anything,” the state-run Korean Central News Agency said, citing an unidentified military spokesman.

US:

• Republican Senate Majority Leader Mitch McConnell sought to reassure nervous bondholders that the US will always pay its debts, saying that there is “zero chance” that Congress won’t raise the nation’s statutory borrowing limit before it’s breached this autumn. Treasury Secretary Steven Mnuchin, for his part, said his desire was for a “clean raise” of the debt ceiling rather than one that was tied to decreases in government expenditures.
• A group of investors and banks known as the Treasury Borrowing Advisory Committee, which counsels the government on its funding and the economy, has highlighted the risks posed in reducing the Fed’s $4.5 trillion balance sheet. Companies’ borrowing costs might rise by 1.35% relative to Treasuries, according to the committee’s presentation to the Treasury, and those higher funding expenses could weigh on stocks. On the debt side, US high-grade companies have already sold about $1 trillion of bonds this year, and are on track to break last year’s issuance record. Junk bond yields, at just 5.8%, are near all-time lows.
• The S&P 500 Index pulled out of the red late in the day to eke out a slight gain (+0.12%), breaking a two-session losing streak. Defensive sectors outperformed. The Dow Jones Industrial Average (+0.13%) rose as well, but the Nasdaq Composite (-0.05%) ended up in the red.
• The tide seems to have turned for US small caps stocks. According to a Bloomberg report, the Russell 2000 Index has pared its 21.4% gain since Trump’s election victory and is now almost flat on the year as White House turmoil has led investors to question whether any of Trump’s pro-growth polices will come to fruition.
  
• What makes this downturn concerning is that that so-called smart money can’t get out fast enough. Large speculators turned more bearish on smaller companies in 8 of the last 9 weeks, with net short positions in Russell 2000 index mini futures reaching levels not seen since November 2009, according to Bloomberg News’s Lu Wang.
• Ray Dalio said he’s “tactically reducing risk” because he’s “concerned about growing internal and external conflict leading to impaired government efficiency. In a LinkedIn post overnight, Dalio wrote that politics “will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937”.
• The US dollar weakened against all of its G-10 peers; the Bloomberg Dollar Spot Index shed 0.3%, while the Dollar Index fell 0.4% to the 93 handle. Money managers in a Bank of America survey last week labelled shorting the dollar as the second-most overcrowded bet across markets, after speculators amassed the biggest net-short position on the dollar in more than 4 years, CFTC data show.
  
• The benchmark US 10yr Treasury yield rose 1bp to 2.19% earlier today, erasing a decline to 2.18% in New York.

Europe:

• European stock investors and strategists are predicting a pickup in the region’s equities, saying the worst of the drag from a rising euro may be coming to an end, according to Bloomberg news. Strategists have boosted their year-end forecasts for European gauges in August, predicting an upside of 5.8% for the Euro Stoxx 50 Index from Monday’s close. Notwithstanding recent stock declines, money managers have piled into the region’s equity funds for 20 of the past 21 weeks, according to Bank of America Merrill Lynch citing EPFR Global data.
• A loss of momentum in the euro’s rally against the dollar, coupled with earnings growth and an improving economy, will boost equities through the rest of the year, investors say. Minutes last week from the ECB’s latest meeting showed officials worried that the single currency may strengthen more than justified, dragging the euro lower and sparking speculation of slower stimulus tapering.

Australia:

• Prime Minister Malcolm Turnbull’s government could collapse if a court rules that three of his lawmakers with dual citizenship are ineligible to hold office. The High Court will begin hearings on Thursday to interpret a 117-year-old law that bars dual nationals from sitting in parliament. Deputy Prime Minister Barnaby Joyce and two other Cabinet ministers are among 7 lawmakers caught up in the fiasco that’s sparked incredulity even in a nation that’s grown used to political turmoil.

Base Metals:

• Industrial metals extended their longest weekly rally in 3 years, with nickel pacing gains and zinc touching the highest in almost a decade amid a combination of faster global economic growth, a weaker dollar and shrinking supplies. An index of the 6 main metals traded in London climbed for a sixth straight week on Friday, the longest such rally since April 2014.
• Nickel jumped as much as 3.4% in London as Japan’s top refiner said it expects a larger global shortage. Most of the main contracts on the LME rose, with copper touching the highest since 2014.

Precious Metals:

• Spot gold erased most of its overnight gain to fall back below the $1,290/Oz handle earlier today, after reaching an intraday high last night of $1,293.85/Oz.
• The short-term support below at $1,270/Oz looks to hold for the time-being; some consolidation is expected between it and the key psychological $1,300/Oz resistance as investors eye a the key annual gathering of global central bankers later this week in Jackson Hole, Wyoming.
• The precious metal has recently broken above a key downward multiyear trendline, in play since 2011. A breach above the $1,300/Oz handle should confirm the breakout and signal the start of a new long-term upward trend.
• Gold has rallied 11% in 2017, compared to a 10% slump in crude oil. That divergence in price may still be going, meaning gold should continue to outperform oil before the 34-month cycle ends, according to Bloomberg News citing a study of past trading patterns for the two assets.
  
• Silver for immediate delivery declined 0.3% earlier to $16.9703/Oz, failing to hold above its 200-day moving average of $17.0396/Oz.

Oil

• Crude oil futures pared most of Monday’s rally to decline 2.3% to $47.37/Oz last night, before a US government report due later today is forecasted to show inventories probably dropped by about 3.5 million barrels last week, due to a period of seasonally strong demand.
• Libya has stopped loadings from its biggest oil field in the latest disruption to the OPEC nation’s crude production and shipments.

USDSGD:

• Spot 1.3613
• USDSGD slid 0.2% to 1.3601 and looks poised to end lower for the fourth consecutive session, following overnight USD weakness.
• 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. To the downside, a decline back below the 1.3600 handle should lead to a retest of the 10-month low of 1.3543.

AUDUSD:

• Spot 0.7936
• AUDUSD gained by as much as 0.3% to 0.7951 earlier this morning before paring back some of its gains.
• The pair has been lifted by metal prices on the rise, or more specifically, iron ore’s 2.6% gain overnight.

USDCAD:

• Spot 1.2559
• USDCAD fell 0.3% to 1.2550 this morning, reversing Monday’s gain and registering a fresh 2-week low.
• The pair has failed to recover back above the 1.2600 handle, and a retest of the 1.2400 support is possible. The 1.2800 resistance target remains.

USDCNH:

• Spot 6.6652
• The PBOC strengthened its reference rate by 0.17% to 6.6597 per US dollar earlier today, its strongest fixing in 11 months.
• USDCNH declined 0.3% to 6.6619 earlier, and is in danger of falling to fresh 11-month lows as the USD continues to exhibit weakness.

USDJPY:

• Spot 109.27
• USDJPY rose 0.2% to 109.34, as the pair continues to be supported above the 109 handle.
• Despite USD weakness, the currency pair looks set to snap a 3-day losing streak as Tokyo-based funds sold yen to buy dollars amid speculation the greenback will be boosted by comments from central bankers at the Jackson Hole meeting this week.
• 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 1.2888
• GBPUSD continues to remain capped below the 1.2900 handle, after shedding 0.2% to 1.2878 earlier. The sterling pound continues to be weighed by uncertainty surrounding the next round of Britain-EU talks due by month-end.
• The next key support below resides around the 1.2800 handle.