January 23, 2018

Daily Observations:

Asian stocks climbed to record highs Tuesday on optimism on corporate earnings and after the US government shutdown moved toward an end. The yen strengthened as the Bank of Japan kept its monetary stimulus unchanged as expected.

IMF Warns of Downside Risk:

Enjoy the party while it lasts: That was the opening day message for the corporate and political leaders attending the World Economic Forum’s annual meeting in Davos. Booming stock markets and the best global economic growth in 7 years are fuelling record levels of optimism among chief executives, according to a survey released by PricewaterhouseCoopers LLP in Switzerland.

Although earlier, the IMF debated that while the outlook for this year and the next was better than previously anticipated, a recession may be closer than many acknowledge and that investors and policy makers should guard against complacency. Among the current risks: potential irrational exuberance in financial markets, surging debt in China and elsewhere as well as political flash points from Brexit to North Korea.

Despite the warning, the IMF upgraded its outlook for this year and the next by 0.2 percentage point each, pushing its forecast for worldwide expansion for both 2018 and 2019 to 3.9%, the highest level since 2011. Trump’s recent tax cut was cited as one reason for the pickup.

US Government Shutdown Ends:

President Donald Trump signed a government spending bill Monday evening that ends a 3-day partial shutdown, White House official said. But that leaves the fight over a politically charged immigration proposal unresolved for at least another 3 weeks.

The impasse broke after Senate Democrats accepted a deal from Majority Leader Mitch McConnell that will fund the government through Feb. 8. In exchange, McConnell agreed to address Democratic demands that Congress restore protection against deportation to young undocumented immigrants brought to the US as children, known as “dreamers.”

The bill, H.R. 195, sets the clock for a showdown between Republicans and Democrats on immigration, one that could potentially end in another standoff over spending. Senator John Thune, the chamber’s No. 3 Republican, said it’s unlikely Congress will be able to pass a final spending bill in 3 weeks and will probably need a fifth stopgap measure.

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.

US Falls Out of Top 10 in Innovation Rankings, Singapore Soars:

The US dropped out of the top 10 in the 2018 Bloomberg Innovation Index for the first time in the 6 years the gauge has been compiled. South Korea and Sweden retained their No. 1 and No. 2 rankings. The index scores countries using seven criteria, including research and development spending and concentration of high-tech public companies.

The US fell to 11th place from ninth mainly because of an eight-spot slump in the post-secondary, or tertiary, education-efficiency category, which includes the share of new science and engineering graduates in the labor force. Value-added manufacturing also declined. Improvement in the productivity score couldn’t make up for the lost ground. Singapore jumped ahead of European economies Germany, Switzerland and Finland into third place on the strength of its top ranking in the tertiary-efficiency category.

Dangers of Liquidity Risk in ETFs:

Mohamed El-Erian, chief economic adviser at Allianz SE, highlighted his concerns about liquidity in exchange-traded funds. Speaking at a conference in Florida, El-Erian listed some geopolitical and market risks for 2018, and included ETFs in the list as well.

“Some ETFs, it’s a small proportion, but some of them have inadvertently overpromised liquidity to users,” he said. “The users have assumed much more liquidity than what the underlying asset class can serve.”

Reiterating his views from a Bloomberg View column in which he wrote last month, the economist warned about the problems which arise as investors move even more money into passive investing products, “some of which venture quite far from highly liquid market segments”; think speculative-grade and emerging markets, where trading volumes may not be as high as more liquid equity markets. El-Erian warned it could get nasty if some of those who use the funds as temporary trading vehicles decide to exit the market en-masse.

BOJ Keeps Stimulus Unchanged:

The Bank of Japan kept its policy interest rates and asset purchases unchanged, t said in a statement released on Tuesday, a result forecast by all economists surveyed by Bloomberg. With the economy growing and inflation slowly but steadily rising, some investors have started to bet that the BOJ is nearing the point where it begins to normalize its ultra-loose monetary policy. The yen gained strength after the BOJ cut its bond purchases earlier this month.

