February 27, 2019

Daily Observations:

Asian shares inched towards a five-month high on Wednesday and the dollar hovered near a three-week low after Federal Reserve Chairman Jerome Powell reinforced the US central bank’s shift to a more “patient” approach on policy in the face of a slowing economy. The dollar held overnight losses and Treasuries steadied.

Powell in No Rush: 

Federal Reserve Chairman Jerome Powell said a healthy US economy has faced some “crosscurrents and conflicting signals” that officials in January decided warranted taking a patient approach to future interest-rate changes.

With inflation pressures “muted,” the Federal Open Market Committee in its decision last month to keep interest rates unchanged “determined that the cumulative effects’’ of its actions and global and financial developments, “along with ongoing government policy uncertainty, warranted taking a patient approach with regard to future policy changes,’’ Powell said in prepared testimony.

“Going forward, our policy decisions will continue to be data dependent and will take into account new information as economic conditions and the outlook evolve,’’ he told the Senate Banking Committee. “We’re in no rush to make a judgment about changes in policy.”

The Fed chairman’s remarks showed no bias toward further interest-rate increases or cuts. He said the data point to continued spending gains this quarter, and he expected the negative effects of the government shutdown to “unwind over the next several months.’’ Under further questioning by senators, Powell again re-emphasized that he isn’t pre-judging the direction of policy.

Trump-Kim Summit II:

President Donald Trump arrived in Hanoi late Tuesday for a second summit with Kim Jong Un that has already shown flashes of disorder, as American journalists were abruptly evicted from a hotel housing the North Korean leader and key details of the meeting remained a mystery.

The White House has set low ambitions for Thursday’s talks, organized in a matter of weeks after Trump announced the summit Feb. 8. The two sides haven’t even agreed on the meaning of denuclearization or the ultimate purpose of the negotiations — and that’s unlikely to be resolved this week.

Trump plans to meet Vietnam’s leaders and sign commercial deals on Wednesday before he meets Kim in the evening. The two leaders will hold a 20-minute one-on-one conversation before dining together at Hanoi’s Metropole Hotel, the White House said. It hasn’t said where they will hold their formal summit on Thursday.

Trump will be joined at dinner by his chief of staff, Mick Mulvaney, and Secretary of State Michael Pompeo. Kim will also be joined by two aides, Sanders said. She didn’t identify them.

China Economy Displays Signs of Revival:

China’s economy is showing the first signs of recovery after months of slowdown, as stock and commodity rallies lift confidence.

That’s the message from a Bloomberg Economics gauge aggregating the earliest available indicators on market sentiment and business conditions. Key stocks and commodities led gains, and smaller firms became more confident. At the same time, gauges of inflation, trade and sales-manager sentiment signal that it may still be too early to say China has bottomed out.

Markets were boosted by the PBOC’s  monetary easing and the breathing room offered by the now extended trade truce with the US, resulting in Chinese shares surging and the yuan strengthening. These developments have helped dispel some of the gloom that’s been cast over the global economy in recent months. World output may already have bottomed out, according to Goldman Sachs Group Inc. Chief Economist Jan Hatzius. In turn, that could strengthen the China outlook.

Stimulus measures including channeling credit to private firms and boosting infrastructure construction have started to work, with new loans hitting a record and exports perking up in January. Monetary policy will remain supportive and fiscal measures,  such as tax cuts, spending increases and special bond sales, will even strengthen this year, Bloomberg reported.

India-Pakistan Tensions Escalate:

The biggest escalation between South Asia’s nuclear-armed rivals in decades is testing both of their leaders: One seeking re-election, and the other facing his first real foreign-policy test.

With a bitterly contested national election in India just weeks away, Prime Minister Narendra Modi was quick to exploit his military’s air strikes on a terrorist camp inside Pakistan that his government said killed more than 300 people. They came in response to a Feb. 14 suicide car bombing in Kashmir claimed by the Pakistan-based Jaish-e-Mohammed, which killed 40 members of India’s security forces. Speaking on Tuesday to a huge, cheering crowd at an election rally in the state of Rajasthan, Modi twice stated that India was “in safe hands” and declared it a “glorious day,” without explicitly mentioning the attack.

Pakistan had its own version of events. After scrambling its jets in response to India’s early-morning incursion across the border, it released photographs of missile remnants it said had fallen on unoccupied territory. Prime Minister Imran Khan’s office said Pakistan would respond “at the time and place of its choosing,” rejecting India’s claim that it had hit a terror camp or inflicted heavy casualties. “Once again the Indian government has resorted to a self-serving, reckless and fictitious claim,” a statement from Khan’s office said. Facing the first major geopolitical challenge of his term, Khan directed the country’s armed forces and the public to “remain prepared for all eventualities.”

Theresa May Offers Option to Delay Brexit:

UK Prime Minister Theresa May said on Tuesday she would allow parliament to vote on Mar 14 on whether to delay Brexit if MPs reject both her deal and the prospect of leaving the EU without an agreement.

If those two options are rejected the government would put forward “a motion on whether parliament wants to see a short, limited extension to Article 50”, May said, adding that any delay could only be until the end of June. “An extension beyond the end of June would mean the UK taking part in the European Parliament elections. What kind of message would that send to the more than 17 million people who voted to leave the EU nearly 3 years ago now?” she said.

