Issue#: 437/2017

Spot values at a glance:







Daily Observations:

Investors got a reprieve from the recent turmoil with Asian stocks recovering from their worst weekly rout since 2011 as volatility swept global markets. The dollar declined against most major peers, while oil and gold gained. However, investors are awaiting US CPI data out Wednesday with nervousness. Pressure on equities has been emanating from the Treasury market, where yields spiked to a 4-year high amid concern the Fed may accelerate its rate-hike schedule.


Markets Remain on an Edge:

Investors are bracing for another bumpy ride this week after volatility returned with a vengeance, delivering the biggest rout in Asian stocks since 2011. While US stocks ended their worst week in 2 years in the green on Friday, fears of interest rate hikes that pushed markets into a correction persist. The Cboe Volatility Index ended almost 3 times higher than its Jan. 26 level, with the S&P 500 Index tumbling 5.2%.  10yr Treasury yields finished the week at 2.85%, near where they started, after pushing as high as 2.88%. This week’s US inflation report may be the next catalyst for the tug-of-war between stocks and bonds that underlies the market turbulence.


Rates May ‘Spike’, Warns US Budget Director:

The US will post a larger budget deficit this year and could see a “spike” in interest rates as a result, but lower deficits are possible over time based on sustained economic growth from Donald Trump’s tax cuts, said Budget Director Mick Mulvaney. Speaking on Fox News a day before the White House is expected to release 2019 spending proposals, Mulvaney said “this is not a fiscal stimulus; it’s not a sugar high”.

In a separate interview on CBS News, Mulvaney said rising budget deficits are “a very dangerous idea, but it’s the world we live in.” His comment echoed Trump’s Feb. 9 tweet that Republicans “were forced to increase spending on things we do not like or want” to secure Democratic votes for the sharp buildup in military spending wanted by the White House and the Pentagon.

Mulvaney said the OMB is updating the 2018 budget released last year and its 2019 request, due Monday, in response to the 2-year budget deal the president signed into law on last Friday. That agreement, which ended an hours-long partial government shutdown, boosts government spending by almost $300 billion but could also increase the deficit to about $1.2 trillion in 2019 and trigger a spike in interest rates.

US Treasury yields have been rising in recent weeks on worries that inflation is heating up as the spending package juices an economy already souped up by tax cuts and at or near full employment.


Kim Exploits Trump-Moon Divide:

North Korean leader Kim Jong Un has made a dramatic gesture that may raise prospects for easing tensions on the Korean Peninsula by inviting South Korean President Moon Jae-in to meet in Pyongyang. The invitation was verbally delivered by Kim’s sister, Kim Yo Jong, during a Saturday meeting at Moon’s presidential compound in Seoul a day after the opening ceremony for the Winter Olympics in South Korea. A Moon-Kim summit would mark the first time leaders of two countries have met in 11 years.

While a summit in Pyongyang would signal warming ties on the peninsula, it also risks driving a wedge in the alliance between the US and South Korea. President Donald Trump has sought to maximize pressure on North Korea to convince Kim to give up his nuclear weapons, and his administration hasn’t ruled out a pre-emptive attack.


Dalio Shorting EU Equities:

Bridgewater, the world’s biggest hedge fund firm run by billionaire investor Ray Dalio, has more than quadrupled the amount it’s betting against EU companies in just a week. According to EU regulatory filings, the firm has at least $13.1 billion in shorts, up from $3.2 billion on Feb. 1. It also more than doubled the number stocks it’s shorting to 44 from 20.

Bridgewater in the past week put more than $1 billion to work betting against oil giant Total SA, making it the firm’s largest disclosed short holding in Europe. The energy titan has been riding out the biggest industry downturn in a generation by selling assets and cutting spending. The hedge fund also started a bearish Airbus SE position, investing about $381 million against the aircraft maker. Among other short positions, it disclosed wagers against BNP Paribas SA, ING Groep NV and Banco Santander SA.

Bridgewater has been building positions against Italian banks and insurers ahead of the March election, which is widely expected to produce no clear winner, hindering the country’s ability to produce economic reforms.


Canadian Labor Market Contracts:

Canada suffered its biggest monthly job loss since the last recession in January, as employers faced quickening wage gains. 88,000 jobs were shed last month, a sharp drop from December’s 64,800 gain which itself had been revised lower. Economists had predicted a gain of 10,000. The drop reflected a record loss of 137,000 part-time jobs, and a 49,000 gain in full-time work.

The employment drop coincided with an increase in the minimum wage in Canada’s largest province, Ontario. That fuelled an acceleration of the national wage rate to an annualized pace of 3.3% that was the fastest since 2015.

The report is a long-waited correction in a tightening labor market that is more consistent with an economy that has been slowing down since the second half of last year. While the unemployment rate increased to 5.9% in January, it’s still near its record low of 5.8% and the faster wage gains may give policy makers at the Bank of Canada more fodder to worry about inflation.


