Spot values at a glance:
Asian stocks took the lead from US equities, extending this year’s stellar run amid continued optimism for global growth. Treasuries held losses and the Dollar Index rebounded on speculation Congress will avert a government shutdown. The Bank of Canada hike rates, as expected, though it adopted a fairly dovish tone in its policy statement.
US Manufacturing Output Gains for Fourth Straight:
US factory production rose for a fourth straight month in December, capping the strongest quarter since 2010 and underscoring a resurgence in manufacturing that’s primed for further advances, Federal Reserve data showed Wednesday. Factory output rose 0.1% month-on-month in December, slowing from the prior gain of 0.3% and missing out on analysts’ expectations of 0.3%.
Total industrial production, which includes mines and utilities, rose 0.9% from a month ago, reversing a 0.1% decline in November and beating the median estimate of 0.5%.
US Government Shutdown May be Averted:
House Republican leaders are pressing ahead with a plan to avoid a shutdown by temporarily funding the government for 4 more weeks. Speaker Paul Ryan and his leadership team were lining up support among House Republicans on Wednesday for a stopgap spending bill to keep the government operating through Feb. 16, setting up a likely vote in the House Thursday.
Republicans are betting Democrats won’t risk forcing the government to shutter during an election year to press their demand for a deal on immigration by Friday’s funding deadline.
Overseas Repatriation May Lead to $500 Billion Bond Exodus:
The newly-rewritten tax code may potentially result in US multinational companies that have stashed billions of dollars offshore – parking most of their profits in Treasuries and US investment-grade debt – to lighten up on bonds and use the money to prop their stock prices via buybacks and dividends.
The size of offshore-parked cash is seismic; an estimated $3.1 trillion of corporate cash is now held offshore, according to an estimate by Goldman Sachs in a research note last November. Led by the tech giants, a handful of the biggest companies sit on over a half-trillion dollars in US securities.
According to Bloomberg news, there’s little to suggest multinationals will immediately liquidate their Treasury investments. Many analysts say companies, rather than selling, could just let their holdings gradually mature. However a drop-off in demand may add to the government’s increasing funding costs.
While MNCs may be less inclined to sell their corporate bonds, at least initially, the impact could be more acute, analysts say. In recent years, firms such as Apple and Oracle Corp. have become some of the top buyers of company debt. Apple alone holds over $150 billion in the bonds, exceeding even the world’s biggest debt funds.
According to a recent study by Bloomberg Intelligence, the tax overhaul could lead to buybacks jumping by more than 70% on an annualized basis to $875 billion. The analysis was based on the growth in completed repurchases in 2004-2005, the last time a tax repatriation holiday was in place.
Apple Repatriating Overseas Cash to Foot Tax Bill:
Apple Inc. said it will bring hundreds of billions of overseas dollars back to the US, to pay about $38 billion in taxes on the money and spend tens of billions on domestic jobs, manufacturing and data centers in the coming years. The company plans capital expenditures of $30 billion in the US over 5 years and will create 20,000 new jobs at existing sites and a new campus it intends to open.
Apple is the first major US technology company to act on the new tax law and it joins others, such as Intel Corp., in responding to criticism by President Donald Trump and others that corporations have been ignoring American workers and manufacturing.
BOC Hikes, ‘Cautious’ on Further Adjustment:
The Bank of Canada indicated it’s in no rush to pursue aggressive interest rate hikes, citing “important unknowns” such as the future of Nafta as it raised borrowing costs for the third time since July, as widely expected. Policymakers sought to quell expectations Canada’s economic boom could prompt them to move quickly with additional hikes, downplaying any worries about the economy overheating and inflation rising above target.
The central bank painted a picture of an economy with inflation already close to target, output largely at capacity, a robust housing sector, and a faster-than-expected reduction in labor market slack. Officials repeated their dovish language about moving ahead cautiously and warned they expect the economy will require continued stimulus.
That seemingly dovish language was insufficient to alter traders’ projected timetable of the central bank’s tightening cycle. The Canadian overnight index swaps curve on Bloomberg showed no meaningful shift in how much and fast the central bank will lift its policy rate over the next 5 years.
Australia Reports Stellar Jobs Report:
Australian employment surged in December, capping one of the strongest years of growth on record. Employment rose 34,700, more than double of the 15,000 gain expected. The jobless rate nudged up to 5.5%, from 5.4% in November, as more people looked for work.
Australia’s economy added more than 400,000 jobs last year, the bulk of them full-time, which should soak up some of the slack that’s been suppressing wages growth and inflation. The central bank has now held its benchmark interest rate at a record-low 1.5% for 17 months to encourage business investment and hiring, with signs of success. Still, debt-laden households struggling with stagnant wages are a cloud over consumption.
Singapore Exports Slow in December:
Singapore’s on-year non-oil domestic exports (NODX) growth slowed more than expected in December due to a contraction in electronics exports and shipments to China, official data showed on Wednesday. Exports gained 3.1% year-on-year, down from 9.1% previously and less than the 8.6% median estimate.
Weekly Thematic News:
According to the World Economic Forum ahead of its annual meeting in Davos on Jan. 23, the threat of large-scale cyberattacks and a “deteriorating geopolitical landscape” since the election of US President Donald Trump have jumped to the top of the global elite’s list of concerns.