The prime minister said she still wanted Brexit to happen on the scheduled date of Mar 29 and repeated her promise to hold a parliamentary vote on her deal on Mar 12. If the deal is rejected, as it was overwhelmingly by parliament last month, the government would then hold a vote on Mar 13 on whether MPs want a no-deal Brexit. The vote on a possible delay would be the following day.

RBA Concerned Over Consumption Outlook:

Australia’s central bank reaffirmed its mounting concern over the consumption outlook as households are besieged by falling property prices, weak income growth and high debt.

The RBA said while the economy was weathering the property slump, if prices declined much further then consumption could be weaker. That would “result in lower GDP growth, higher unemployment and lower inflation,” the bank said in minutes of its February policy meeting released in Sydney Tuesday.

RBA Governor Philip Lowe dumped a tightening bias in favor of a neutral policy outlook earlier this month amid increasing risks at home and abroad and a downgrade in forecast domestic economic growth. Yet he remains buoyed by resilient hiring and unemployment edging lower, suggesting faster wage growth and an uptick in inflation could still be in the offing.

“Members noted that there were significant uncertainties around the forecasts, with scenarios where an increase in the cash rate would be appropriate at some point and other scenarios where a decrease in the cash rate would be appropriate,” the central bank added.

MAS Sees No Need for Policy Stimulus:

Singapore’s monetary policy stance remains appropriate for current conditions and there’s no need for policy stimulus if the economy performs as expected, central bank Managing Director Ravi Menon said.

Growth will probably come in at the midpoint of the 1.5% to 3.5% forecast range for this year, or slightly lower, bringing “the economy back to its potential,” Menon said at an event hosted by Citigroup Inc. in Singapore on Wednesday. “There’s no need for stimulus if this continues this way.” While the central bank’s stance is “appropriate” given the current growth and inflation dynamics, “what we do in April is a totally different matter,” he said. “Two months is a long time, so we’ll see how it looks like then.”

The Monetary Authority of Singapore, which tightened policy twice last year, is scheduled to announce its next decision in April. It uses the exchange rate, rather than interest rates, as its main policy tool.

The latest inflation data was “well within the 1.5%-2.5% range we see for core inflation,” Menon said. The fiscal spending coming through is “going to be neutral,” he added. “So things are pretty much as expected, and unchanged” for the Singapore picture, he said.

Investors Remain Doubtful of Recent Rally:

Asia stocks just notched their best streak in a year, China’s in a bull market and momentum indicators are white hot. However, according to a Bloomberg report,  while money managers say they welcome the recovery from last quarter’s pummelling, they have yet to find any good reason to trust it.

Even the ones who avoided selling everything before markets turned around are preaching caution. Investor scepticism followed what may be the biggest quarterly reversal for Asian equities in a decade. After plunging in October and December, shares everywhere have rallied amid trade optimism and a pause in Federal Reserve rate hikes. The MSCI Asia Pacific Index has climbed 13% from its 2018 low, while the benchmark for American shares has rallied almost 19%.

Still, with December’s drubbing fresh in mind, investors were practically unanimous that remains too early to sound all-clear on the region’s economies or politics. Analysts indicated that there needs to be significant level of improvement towards tariffs being repealed for markets to sustain their strong positive reaction.

FX Updates:

USD/SGD:

Spot: 1.3485

USDSGD confirmed its break below 1.3500 this week, closing below the handle for the second session in a row Tuesday, following recent USD weakness. The pair’s 8-month low at 1.3443 is the next level below. The momentum for USDSGD remains to the downside, after the pair failed to break above its 50-day moving average earlier this month.  

AUD/USD

Spot: 0.7183

AUDUSD is threatening to break above 0.7200, on the back of recent Fed dovishness and recent risk-on appetite following optimism on the US-China trade dispute front. However, the longer-term trend continues to point to the downside . The key resistance above is the 200-day moving average, currently at 0.7259.

USD/CAD:

Spot: 1.3172

USDCAD retreated back below 1.3200 overnight, following broad USD weakness as Fed Chair Powell’s comments last night failed to spur USD demand. The 3-month low at 1.3069 represents the key support; a break below would also signal the break of the pair’s 17-month old uptrend.

USD/CNH:

Spot: 6.6907

USDCNH maintains below its 6.7000 handle for the third straight session. The pair reached its lowest since last July earlier this week following US-China trade dispute optimism.

USD/JPY:

Spot: 110.61

USDJPY remains capped below its 200-day moving average of 111.29, extending its decline last night to a 1-week low. The pair is showing signs of fatigue, following its sharp rebound from sub-106 in early January, having struggled to hold above 111 over the past 2 weeks.

GBP/USD:

Spot: 1.3247

GBPUSD climbed to its 7-month high, testing the key 1.3300 resistance, overnight,  following Prime Minister Theresa May’s promise to allow Parliament a vote to delay Brexit and block the prospects of a no-deal. The pound is among this year’s best-performing G-10 currencies as investors bet that UK’s lawmakers will prevent the nation from crashing out of the EU without a deal and call a second referendum.

Sources: Bloomberg