January 26, 2018

Daily Observations:

Asian stocks came off record highs on Friday but were still poised to end the week with strong gains, while the battered dollar won back some ground after President Donald Trump said he wanted a strong US currency, contradicting comments made by Treasury Secretary Steven Mnuchin a day earlier. ECB President Draghi said economic data pointed to “solid and broad” growth with inflation likely to rise in the medium term from subdued levels.

 

Has the Market Peaked?

According to Canaccord Genuity Inc, two widely-followed measures of US economic sentiment are indicating market optimism has reached the tip of its crest. If history is any guide, bouts of equity volatility and plunging Treasury yields will soon follow.

The US Citi Economic Surprise index, the rate at which data exceeds analyst expectations, has started to fall after reaching a 5-year high in December. Meanwhile, the Federal Reserve’s index of the public’s uncertainty about the outlook for monetary policy is climbing after reaching a 3-year low in November.

December was only the fifth time since 2003 the economic-surprise index peaked above 75. From each peak to the corresponding trough, 10-year yields on average dropped 1.11 percentage points over the next 7 months, according to data compiled by Canaccord.

The Monetary Policy Uncertainty index, which measures angst around the Fed’s moves as recorded in news articles, has enjoyed consistent weak inflation readings that set the stage for reliably accommodative policy. Yet in the past, after similar lows came periods that were associated with more volatility and drawdowns, though the effect was noted to be often temporary.

 

Trump Talks up the Dollar:

US President Donald Trump declared that the dollar would continue to strengthen and that remarks made by his Treasury secretary suggesting support for a weaker USD the day before had been taken out of context. “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar,” Trump said during an interview with CNBC from the World Economic Forum in Davos, Switzerland.

Trump added that the dollar would gather strength as the US economy continues to grow. Following Trump’s remarks, the dollar all but erased its decline that was spurred the day before when Treasury Secretary Steven Mnuchin said a weak dollar is beneficial to the US economy.

 

US Dollar’s Slide Approaching a Key Support:

Regardless of whether the Trump administration wants a strong US currency or not, the USD’s plunge this week has led to the Dollar Index approaching a key technical support – the 50% retracement level of the DXY’s ascent between Apr 2011 and Jan 2017. A break below the 88.25 support is likely to lead to a further drop to the 85 handle.

The USD is weaker in 2018 against all major currencies, as illustrated below.

 

Draghi Optimistic on Inflation:

Mario Draghi expressed conviction that euro-area inflation will pick up, pushing the euro even higher despite his warning that the exchange rate is a renewed concern. The ECB president said the strengthening economy justifies some currency appreciation, while reviving a warning on volatility that hasn’t been used since September.

The ECB yesterday stuck by its plan to continue buying 30 billion euros of assets a month until at least the end of September, while keeping interest rates unchanged.

 

Brexit Positioning:

Theresa May isn’t ruling out paying for access to the European single market after Brexit. In an interview Thursday, May said she was “very clear that we want to develop a deep and special partnership, a comprehensive trade agreement.” She pointedly noted “we recognize the importance of the financial services and we want to ensure that we can continue to see those financial services, ensuring the City of London retains its role as a global financial center.’’

Speaking elsewhere in Davos, Chancellor of the Exchequer Philip Hammond said Britain “should be confident of reaching something much more ambitious than any free trade agreement that has ever been achieved.’’ Irish Prime Minister Leo Varadkar held out hope that Britain may end up with a “Norway plus” relationship. Interestingly, Barclays Plc CEO Jes Staly has told May to be prepared to sacrifice access to the market if that means gaining control of the rules that govern finance, people with knowledge of the exchange said.

 

Japan Inflation Continues to Lag Target:

Japan’s inflation in December continued to lag a strong economic revival, leaving the central bank in a dilemma on how to exit crisis-era stimulus policies that even some of its own board members warn will start to hurt more than help if retained for too long.

Core inflation gained 0.9% year-on-year, in line with expectations and unchanged from the previous month. Headline CPI rose 1.0% over the same period, lower than the median estimate of 1.1% but accelerating from November’s 0.6% gain. Inflation continues to remain well off the central bank’s 2% target.

 

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.

 

Singapore a Potential Casualty of Trade War:

Economic growth in Singapore has closely followed year-on-year changes in global trade volumes for almost twenty years, as the nation handles the second highest amount of containers in the world.

Any escalation of US protectionism, with Trump seen advocating his “America First” policies at Davos, could have an adverse reaction on investor expectations for Singapore’s growth, monetary policy and the local dollar.In his first year in office, he’s withdrawn the US from the Trans-Pacific Partnership free trade deal and the Paris Agreement on climate change. He’s threatened to renege on the Iran nuclear deal, a free-trade agreement with South Korea, and Nafta as well.

 

 

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 28.9% 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 15.4% from a year ago as of Thursday.

 

 

FX Updates:

USD/SGD:

Spot: 1.3068

USDSGD rebounded from a fresh 2-1/2 year low of 1.3009 on Thursday, following Trump’s commenting last night that he favors a stronger USD. The 1.3000 psychological support is likely to hold over the near term, with a pullback to the previous level of 1.3150 possible.

Over the longer term, the bias for USDSGD continues to remain to the downside; the next support can be found at 1.2830 – 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: 0.8054

AUDUSD failed to hold above the key 0.8100 handle last night, after Trump’s strong dollar comments took a wind out of AUDUSD bulls. The key resistance at 0.8125 remains, and the recent exhaustion in the currency pair indicates the rally since mid-December has topped out. The recent low around 0.7950 is likely to be tested again.

 

USD/CAD:

Spot: 1.2349

USDCAD reversed its previous day’s decline, which saw the pair reach its lowest level since last September, amid the USD’s sharp rebound overnight and as crude oil prices turned lower.

Canada’s inflation report for December is due on later today, which could help guide expectations for further Bank of Canada interest rate hikes and provide further clues for the Canadian dollar’s future direction.

Bank of Canada Governor Stephen Poloz said on Thursday that even he did not know what potential there may be for further hikes this year, reiterating that policymakers remained both data dependent and alert to developments with Nafta.

 

USD/CNH:

Spot: 6.3291

2 weeks after breaking below the important 6.4436 support, USDCNH seems to have found some support at tis 6.3000 handle, rebounding off the level Thursday night. Offshore yuan is currently trading near at its strongest level against the USD since the PBOC devalued the yuan in August 2015.

Momentum remains firmly to the downside, with the currency pair last week closing below its 200-week average for the third consecutive week – the first time it has done so since July 2015.

 

USD/JPY:

Spot: 109.39

The yen rebounded against the US dollar from 108.50, its weakest level since September last year. This morning’s inflation numbers showed continued rising of prices although the 2% targeted by the BOJ remains far off.

 

GBP/USD:

Spot: 1.4181

GBPUSD briefly pushed through the 1.4300 handle yesterday, its highest level since the Brexit referendum in June 2016, although the pair has pared gains back below 1.4200.

U.K. Chancellor of the Exchequer Philip Hammond said he is “very happy with where the currency is at the moment”, in an interview with Bloomberg in Davos yesterday. The stronger pound could boost the UK economy by helping to bring down inflation, which has raced ahead of wage growth since the Brexit referendum in 2016.