Issue#: 539/2017

Spot values at a glance:







Daily Observations:

Asian stocks kicked off the week with modest gains ahead of key central bank meetings and a looming US-China tariff deadline. Treasuries stabilized after declines. Equity benchmarks were higher from Tokyo to Sydney. Investors are awaiting news on whether the US will go ahead with a planned Dec. 15 tariff hike on Chinese imports. Weekend data showing a drop in Chinese exports underlined the stakes for growth. S&P 500 futures slipped after the index logged gains Friday, when reports showed payrolls jumped the most since January, wages beat estimates and consumer sentiment increased.


China’s Exports in November Drops Unexpectedly:

Total China exports in November dropped 1.1% from a year ago, and to the US they were down 23%, the customs administration said Sunday. That was the worst result for exports to the US since February and the 12th straight monthly decline. Overall shipments had been expected to rise 0.8%, as retailers and companies stock up before the Christmas shopping season.

According to Bloomberg news, the unexpected drop in China’s exports in November shows one reason why the nation wants to agree on a phase one trade deal – US tariffs are hurting China’s exports at a time when global demand is already weak.

About 18 months of tit-for-tat tariffs have damaged both economies, with Chinese companies and American farmers selling less to the other side. When the 2 sides agreed to work on a ‘phase one deal’ in October there was hope that it would lead to a quick resolution of at least some of the underlying issues. However negotiations have stretched out and even if some of the tariffs are removed, both sides will be economically worse off than they would have been without the conflict.

The latest signs from the talks indicate that negotiators are moving closer to an agreement despite some sharp rhetoric and diplomatic spats over Xinjiang and Hong Kong. The US side expects a phase one deal to be completed before the Dec. 15 deadline when new American tariffs on Chinese goods are scheduled to take effect, according to people familiar with the matter. If those tariffs were to go into effect on products like smartphones and computers, it would further damage China’s exports and raise prices for US consumers.


September Repo Blowup:

The September mayhem in the US repo market suggests there’s a structural problem in this vital corner of finance and the incident wasn’t just a temporary hiccup, according to a new analysis from the Bank for International Settlements.

This market, which relies heavily on just 4 big US banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.”And hedge funds are financing more investments through repo, which “appears to have compounded the strains,” the researchers added.

This brings the BIS, the central bank for central banks, into a controversy that has vexed observers for almost three months: Why did the repo market get so bad, so quickly? On Sept. 17, rates on general collateral repo briefly surged to 10% from around 2%. Many, including the Fed, concluded in the immediate aftermath that two transitory events collided: investors used repo to finance the purchase of a large batch of newly auctioned Treasuries at the same time that quarterly corporate tax payments drained liquidity from that market.

Reserves, or cash that banks stash at the Fed, are the easiest asset for banks to tap when they want to quickly move money into repo. And it would’ve been logical for banks to pour cash into repo to get those 10% returns from an overnight loan. The 4 banks that dominate the market hold about 25% of the reserves in the US banking system, but 50% of the Treasuries. That mismatch likely slowed the movement of cash into repo, the BIS researchers postulated.

Volatility in the amount of cash the US Treasury keeps parked at the Fed also affected banks’ reserves. “The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big 4 banks and their willingness to lend into the repo market,” the team wrote.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back.

Some analysts have also pointed to a new corner of the market which has seen immense growth: sponsored repo. This allows banks to transact with counterparties like money-market funds without impacting their balance sheet constraints. The downside is that it’s only available on an overnight basis, and as a result has further concentrated funding risk.

Along with changing market structure, the researchers also connected the repo ruckus to banks being somewhat out of practice in daily reserve management. That’s because trillions of dollars’ worth of Fed asset purchases had left the banking system flush with cash for years.


Central Bank Risks to Rise in 2020:

According to a Bloomberg news piece, after more than 10 years of crisis fighting, coupled with this year’s rush to support global growth, central banks in key economies face a new decade with few good options to fight the next downturn.