Australian Banks Under Scrutiny:

Australia’s banks, rocked by years of scandals and wrongdoing, risk having further misconduct exposed as a powerful government-appointed inquiry into the nation’s financial industry starts. The year-long Royal Commission will examine the nation’s banks, insurers, financial services providers and pension funds, and consider whether regulators have enough power to tackle misconduct.

The hearings, expected to begin in March, will look specifically at lending practices in the big profit centers of mortgages, car loans and credit cards and whether consumers have been treated honestly and fairly. Anger over bank conduct has grown as evidence of wrongdoing mounts – from rigging interest rates and ripping off customers, to allegations Commonwealth Bank of Australia breached anti-money laundering and terrorism financing laws more than 50,000 times, even as lenders rack up record profits.

The inquiry is also set to focus on bank profitability. In a background paper published Feb. 9, the commission said the big banks have posted fatter profit margins and higher return-on-equity than smaller lenders, and Australian banks are comparatively more profitable than peers in Canada, Sweden, Switzerland and the UK.


How Higher Yields Can Derail a Stock Market Rally:

According to a Bloomberg View article, concern is mounting that the Treasury market’s travails are becoming an inescapable portent for stocks. Below are some reasons why spiking yields can be adverse for stocks:

  • Earnings yield. A major selling point for equities since the financial crisis has been the higher yield of equities versus fixed income, with earnings considered the “yield” of a share of stock. The S&P 500’s annual profits are currently about 4.3% of the index’s price. Generally investors feel safe when that number is comfortably above Treasury rates by about 1.5 percentage points. The rise in bond yields has narrowed the spread to the smallest in 8 years.
  • Net present value. To put it simply, today’s value of future earnings goes down as interest rates go up, thus making stocks more overvalued, and the risk-free payout of a bond in, say, a year, becomes more competitive. Once yields rise to a certain level, stock investors begin to get attracted to low-risk bond yields instead of higher-volatility stock investments.
  • Servicing debt. Higher rates may raise corporate expenses which includes debt costs, which in turn can shrink net income and compress margins.
  • Global end of easy money. The Fed isn’t the only one normalizing policy. The ECB has reduced its monthly asset-purchase target and hasn’t decided whether to extend buying after September. German 10yr bund yields went from 30 to 77 basis points over the past 2 months. The correlation between German and US 10yr notes stands at north of 0.6. Rising yields in Germany has already caused the nation’s benchmark equity index to drop for 7 out of the past 10 weeks. Central banks in Canada and the UK have also indicated hawkish tilts in their policy statements.



FX Updates:


Spot: 1.3260

USDSGD gained for a second consecutive week last Friday, rising to an intra-week high just shy of 1.3350. The long-term trend remains to the downside, nevertheless, with the pair failing to gain pass the previous support-turned-resistance level of 1.3350.

The downtrend is expected to continue to hold this week. Gains in USDSGD is likely to be capped around 1.3400, while to the downside, the psychological support of 1.3000 remains.

December retail sales, January NODX and 4Q GDP numbers are all due to be reported this week.



Spot: 0.7823

AUDUSD declined back below its 200-week moving average last week, amid a strengthening USD. The pair’s direction is likely to be headed lower if the 0.7750 support gets broken soon. The support trend line since 2016 could possibly buoy the currency pair around the 0.7600 handle.

The Australian jobs report due on Thursday is likely to be a major driver of moves this week.



Spot: 1.2565

USDCAD stopped short of recovering above its 200-week average on Friday, following a jobs report which showed the fastest gain in wages since 2015, thus boosting speculation that the Bank of Canada could a adopt a more hawkish approach in tackling inflation.

The currency pair is expected to pare some of last week’s gains this week. A decline back to the year-to-date low of 1.2250 is likely over the medium term.



Spot: 6.3084

USDCNH continues to fluctuate just above its 6.3000 handle. The pair on Friday had reversed Thursday’s gains, and essentially ended the week unchanged. Having broken its 200-week average for the first time since 2015 earlier last month, the momentum for USDCNH continues to stay to the downside. A convincing break below the recent low of 6.2557 is likely to lead to a quick drop to 6.2000.



Spot: 108.74

USDJPY looks poised to test the 108 handle again this week. The support has been holding out well over the past year; as such a break below it is likely to trigger a sharp fall in USDJPY to 105 in the coming months. Should market volatility persist, more investors could start seeking safe haven refuge in the Japanese yen, driving the pair below the 108 support. 110.50 provides near-term resistance to the upside.



Spot: 1.3843

GBPUSD corrected back below 1.4000 last week, although the pair’s trend remains on the up. The support around 1.3650 is expected to hold. GBPUSD is projected to regain back above 1.4000 with the 200-week moving average at 1.4350 a potential target for sterling bulls.

A potential banana skin continues to be Brexit developments. The pound had its worst week last week since October after EU’s chief negotiator Michel Barnier said a Brexit transition was not a given.


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