January 12, 2018

Daily Observations:

Most Asian stocks eked higher Friday, after US equities closed at yet another record high as volatility in the Treasuries market subsided. The euro advanced following a hawkish tilt from the ECB. The US dollar remained weak after weaker-than-expected inflation data.

US PPI Falls Unexpectedly:

US wholesale prices fell in December for the first time in more than a year on declining costs for services, a potential sign that inflation pressures are easing in the economy, a Labor Department report showed Thursday.

PPI last month declined 0.1% from November, compared to the prior gain of 0.4% and the median estimate of 0.2%. Core PPI, stripped of the volatile effects of food and energy, slipped 0.1% as well, compared to the prior gain of 0.3% and missed the estimated 0.2% too.

With inflation still below the Fed’s target, the PPI report is likely to put additional focus on Labor Department figures due Friday for consumer prices. That will give a better indication of where inflation is headed and how it will factor into the central bank’s deliberations over how fast to raise interest rates in 2018.

Food Prices Remain Depressed:

Globally, food prices have been in decline for the past three months and in December costs fell the most in more than two years. Food got cheaper thanks to a slump in prices of sugar and dairy products from cheese to butter, the United Nations’ Food and Agriculture Organization said Thursday. Prices of meat, grains and vegetable oils fell too.

While oil and metals prices gained from stronger manufacturing, agricultural commodities have been mostly stuck in the doldrums due to a glut of everything from sugar to wheat. Lower prices of staples may help restrain inflation at a time when investors are betting it will pick up, spurred by a surge in commodities and the fastest world economy since 2011. The Bloomberg Commodity Index, a gauge of 22 raw materials, rose for a record 14 days in a row last week, reaching a 3-year high

ECB Gets Hawkish:

ECB policy makers said they’re open to tweaking their policy guidance soon to align it with a strengthening economy, spurring a rise in the euro as traders bet bond-buying will end in September. In the account of its December meeting, the Governing Council said there was a “widely shared” view among officials that communication would need to evolve gradually based on the outlook for growth and inflation, but the language on the monetary-policy stance could be revisited early this year.

Though inflation remains weaker than the ECB would like, the broader economy is booming, with the central bank estimating the fastest expansion in 10 years in 2017. Surveys of confidence have surged and measures of activity are at multi-year highs.

Bond Market Nearing Edge?

Despite the benchmark 10yr Treasury yield breaking above the key 2.50% resistance this week, reaching its highest level since March and renewing worries about the potential for faster inflation, a recent Bloomberg View article suggests a bond market meltdown isn’t on the cards, instead suggesting that a mild correction could be due instead.

The article cited still-buoyant demand in Treasuries, indicated by strong showings in the 3-, 10- and 30-year bond auctions this week. Thursday’s sale of 30-year bonds attracted $2.74 in bids for every $1 offered – the highest bid-cover ratio since 2014. The latest monthly survey of more than 60 economists by Bloomberg released Thursday shows that the 10-year note’s yield, at 2.53%, is expected to be little changed through the rest of the quarter, and rising to just 2.90% by year-end. Economists have a history of being too pessimistic on bonds. At this time last year, they expected the yield to be above 2.75% by now and rising to 3.25% by the end of 2018.

Bond fund manager Bill Gross, who called the start of the bond bear market this week, is sceptical of how much damage can be done in the $14.5 trillion Treasuries market, stating that he doesn’t foresee dramatic losses. He expects the 10-yr yield to rise only 15-25 basis points more by year-end.

China Trade Slowed in December:

China December imports slowed to 4.5% year-on-year, from 17.6% in November, and missed the median estimate of 15.1%. Exports over the same period decelerated to 10.9%, from 11.5% the prior month, but was a touch higher the 10.8% rise expected. The country’s trade surplus widened to $54.7 billion, from $39.9 billion previously.

After several lean years, China’s trade performance rebounded in 2017 thanks to strong demand at home and abroad. While exports are contributing to China’s growth once again, its strong appetite for industrial commodities such as iron ore and coal has also boosted resources prices worldwide in a boon to the global economy.

China Refutes Treasuries Claim:

China’s State Administration of Foreign Exchange said that a news report saying officials reviewing the country’s foreign-exchange holdings have recommended slowing or halting purchases of US Treasuries might have quoted a “wrong source.” “We think the report might have cited wrong sources or may be fake news,” SAFE said in a statement posted on the administration’s website, an apparent reference to a Bloomberg News story published on Wednesday.

“China has always managed its forex reserves investments in accordance with the principle of diversification, to ensure the overall safety of FX assets, to maintain and increase their value,” SAFE said. “Investments in U.S. Treasuries is managed in a professional way according to market conditions and investment needs.”

Singapore May Raise Taxes:

According to Bloomberg news, speculation is buzzing that the Singapore government will raise the goods and services tax in its Feb. 19 budget rollout, although GST probably won’t be the whole story.

Authorities have several other options to increase taxes, or at least signal that they’re needed in the coming years, as the city state grapples with rising health and retirement costs as the population ages rapidly.