Interest rates are either already around historic lows or negative after more than 750 cuts since 2008, spurring concerns they are doing more harm than good. At the same time, leading central banks are buying bonds again after the purchase of more than $12 trillion of financial assets wasn’t enough to revive inflation. With the Fed, ECB and BOJ set to hold their final policy meetings of the year and decade over the coming 2 weeks, the worry is the next 10 years could be their most testing yet.

The mounting fear is that the lacklustre expansions and inflation which have plagued Japan since the early 1990s will now be witnessed globally. Bank of America Corp. analysts are among those warning investors to be alert to “quantitative failure or monetary policy impotence.”

Back in 2009, 10year bond yields, a proxy gauge for estimates of monetary settings, tipped a big rebound for major economies. Instead, yields in Europe and Japan that were expected to surge have gone negative, US yields are about 350 basis points lower than markets had bet and China’s about 130 points lower. Traders today are more cautious, betting on gains of less than 1 percentage point on 10year yields for all 4 regions.

A recent study published by the Peterson Institute for International Economics concluded that while some have remaining ammunition, it’s limited. The Fed could fight a mild but not a severe recession given it has room for stimulus equivalent to a 5 percentage point cut in its benchmark, but the ECB and BOJ have just 1 point’s worth left, it said. Those limitations will be on display in the upcoming meetings. The Fed is forecast to hold steady on Dec. 11. A day later the European Central Bank is expected to stay on hold while the BOJ is also seen treading water on Dec. 19.

Pacific Investment Management Co. last week became the latest contributor to the debate over whether the negative rates witnessed in the euro-area and Japan hurt rather than help. Going below zero squeezes bank profitability and so reduces lending, depresses market returns and by extension consumption, according to the bond giant.

Such spillovers help explain why Fed Chairman Jerome Powell has all but ruled out negative rates for the US despite pressure from President Donald Trump. Reserve Bank of Australia Governor Philip Lowe has done the same. Sweden’s Riksbank made clear it wants to put an end to half a decade of life below zero even as growth slows. China’s policy makers don’t want to make the same mistakes. In a recent essay, People’s Bank of Governor Yi Gang doubled down on a pledge to stick to conventional monetary policy.


Goldman’s Case for Gold:

Goldman Sachs Group Inc. said investors should diversify their long-term bond holdings with gold, citing “fear-driven demand” for the precious metal.

“Gold cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever,” Goldman analysts including Sabine Schels said in a note Friday. “We still see upside in gold as late cycle concerns and heightened political uncertainty will likely support investment demand” for bullion as a defensive asset.

The precious metal climbed to a 6-year high in September as the Federal Reserve cut borrowing costs and the total pile of debt yielding less than zero climbed to a record $17 trillion, boosting the appeal of non-interest bearing gold.

Hedge funds and other large speculators boosted their bullish bets on the precious metal by 8.9% in the week ended Dec. 3, government data showed Friday. That’s the biggest gain since late September. While Goldman said the correction on bullion prices has further room to run, the bank is still sticking to its forecast prices will climb to $1,600/oz over the next year.


Singapore Property Glut:

According to a Bloomberg news report released earlier today, Singapore has a property glut that could take years to clear, threatening to kill a nascent price recovery amid an already uncertain economic outlook.

Singapore’s property market had an overhang of 31,948 units as of Sept. 30, according to the Urban Redevelopment Authority. Sales have averaged about 2,500 homes per quarter this year, and at that rate it will take almost 4 years to clear the backlog, according to Christine Li, head of research for Singapore and Southeast Asia at Cushman & Wakefield Plc.

The glut has prompted developers to call for property curbs to be eased, including lowering the 20% stamp duty for foreign buyers and getting more time to sell apartments before being hit with punitive levies. The over-supply also threatens to push down prices, the city-state’s central bank warned last month.