Economists surveyed by Bloomberg continue to see tightening on the horizon, with half of them predicting the first move to come later this year. The BOJ is lagging behind its global peers in normalizing policy after years of unprecedented stimulus. The Federal Reserve is expected to continue raising rates this year, and some European Central Bank officials are calling for the end of asset purchases ahead of a policy meeting later this week. The Bank of Canada raised its overnight rate target last week.

Weekly Thematic News:
 

Smart Real Estate Singapore:

After a 4-year slide in private residential prices, analysts are now calling an end to the property downturn. Singapore home prices have risen for 2 consecutive quarters and they are expected increase by about 5.5% this year, according to a survey by Bloomberg. There’s also the earnings season to look forward to next month as the upbeat outlook for the real estate market may augur well for Singapore developers.

On Feb. 28, City Developments Ltd. is expected to post an annual profit of S$563.4 million, according to Bloomberg data. CapitaLand Ltd. and UOL Group Ltd. are also both seen publishing earnings statements in February with analyst estimates pointing to a 9.4% increase in UOL’s full-year net income.

The city-state’s real estate sector looks to be emerging from its rut amid a jump in home sales and aggressive bids for land by developers. An index tracking private residential prices rose 1% in 2017, compared to a 3.1% decline in 2016, data from the Urban Redevelopment Authority showed. A poll of 11 analysts conducted between Jan. 11 to Jan. 22 showed a median estimate of a 5.5% rise in home prices this year.

Investors looking to allocate capital into 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 30.0% over the past year.

Cyber Security:

According to the World Economic Forum, 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 Monday.

FX Updates:

USD/SGD:

Spot: 1.3176

USDSGD declined to a fresh 2-1/2 year low Tuesday, with the US dollar remaining on the backfoot despite the end of a temporary US government shutdown. The key support lies closely below at 1.3150, last tested during in 1H 2015. A break below is likely to lead to more downside in the currency pair, with the next support to be found at 1.2830 represents a significant level, having been a past resistance in 2013 and 2014.

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.

AUD/USD:

Spot: 0.7995

AUDUSD pared some of it previous session’s gain earlier today, but still managed to hold around the 0.8000 handle. Iron ore futures slipped to a year-to-date low earlier today; further iron ore weakness is likely to weigh on the Aussie dollar, although further declines in the currency pair is likely to find support near the base of its Dec-Jan uptrend.

The key resistance to the upside resides at the 2017-high of 0.8125.

USD/CAD:

Spot: 1.2457

USDCAD failed to gain above 1.2500 on Monday, instead erasing most of last Friday’s gains and declining back to 1.2450 on Tuesday, ahead of the resumption of talks to renegotiate Nafta which is scheduled to take over the rest of the week.

Canadian inflation due on Friday is expected to have dipped slightly in December but still remain near the central bank’s 2% target.

More sideways action between 1.2400 and 1.2500 is predicted for USDCAD over the short term.

USD/CNH:

Spot: 6.3997

A week after breaking below the important 6.4436 support, USDCNH seems to have found some support at tis 6.4000 handle. Offshore yuan is currently trading near at its strongest level against the USD since Nov 2015.

The currency pair last week closed below its 200-week average for the third consecutive week – the first time it has done so since July 2015.

USD/JPY:

Spot: 1110.78

USDJPY erased earlier gains, reversing sharply after a slight change in the Bank of Japan’s policy statement. The statement indicated that officials see inflation expectations as unchanged, as compared to the previous release which stated that inflation expectations were weakening.

The immediate support resides around the 110 handle. Abreak 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.

GBP/USD:

Spot: 1.3983

GBPUSD soared to its highest since the Brexit referendum earlier today, briefly gaining past 1.4000. The currency pair has risen over the last week, month, three months, six months and 12 months against a basket of nine other major developed currencies based on data compiled by Bloomberg, the only one of the bunch to do so.

The pair is likely to face some resistance at the current 1.4000 mark.