August 3, 2017

Daily Observations:

Asian equities fell after surging to the highest level in almost 10 years, with investors assessing the strength of company earnings before US nonfarm payrolls, due on Friday, which is expected to provide more clues on the health of global growth. The US dollar reversed its overnight weakness, while gold and crude oil fell.

Geopolitics / Trade Wars:

• US President Donald Trump is considering additional sanctions against Venezuela after freezing the assets of President Nicolas Maduro, who recently showed his intolerance for dissent by arresting opposition politicians. One major option includes curtailing crude imports from the petrostate.
• On Wednesday, Trump signed a bill imposing sanctions on Russia as punishment for meddling in the US presidential election, as well as others on Iran and North Korea, while calling the Congressional legislation “significantly flawed.”
• On North Korea, which has claimed the ability to strike any part of the U.S. with its intercontinental ballistic missiles, some experts fear it may be too late for sanctions to effectively deter the regime’s military ambitions.
• US officials are gearing up to investigate China over what the administration perceives to be violations of intellectual property, said a government official who spoke on condition of anonymity on Wednesday because the probe hasn’t been announced. The administration is considering having the US Trade Representative’s office investigate the matter under section 301 of the Trade Act of 1974, the New York Times reported, which allows the president to impose tariffs to protect US industry from foreign countries’ unfair trading practices.

US:

• The ADP employment change for July fell to 178,000, from 191,000 in June; the median estimate was 190,000. June’s figure was revised upwards to 191,000 from 158,000.
• Federal Reserve Bank of Cleveland President Loretta Mester is keeping the faith that weak inflation will bounce back, even as she lowers her estimate for where unemployment begins to trigger higher prices. In a speech, Mester said inflation’s recent softness had convinced her to lower her estimate for the level at which unemployment begins to promote faster price increases, to 4.75% from 5%. Unemployment was 4.4% in June, just off a 16-year low set in May.
• The Fed’s San Francisco President John Williams said next month’s FOMC meeting “would be an appropriate time” to announce details of the central bank’s balance-sheet normalization. He added that’s consistent with what policy makers have been communicating throughout the year, not an acceleration.
• In an interview with the Wall Street Journal published Wednesday, Boston Fed President Eric Rosengren signalled he, too, might support a balance-sheet announcement at the Sept. 19-20 gathering. With the federal funds rate target range well above zero, “there’s no reason to have that extraordinary accommodation coming from the balance sheet any longer,” he said.
• The US dollar weakened to new multi-month lows last night but rebounded rather quickly heading into Asia’s open; the Bloomberg Dollar Spot Index and the Dollar Index both registered fresh 15-month lows.
• The benchmark 10yr Treasury yield rose 2bps to 2.27% in New York, after Fed officials hinted more details regarding the central bank’s balance sheet normalization may be revealed next month.
• The Dow Jones Industrial Average (+0.24%) broke above 22,000 for the first time ever Wednesday, buoyed by Apple Inc.’s impressive quarterly results released after the prior day’s close. The S&P 500 Index (+0.05%) and Nasdaq Composite (+0.00%) were virtually flat on the session.

Canada:

• The Markit Canadian manufacturing PMI gained to 55.5 last month, from 54.7 in June.

Europe:

• The euro briefly rose through 1.1900 against the USD on Wednesday for the first time since the start of 2015 and rising from as low as 1.0570 in April when the rally started. The gains have been broad-based, as evidenced by the Bloomberg Euro Index rising 8.74% this year, putting it on track to reverse a string of 3 straight annual declines.
• Although much of the euro’s strength is a function of the dollar’s weakness, there’s no denying that the euro zone economy is gathering pace. Eurostat data Tuesday showed the economy expanded 2.1% in the second quarter from a year earlier, the fastest pace since 2011. According to Bloomberg news report, a stronger euro could start to bite into the profits of European exporters, and there are signs that analysts are starting to temper their earnings estimates as a result.

UK:

• Moody’s raised the outlook on the nation’s banks to stable from negative, according to a report Wednesday. Strong capital positions, loan quality and funding should underpin profitability even as the economy slows, while additional costs associated with preparing for Brexit will be “moderate,” it said. Moody’s findings contrast with a report this week by Oliver Wyman Inc., which said lenders may need to find as much as $50 billion of additional capital to support new European units if there is a hard Brexit.
• UK construction growth slowed to the weakest in almost a year in July. The construction PMI fell to 51.9 last month, from 54.8 in June, missing out on the median consensus of 54.0.
• The BOE is due to release its monetary policy decision later today. The MPC kept rates unchanged when it last met in June, but the split vote suggested that some members were worried about the risk of persistent inflation overshoot, according to economists at Bloomberg Intelligence.

