Spot values at a glance:
Asian stocks fluctuated Thursday, while US equity-index futures slipped as investors assessed the implications of the recent market turmoil that has elevated volatility. The Dollar Index held above 90, while the 10yr yield maintained north of 2.80%. Gold and oil extended declines.
US Markets Remain Jittery:
US stocks remained on unsteady footing as the bout of volatility that’s gripped global financial markets persisted amid signs that the rise in Treasury yields has yet to run its course.
Overnight pressure came from a weak 10yr note auction, sending the benchmark 10yr Treasury yield toward its 4-year high reached earlier this week which sparked the biggest equity selloff in 7 years. Stocks swung between gains and losses throughout the session before ending lower after heavy selling in the final 15 minutes of trading.
The VIX continued to drop, ending the session around 28, while gold declined, oil plunged, the dollar continued to strengthen, and President Donald Trump weighed in to lament the recent slide in equities.
US Budget Deal Agreement Announced:
Senate leaders announced a bipartisan two-year budget agreement Wednesday that would provide nearly $300 billion in additional funding, a step likely to avert a Friday government shutdown and end a month-long impasse on spending priorities. The plan would also suspend the federal debt ceiling until March 2019, according to Senator Roy Blunt of Missouri, a member of the Republican leadership team. It also would provide hurricane and wildfire disaster aid. Blunt said he expects a Senate vote on Thursday.
The dollar rose on news about the deal, as did the benchmark 10yr Treasury yield.
Fed’s Williams Insists Fundamentals of Economy Remain Unchanged:
Federal Reserve Bank of San Francisco President John Williams said he isn’t altering his view on the US economy or preference for a continued gradual rate hike path after several days of volatile markets. Williams stated that movements in asset prices of late have not fundamentally changed his view of the economy, and that it remains on a very solid growth path.
Oil Sinks on Record US Output:
Crude oil posted its biggest loss in 2 months as record crude production from US fields reignited worries that supplies will swamp demand. Crude oil futures declined 2.5% in New York, after it was reported that output from American rigs jumped to 10.25 million barrels a day last week, vaulting the US into the elite of world producers alongside Saudi Arabia and Russia. With production set to climb even higher later this year, the Saudi- and Russia-led alliance of other major suppliers will come under renewed pressure to reconsider self-imposed output caps aimed at eroding a glut.
US production has jumped 78% in the past 6 years as drilling techniques perfected to release natural gas from shale were adopted by oil explorers. With oil still trading above $60/bbl, shale drillers may be inclined to boost production because they can buy hedges that lock in profits and shield them from any subsequent price declines.
A production report released yesterday showed the government made a surprise revision to its supply outlook that forecasted domestic daily output will hit 11 million barrels in November, a year sooner than previously expected.
China Trade Surplus Shrinks:
China’s January exports rose 11.1% year-on-year in USD terms, more than the 10.7% expected. Imports over the same period soared 36.9%, more than the 10.6% expected and December’s 4.5% increase.
China’s trade performance rebounded in 2017 thanks to strong demand at home and abroad. However, expectations of growing trade disputes with the United States are clouding the outlook for exports this year, while a cooling property market may curb domestic demand for imported raw materials such as iron ore.
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. Selling resumed Sunday night as index futures opened lower, a week after yields on 10yr Treasuries climbed to a 4-year high of 2.84%. 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.
Weekly Thematic News:
Financial services workers will be among the first to be hit by the rise of automation while women will feel the effects earlier than men, according to research by PricewaterhouseCoopers. The report, which analyzed more than 200,000 jobs across 29 countries, anticipates three stages of automation between now and the mid-2030s, which will eventually impact almost one third of UK workers. The first, the algorithm wave, is already underway.
Whether we like it or not, robots and automation are here to stay. Investors looking to capitalize on this trend can do so by buying into the Robotics US portfolio on iAdvisor. The portfolio has returned 49.0% year-on-year, and focuses on companies that are well-established in the field of robotics and automation and have garnered a healthy return on invested capital.
USDSGD gained past 1.3200 Thursday following overnight news that an announced US budget agreement could avert a government shutdown, thus boosting the US dollar.
The key support continues to remain at the psychological 1.3000, while the resistance resides above at 1.3350. Over the longer term, the bias for USDSGD continues to remain to the downside.
AUDUSD declined to its 50-day moving average of 0.7814 earlier today, extending the pair’s decline to 3 straight days. The pair is currently at the 50% retracement mark of its Dec-Jan rally, and some Australian dollar buying is expected to buoy the FX pair above the 0.7800 handle.
The RBA earlier this week left interest rates unchanged at 1.5%, with Governor Lowe maintaining that a return of rapid wage growth remains a distant prospect despite recent improvements in business investment and employment.
USDCAD gained to its highest level in almost a month last night amid crude oil weakness and a stronger US dollar. Brent has now turned negative for 2018 while WTI isn’t looking great either. The falling oil price is bad news for the Canadian dollar, and good news for USDCAD, which has already been on the rise following last week’s publication of mostly better than expected US data.
A break above 1.2600, the pair’s next significant resistance, is likely to lead to a retest of its 7-month high of 1.2920.
USDCNH regained above 6.3000 Thursday, amid a stronger US dollar overnight. The pair, in its previous session, had declined to its lowest level since before the yuan devaluation in 2015, shrugging off central bank signals that appreciation could slow. The central bank has set the fixing more than 40 pips weaker than estimates three times in the past week, something that hasn’t been seen since October.
Today’s recovery in USDCNH is expected to persist, with the 6.4000 level likely to be tested over the coming weeks.
USDJPY continued to remain within its 109-110 range over the past couple of days. According to a Bloomberg report, investors are betting that the yen will do better this year than its haven counterpart, the Swiss franc. With waning political risks in Europe and the Swiss National Bank reluctant to move away from its rhetoric on a “highly valued” currency, options markets favor the yen and analysts see the franc weakening. Add in speculation that the Bank of Japan will take tentative steps toward normalizing policy before the SNB, and that’s leading some traders to short the Swiss currency against the yen.
USDJPY remains in a major sideways trend, as it has been the whole of last year, ranging between 108 and 115. The key support remains at 107.50.
GBPUSD was largely unchanged earlier today, following 4 consecutive daily declines which saw the pair from 1.4231 last week, to 1.3875 yesterday. The BOE is set to announce its interest rate decision, MPC minutes and quarterly inflation report later today, in what could be a potentially highly volatile session ahead for the currency pair.
GBPUSD’s recent drop has created room for the BOE to deliver a somewhat hawkish message along with status quo decision on the rates, according to a Reuters report. In addition, the pound may rise sharply should the BOE’s quarterly inflation report bear a hawkish tilt.
The key resistance remains at 1.4345, while the 1.3600 region is expected to provide some support.