According to the news article, other areas which might undergo tax reform include:

1. E-commerce.
   • Online shoppers in Singapore generally aren’t taxed for their purchases if they don’t exceed S$400, Indranee Rajah, senior minister of state for law and finance, said in a November interview. Given how quickly online vendors are changing the way people shop, such a tax change should have been achieved “probably yesterday,” she said.
2. Estate tax
   • Singapore removed the tax on assets for people who died after Feb. 15, 2008, and it’s possible the government may seek to reinstate the estate duty at some point, said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. The levy fits the government’s goal of broadening the tax base and ensuring that the fees are equitable.
3. Personal income & corporate taxes
   • Personal and corporate tax rates in Singapore are among the lowest in the world, and there may be room to adjust those without threatening the city state’s competitiveness.
     
4. Virtual currencies
   • Ernst & Young LLP has stated that IRAS needs to address whether the currencies be treated as a commodity for tax purposes, or as a commodity derivative, “given the proposed statutory definition that it is a digital representation of value where the underlying asset is a virtual commodity”.

Weekly Thematic News:

Solar Energy:

According to a Bloomberg news, the global power needed to create cryptocurrencies this year could rival the entire electricity consumption of Argentina and be a growth driver for renewable energy producers from the US to China. Miners of bitcoin and other cryptocurrencies could require up to 140 terawatt-hours of electricity in 2018, about 0.6% of the global total, Morgan Stanley analysts led by Nicholas Ashworth wrote in a note Wednesday. That’s more than expected power demand from electric vehicles in 2025.

With the move to clean energy increasingly becoming heavily-emphasized in recent times as well, the multi-year growth of the solar energy industry is expected to continue its exponential growth. Investors can purchase the Solar Energy US portfolio on iAdvisor, which has outperformed all but one portfolio over the last year, returning 60.9% as of Friday.

Smart Real Estate Singapore:

Credit Suisse Group AG and Morgan Stanley are calling the end of Singapore’s property downturn, after a second consecutive quarterly increase in private residential prices. Home prices may rise as much as 10% this year, according to analysts at Credit Suisse, while Morgan Stanley and OCBC Investment Research expect as much as an 8% increase, according to reports from the brokerage firms.

Private residential prices rose for a second straight quarter in the period ended Dec. 31, reinforcing signs that the city-state’s property market is emerging from a 4-year slump. For 2017, prices rose 1% compared with a 3.1% decline in 2016, data from the Urban Redevelopment Authority showed.

Investors looking to invest in the local real estate sector can buy into the Smart Real Estate Singapore portfolio on iAdvisor, which has returned a healthy 29.6% from a year ago and provides a dividend yield of 5.0% as of Monday.

FX Updates:

USD/SGD:

Spot: 1.3283

USDSGD sank back below 1.3300 last night following USD weakness brought about by weaker-than-expected PPI numbers. The momentum for the currency pair looks poised to remain to the downside, have broken below its key support of 1.3300 last week.

The Singapore Dollar has been trading nearer towards the stronger end of its trade weighted basket for several months, hence a modest tightening at the April MAS meeting is possible. South Korea has already raised rates and Malaysia is poised to do so later this month, so a hawkish Singapore adjustment could be appropriate in this Asian context.

AUD/USD:

Spot: 0.7880

AUDUSD briefly traded above 0.7900 this morning before paring gains back below the resistance level. The pair is expected to retest its highs again before too long, though the more significant resistance level lies further up at 0.8125 – the high last year.

According to Bloomberg news, a month-long rally in the Australian dollar is due for a pause if hedge funds and other large speculators are to be believed; they’re holding the biggest short position in the Aussie in almost 2 years.

USD/CAD:

Spot: 1.2527

USDCAD pared previous day’s gains after reaching its 100-day moving average yesterday. The Canadian dollar’s recent rise has hit a snag as of late despite stronger crude oil prices, a stellar jobs report and a potential upcoming rate hike, following news of a potential pull out of Nafta by the US this week.

The pair still remains below the previous key level of 1.2650 though; any shift in momentum bias to the upside would require 1.2650 to be breached first. To the downside, the September low of 1.2062 represents the next support point.

USD/CNH:

Spot: 6.4859

USDCNH declined back below 6.5000 and is headed for its first weekly retreat since early December. The key support lies along the 6.4436 level – the lows in both 2016 and 2017; significant yuan selling is expected around here.

USD/JPY:

Spot: 111.26

USDJPY extended recent declines Friday, and is on course to retest a 3-1/2 month low at 110.84. The sharp selloff in the on Wednesday occurred after the BOJ’s surprise reduction in its JBG purchases.

Nevertheless, the yen continues to trade largely between the range of 111 and 114.50, a common trend over the last 3-4 months. The key resistance lies at 114.50, where a break above could drive the pair further up towards 118.

GBP/USD:

Spot: 1.3548

GBPUSD rebounded to the upside Friday and looks poised to retest the key 1.3657 resistance level over the near term. However, the ongoing uncertainty regarding Brexit continues to be a negative influence on currency pair. There has been recent reports indicating the EU and Germany are unwilling to allow Britain to offer financial services within the EU after Brexit. The EU is also reported to have written to a number of different industries warning about the prospect of a no-deal outcome.

Further uncertainty pertaining to Brexit could cap sterling’s gains against the USD around the 1.3600 handle.