The glut is more pronounced in outlying suburban areas versus areas closer to downtown, where easy access to top schools, shopping streets and the central business district are drawcards. As of the third quarter, there were 8,917 unsold units in prime districts, compared to 10,538 in suburban areas.

The roots of the current glut, which includes finished apartments and those still under construction, can be traced back to the property boom of 2017-18 and the en-bloc fever that enveloped the city. In an en-bloc sale, a group of owners team up to sell entire apartment blocks to a developer, which then redevelops the site.

“Excessive exuberance” in buying en-bloc sites caused the over-supply, Cushman & Wakefield’s Li said. And it would be “unwise” for the government to bail out developers by easing cooling measures, she said. Instead, stricter limits should be imposed on en-bloc sales to prevent a repeat of the buying frenzy. “If this precedent of a bail-out is set, developers will not exercise restraint in acquiring en-bloc sites in future cycles, flooding the market with supply and relying on the government to rescue them again.”

While residential property prices declined after the government imposed a fresh round of curbs in July 2018, they’ve recently started to creep up again, gaining 1.3% last quarter. As well as winding back hefty stamp duties for foreign buyers and residents buying multiple properties, developers would like to see further concessions, including getting more time to sell projects. To stop land hoarding, developers have 5 years from the time of purchase to build and sell all units at a site, or risk being hit with a 25% levy.


China Orders Removal of Foreign Tech in State Offices:

The Chinese government has ordered state offices and public institutions to remove foreign computer equipment and software within three years, the Financial Times reported.

The move is part of a broader effort to decrease China’s reliance on foreign technologies and boost its domestic industry. The goal is to substitute 30% of the technology next year, 50% in 2021 and 20% in 2022, the newspaper reported, citing estimates from analysts at the brokerage China Securities.

The government under President Xi Jinping has been trying for years to replace technologies from abroad, and particularly from the US. Bloomberg News reported five years ago that Beijing was aiming to purge most foreign technology from its banks, the military, government agencies and state-owned enterprises by 2020.

US President Donald Trump’s aggressive policies against China and its leading companies have given this effort renewed urgency. His administration banned US companies from doing business with Huawei Technologies Co. this year and blacklisted other Chinese firms.

Still, Beijing’s push has proven difficult because its domestic industry hasn’t yet shown itself capable of matching foreign technologies in certain sectors. Particularly hard to replace, for example, are semiconductors from suppliers like Intel Corp. and Nvidia Corp., as well as software from Microsoft Corp. and Apple Inc. The FT reported that the latest order came from the Chinese Communist Party’s Central Office earlier this year. The newspaper said the goal is to use “secure and controllable” technology as part of the country’s Cyber Security Law passed in 2017.


“Japanification” a Risk for Key Developed Economies:

Investors are scanning the world for the next outbreak of stagnant inflation and tumbling yields, following the lead of, first Japan, and then Europe. The malaise of “Japanification” burst into the mainstream this year, leaving in its wake a record amount of negative-yielding debt. Quantitative easing and a low-rate regime in Europe delivered banner returns on the region’s bonds, at the expense of bank profits and retirement savings. Many say it recalls Japan’s lost decade.

Some analysts have postulated that this might happen to the US, with only a plain-vanilla recessions needed to prompt policy makers to succumb to zero yields. While strong labor market data last week eased concerns about an imminent US downturn, the country’s yield curve has already signaled a recession is brewing. If that comes to pass, the Fed could emulate peers in Japan and the euro area by cutting rates to zero and re-introducing QE. Coupled together with the risk of US political gridlock and excess global savings, zero-bound yields could stay for years to come.

It’s a scenario preying on the minds of central bankers. Fed Governor Lael Brainard is even floating the idea of asset purchases to suppress short-to-medium term borrowing costs in a scenario of zero-rate benchmarks. That would be akin to Japan-style yield-curve control.