The growing cyber-dependency of governments and companies, and the associated risks of hacking by criminals or hostile states, has replaced social polarization as a main threat to stability over the next decade, according to the WEF’s yearly assessment of global risks, published Wednesday.
John Drzik, president of global risk and digital at Marsh, which contributed to the study, said as companies “invest in things like artificial intelligence, they are widening their attack surface.” Recent high-profile security breaches that have fueled this perception include the WannaCry ransomware attack, which infected more than 300,000 computers across 150 countries, and NotPetya, which caused two companies losses in excess of $300 million. The cost of cyber-crime to firms over the next five years could reach $8 trillion, the WEF said.
Similarly, thousands of attacks every month on critical infrastructure from European aviation systems to US nuclear power stations show state-sponsored hackers are attempting to “trigger a breakdown in the systems that keep societies functioning,” the WEF added.
Investors can park some money in this increasingly important trend by buying into the Cybersecurity US portfolio on iAdvisor, which has returned 17.6% from a year ago as of Thursday.
Australia, one of the world’s biggest users of rooftop solar panels, likely added the most new capacity on record last year as electricity users sought to ease escalating power bills.
A preliminary estimate by Australia’s Clean Energy Regulator of 1.05 gigawatts installed last year would be a record for the country, the government body said in an emailed statement last Friday. While subsidies and generous feed-in tariffs helped boost growth earlier this decade, last year’s gains were driven by users seeking to sidestep a surge in the cost of electricity and a push by vendors into the commercial sector, according to Bloomberg New Energy Finance.
The shift to solar may have quickened as power prices spiked last year on tight supplies of coal and gas, which fuel the bulk of generation capacity on the national electricity market. BNEF estimates the cost of solar systems for residential customers has declined 44% since 2012.
Investors looking to invest in the solar energy space can purchase the Solar Energy US portfolio on iAdvisor, which has outperformed all but one portfolio over the last year, returning 60.8% as of Thursday.
Smart Real Estate Singapore:
Credit Suisse warned that gains for Singapore’s real estate investment trusts may be limited this year after a surge in prices in 2017 left valuations looking stretched. Kum Soek Ching, head of Southeast Asia research in the firm’s private banking operation, pointed to declines in the extra yield from the securities versus risk-free rates from Singapore government bonds. For this year, the REITs may return 3.4 percentage points over a 10-yr bond, less than the historical average of 3.7 percentage points, Kum wrote in a note.
The Straits Times REIT Index gave a 28% total return last year as funds flowed into Singapore and the outlook brightened for property. Though prospects remain good, with rents improving as demand recovers and supply eases, investors may want to wait for more attractive entry levels, the analyst said.
Investors looking to invest in the local real estate sector can buy into the Smart Real Estate Singapore portfolio on iAdvisor, which outperformed the Straits Times REIT Index to return 32.7% last year.
USDSGD seems to have found some support around the 1.3200 handle, holding strongly above it throughout the week. The momentum remains to the downside though, with the key support to be found at 1.3150. On a longer-term basis, 1.2830 represents a significant level, having been a past resistance in 2013 and 2014.
Over the near-term, the currency pair is likely to recover back to 1.3350 first.
The SGD has been trading nearer towards the stronger end of its trade weighted basket for several months, with a modest tightening at the April MAS meeting expected.
AUDUSD initially jumped after better-than-expected jobs data in Australia boosted the Aussie this morning, before heading lower as traders focused on the fact the employment rate rose for the first time since June. The currency pair was also pressured by a strengthening USD amid speculation Congress will be able to avert a government shutdown.
The AUDUSD remains strongly capped at the 0.8000 psychological level. Having risen more than 6% over the past 5 weeks, a pullback to 0.7900 is expected over the near-term. A break above 0.8125 would signify a shift in long-term trend to the upside.
USDCAD was little changed at the end of last night’s seesaw session, after the Bank of Canada hiked interest rates and indicated confidence in the outlook for the economy, but sounded a cautious tone on the future of NAFTA. While the rate hike was widely expected, investors were initially taken aback by the central bank’s cautious tone about future rate hike, as reflected in the currency pair soaring above 1.2500 at one point.
The rather dovish statement put out by the BOC last night may deter loonie bulls. For now, some consolidation around 1.2500 is expected.
USDCNH seems to have found some support around the 6.4150 region, bouncing off the level 4 times over the past week. The currency pair last week closed below its 200-week average for the second consecutive week – the first time it has done so since July 2015.
All eyes will be on China’s fourth quarter GDP due for release later today.
USDJPY rebounded sharply Thursday after it was reported that BOJ officials believe ultra-easy monetary policy is needed for now and are of the opinion that the markets have run ahead of themselves; thus, the unwinding of yen longs may gather pace. A recovery back to 112 is likely over the short-term.
To the downside, the tipping point for USDJPY lies at 110; a break below it would signify a breakout off the 2-year long triangle consolidation for the currency pair, and may potentially lead to the yen strengthening to 107.50 against the greenback.
GBPUSD soared to its highest since the Brexit referendum last night, gaining to 1.3942 before paring back gains earlier this morning. Optimism on sterling pound remains high, with a BOE official commenting yesterday that more rate increases will be needed over time. Renewed hopes of a soft Brexit may also continue to prop the pound. The psychological 1.4000 is next in line to be tested.