Japan:

• According to a Bloomberg news report, an increasing number of economists forecast that Japan’s consumer prices will not only fail to meet Bank of Japan’s target, but that they will peak as soon as this autumn, in stark contrast with the view from Governor Haruhiko Kuroda and his policy board. Inflation is expected to top out at 0.8% in the fourth quarter this year, according to the median projection compiled by Bloomberg. With energy prices expected to be flat, some analysts see that coming even earlier.
• The Nikkei PMI services gauge in July fell to 52.0, from 53.3 in June. PMI composite declined as well, down to 51.8, from 52.9 in the month prior.

China:

• The Caixin PMI services for July ticked lower to 51.5, from 51.6 in June. However, the PMI composite gauge rose to 51.9, from 51.1, over the same period.

Singapore:

• The Nikkei Singapore PMI in July rose to 51.3, up from 50.7 in July.

Precious Metals:

• Spot gold fell by as much as 0.8% to $1,257.02/Oz earlier today, although it has since recovered back above the $1,260/Oz support, as investors await Friday’s US jobs report. A positive report could further bolster the case for another interest-rate hike this year.
• On a longer-term basis, spot gold is currently testing a key downward multiyear trendline, in play since 2011. An upward move above the $1,280/Oz handle should confirm the break above the trendline and signal the start of a reversal.
• Silver for immediate delivery extended a previous session drop, after it had failed to test the $17/Oz handle on Wednesday, slumping 1.1% to $16.4775/Oz earlier.

Oil

• Crude oil futures expiring in September rose 0.9% to $49.59/bbl in New York, but halted gains during Asia trade earlier today, paring 0.4% as investors weigh resurgent US output against declining crude and gasoline stockpiles.
• Data showed US output rose while crude inventories fell by less than analysts expected; however, demand for gasoline was immense, fuelling a sizeable decline in product stockpiles.
• The shale surge that’s tied down global oil prices shows no signs of abating, as 4 of the biggest US drillers said this week that they’re not backing away from lofty production targets for 2017. In second-quarter earnings reports, EOG Resources, Devon Energy, Newfield Exploration and Diamondback Energy all outlined goals that would help push US output toward a record 10 million barrels a day next year. The US drillers said they’re getting more efficient, allowing them to raise production goals without boosting spending.

Solar Energy:

• Home retailer IKEA of Sweden AB said it would start selling batteries for rooftop solar panels in the latest sign that once-costly storage technologies are becoming mainstream. The Solar Battery Storage system was announced in partnership with UK panel provider Solar Century Holdings Ltd. on Wednesday, providing potential savings on electricity bills by enabling users to use stored solar power when the sun is down and power grid costs are high.
• Tesla has completed its first solar roof installations, the company reported Wednesday as part of a second-quarter earnings report. Just like the first Model 3 customers, who took their keys last week, the first solar roof customers are Tesla employees. By selling to them first, Tesla says it hopes to work out any kinks in the sales and installation process before taking it to a wider public audience.
• The company has been adopting an Apple Store strategy for solar power since acquiring SolarCity Corp. last year for $2 billion. The idea is to cut down on the high price associated with actively identifying new customers, and instead attract them passively through its upscale auto stores in shopping malls and other high-traffic locations. Initial trials found the new approach was 50 to 100 percent more effective than at the best non-Tesla locations selling SolarCity products. Tesla halted SolarCity’s door-to-door sales earlier this year and is staffing up more than 70 stores for solar sales.

USDSGD:

• Spot 1.3605
• USDSGD rose by as much as 0.2% to 1.3618, and looks poised to notch a third straight session of gains.
• 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 is more likely.

AUDUSD:

• Spot 0.7930
• AUDUSD extended a previous day’s decline below the 0.8000 resistance, falling 0.6% to 0.7915 earlier today, ahead of Friday’s release of an RBA statement. Analysts are predicting further elaboration on comments made earlier this week that a rising Aussie dollar will subdue inflation and hurt growth and employment.
• The next resistance target resides at the 2-year high of 0.8164, while to the downside, 0.7875 is expected to provide support.

USDCAD:

• Spot 1.2592
• USDCAD is poised to gain for a fourth consecutive session after the pair earlier rose 0.4% to 1.2596, its highest level in almost 2 weeks.
• The pair has been well supported above the 1.2400 handle. A break above 1.2600 and the pair could extend its rebound higher towards the 1.2800 key resistance level. ,

USDCNH:

• Spot 6.7329
• The PBOC kept its reference rate little changed at 6.7211 per US dollar earlier today.
• USDCNH extended its rebound from its lowest level since October last year, gaining 0.1% to 6.7371.

USDJPY:

• Spot 110.70
• USDJPY was little changed on the day, as the currency pair continues to maintain above its 110 support, following a 3.8% decline over the past 3 weeks. A rebound back to 112 is expected to be likely.
• Further downside should be capped by the base of a rising wedge pattern, established since April, at around 109.50.

GBPUSD:

• Spot 1.3217
• GBPUSD retreated from more than a fresh 10-month high reached last night, falling 0.2% to 1.3209 earlier today.
• All eyes will be on the BOE’s policy decision due later today. The next resistance target is at 1.3450.