The gangbusters November US payroll report sent Treasury yields higher but hasn’t dislodged bets the Fed will keep interest rates on hold through at least the first quarter of 2020. With inflation still tepid, Chairman Jerome Powell has as good as ruled out a rate increase.

In Italy, political risk has done little to deter investors predicting that yields may reach 0% next year amid speculation the ECB could take rates down another notch. Meanwhile, bond-market pariah Greece, which faced borrowing costs of 44% seven years ago, now commands rates of just 1.5%.

Negative yields and a deluge of ECB cash have helped relieve stress in the euro-zone’s shakiest members, but also made it harder for the region’s banks to squeeze out a profit. Pension savings are also at risk, creating an increasingly vociferous backlash.

And yet, another two holdouts among developed markets, the UK and Australia, could also soon capitulate to zero or sub-zero yields. Australia’s central bank may be set to join the ECB and Bank of Japan down the once unthinkable route of QE after cutting its benchmark to a record low of 0.75%.

In Britain, the tipping point could be a no-deal exit from the European Union, according to Citigroup Inc. While a Conservative majority at the upcoming election on Dec. 12 would likely see a divorce deal passed next year, there is still the chance of a cliff-edge exit at the end of 2020.


FX Updates:


Spot: 1.3606

USDSGD hovered near a 1-month low earlier today, just around its 1.3600 handle, as investors await the Fed’s policy decision this week. The failure to hold above its 200-day moving average (200dma) of 1.3670 earlier this month has opened up the way lower for USDSGD. A break below 1.3600 could lead to a lower target of 1.3560, last tested in early-November.



Spot: 0.6831

AUDUSD’s failure to add onto last Tuesday’s rally could mean a retracement back to 0.6800 could be on the cards this week. The Aussie’s strength last week was largely due to widespread optimism the US-China phase-one deal would be inked soon. However, recent Australian economic data has been poor: GDP growth missed forecasts for the third quarter, retail sales stalled in November and capex extended its losing streak. This puts more pressure on the RBA for more quantitative easing going into 2020. The key support below remains at 0.6670.



Spot: 1.3259

USDCAD gained the most last Friday since October, following an unexpected weakening in Canada’s job market. The economy lost 71,200 jobs in November, following a decline of 1,800 in October, and missing the forecast of a 10,000 gain. The employment rate rose to 5.9% in the month, from 5.5% in October. The Bank of Canada could tone down its recent optimistic view on the economy and adopt a more dovish approach next year. All eyes will be on Governor Poloz when he speaks on Dec 12. A retest of the 1.3300 handle is expected this week.



Spot: 7.0338

USDCNH is poised to snap a 3-session losing streak, gaining 0.1% to 7.0338 earlier today. Trading in the yuan remains muted as investors await the next development in the US-China trade dispute. The onshore yuan’s 60-day historical volatility fell to the lowest since August 2017. China reported over the weekend an unexpected drop in November exports, providing it with a reason to hammer out a phase-one trade deal. The path of least resistance remains to the downside, a break of 7.000 could result in a sharp drop back to the 6.8260 support level.



Spot: 108.60

USDJPY was little changed earlier today after completing its biggest weekly gain last week since early October. The yen’s reaction to earlier upbeat Japanese growth figures were muted at best. Yen traders could be adopting a cautious tone key Fed and BOJ rate decisions over the next 2 weeks. A break above 109, which happens to be the pair’s 200-day moving average as well, is likely to lead to a run up back to the next resistance level at 110.63.



Spot: 1.3144

GBPUSD lingered near a 7-month high, following its pre-election rally last week. Weekend polls suggest the ruling Conservatives continue to hold top positions across all major surveys. However, Labour seemed to have cut the lead in some of the polls. From a technical point of view, a pullback for GBPUSD should occur soon, possibly to 1.3000, although the longer-term bias remains to the upside.



Sources: Bloomberg

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UEN: 201419754M

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