February 26, 2018

Daily Observations:

Asian equities rose, extending a 2-week global rally, after US stocks posted strong gains last Friday and Treasury yields steadied. US monetary policy is back in focus with two appearances from Federal Reserve Chairman Jerome Powell this week. The dollar declined against its major peers, while gold climbed.

Xi’s Rule Set for Longer Term:

The Communist Party is set to repeal presidential term limits in a move that would allow Xi, who is also party leader and commander-in-chief of the military, to rule beyond 2023. The party’s Central Committee announced Sunday that it was seeking to strike a constitutional provision barring the head of state from serving more than two consecutive terms. The move dispenses with the orderly succession system China adopted in the aftermath of Mao Zedong’s chaotic rule. It also draws comparisons with Vladimir Putin’s successful effort to consolidate control over Russia’s post-Soviet democracy.

Speculation that Xi might seek to stay on has intensified since he declined to set out a clear successor at the party’s twice-a-decade leadership reshuffle in October. But the constitutional amendment represents a formal break from the succession practices China set up to establish stability and facilitate its economic revival after the tumult of the Mao era.

The announcement comes just a week before China’s rubber-stamp parliament, the National People’s Congress, meets with an agenda that includes confirming Xi’s second term and approving a series of constitutional changes recommended by the Central Committee.

Goldman Says Stocks May Correct 25% if 10yr Yield Rises to 4.5%:

Goldman’s base-case scenario calls for a 10yr yield of 3.25% by the end of 2018, though a “stress test” out to 4.5% indicates such a move would cause stocks to tumble by 20% to 25%, economist Daan Struyven wrote in a note Saturday. He also said the economy would probably suffer a sharp slowdown but not a recession.

The benchmark 10yr yield is currently lower at around 2.86%, after retreating from its multi-year high of 2.95% reached last week.

Powell Set to Testify:

New Fed Chairman Jerome Powell will testify on the economy before Congress and the House this week. It’ll be the first time since Powell was sworn in that bond traders get a chance to parse every word from the new Fed leader, as they did with his predecessors. With an economy that the Fed says may already be beyond full employment, inflation showing signs of life, and fiscal stimulus on top of that, it may be a struggle for Powell to tamp down optimism and avoid sounding overly hawkish.

Some strategists are already bracing for a more aggressive Fed and for further bond-market losses ahead, even though the benchmark 10yr Treasury yield fell last week on a weekly basis for the first time all year. Treasury yields have climbed so quickly so far this year that some analysts are already reviewing their projections for the year. Bank of America Corp. last week raised its 10yr yield forecast for year-end to 3.25% percent, from 2.90%. Goldman Sachs Group Inc. boosted its estimate for the end of 2018 to the same level, and indicated that 5 rate increases this year is a “low probability”; the bank sees 4 in 2018 and another 4 in 2019.  As of now, Fed policy makers only anticipate moving 3 times this year and 2-3 times next year.

Trump Favors Steel Tariffs:

President Donald Trump has told confidants that he wants to impose the harshest tariffs on steel and aluminum imports recommended by the Commerce Department, according to three people familiar with the matter, Bloomberg news reported.

Trump has said he wants to slap a global tariff of 24% on steel imports, the most severe of 3 options presented to him in a report in January. He’s also considering as much as a 10% duty on all aluminum entering the US, which would be more than 2.5 percentage points higher than the harshest of Commerce’s recommendations.

Tariffs on such widely used commodities could spark retaliation from nations including China and allies like Canada, while potentially raising prices on everything from cars to beer cans. Some political analysts and economists have speculated the president would take a targeted approach to the tariffs, and he’s under pressure from members of his own Republican party to refrain from measures that may antagonize other countries and disrupt supply chains.

Weekly Thematic News:

Water:

Water scarcity made worse by climate change is a growing issue worldwide, and no place knows that better than Cape Town, the South African city contending with the worst drought on record. According to Sisa Ntshona, CEO of South African Tourism, the city’s tools for reducing water consumption, though, could be used around the world to preserve limited resources.

He added that world class cities such as Los Angeles, Beijing and Sao Paulo, are going through the same thing and a lot of them have had to put in water restrictions. Currently the world is looking at Cape Town to build some form of a playbook to use in response to a water crisis.

Water scarcity is becoming an increasingly pressing problem for countries and is predicted to come under greater focus in the future. Investors can seek to profit from iAdvisor’s water-themed portfolio, which includes companies that derive revenues from activities like water distribution, water infrastructure and water purification. The portfolio has returned 19.6% over the past 12 months.

FX Updates:

USD/SGD:

Spot: 1.3178

USDSGD retreated back below 1.3200 earlier today, paring some of the last week’s gain. The long-term trend continues to remain to the downside although the pair failed to make a lower low last week, indicating that consolidation between 1.3000 and 1.3340 over the near future is likely possible.

AUD/USD:

Spot: 0.7863

AUDUSD continues to be supported strongly at the 0.7800 handle, rebounding off it last week for the third time in a month. The currency pair’s 200-day and 200-week moving averages fall around 0.7800 as well, indicating strong support within the region.

USD/CAD:

Spot: 1.2629

USDCAD failed to close above its 200-week moving average of 1.2650 last Friday, signalling a retreat back to 1.2500 is possible this week. Following news that Trump is favouring imposing tariffs on widely-used commodities such as steel, the Canadian dollar could potentially weaken further against its US counterpart over the next few days.

USD/CNH:

Spot: 6.3184

USDCNH continues to fluctuate just above its 6.3000 handle. The pair on Friday had reversed Thursday’s gains, but still managed to close higher for the week. 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.

USD/JPY:

Spot: 106.57

USDJPY’s failure to regain above 108 last week may have set a more bearish tone for the week ahead. The pair was lower today, sliding below 107 earlier this morning despite BOJ Governor Kuroda stressing the need for continued powerful easing.

The pair looks poised to test the 105.55 low again this week. After breaking last week to the downside of its 2017 sideways range, USDJPY is slated to test 102.50 over the next 12 months.

GBP/USD:

Spot: 1.3998

GBPUSD continues to trade around its 1.4000 handle, gaining slightly earlier today from Friday’s close. Over the weekend, BOE Deputy Governor Dave Ramsden was coming with hawkish rhetoric in an interview where the Sunday Times newspaper reported him changing his outlook for rates, switching from a dove to a hawk after he said that he sees “case for rates rising somewhat sooner rather than somewhat later,” after previously voting against the Nov rate hike in 2017.

For pound traders seeking some clarity on Brexit, speeches by UK’s PM Theresa May and the leader of the opposition will prove crucial in the coming week. May is scheduled to outline her plan on the future relationship in a speech on Mar. 2 after Labour leader Jeremy Corbyn sets out his party’s Brexit position later today.