January 3, 2019

Daily Observations:

US stock futures fell and Asian shares wobbled on Thursday after a rare revenue warning from Apple Inc added to worries about slowing global growth and weaker earnings. The yen surged and gold advanced as investors flocked to safe havens. Oil again slipped under $46/bbl as it pared a rally on the back of Saudi Arabia trimming exports.

Apple Cuts Sales Outlook:

Apple Inc., for the first time in almost 2 decades, lowered its revenue outlook, citing fewer than expected upgrades to new iPhones, weakness in China’s economy and supply constraints to newer models of the Apple Watch, iPad Pro and AirPods.

Chief Executive Officer Tim Cook said Wednesday the company expects sales of about $84 billion in the quarter ended Dec. 29, down from earlier estimates of $89 billion to $93 billion. Apple reported sales of $88.3 billion in the fiscal first quarter a year earlier, so the new estimate would mean Apple is reporting a holiday quarter slowdown for the first time since Cook became CEO in 2011.

The announcement, in a letter from Cook to investors, sent shares down as much as 8.5% in extended trading. The reduction to the forecast comes after weeks of signals from inside Apple and its supply chain indicating the company is struggling to sell the latest iPhones released in September. The flagship product earns Apple about two-thirds of its revenue, and allows the company to generate more money from attached products like Apple Watches, AirPods, and services like Apple Music.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote. Greater China and other emerging markets accounted for the vast majority of year-over-year iPhone revenue decline, but iPhone upgrades also weren’t as strong as the company anticipated in some developed markets, Cook said.

US Mum on China Trade Concessions:

US government officials are publicly withholding judgment on China’s efforts to ease trade tensions ahead of talks next week, raising the prospect that Beijing’s latest economic-reform announcements won’t go far enough to satisfy President Donald Trump’s demands.

China in recent weeks has announced steps to open up its economy since Trump and President Xi Jinping met over dinner Dec. 1 to diffuse tensions. But they mostly fall short of US Trade Representative Robert Lighthizer’s demands for big structural changes on alleged forced technology transfer and theft of intellectual property, analysts said.

Pressure is building on both countries to deescalate the feud, which is starting to weigh on their economies and financial markets. China’s manufacturing purchasing managers index dropped to 49.4 in December, the weakest since early 2016 and below the 50 level that denotes contraction. Measures of new orders and new export orders slipped, a bearish signal for future demand.

Meanwhile, 5 US Federal Reserve indexes of regional manufacturing all slumped in December, the first time they’ve fallen in unison since May 2016.

US Government Shutdown Persists:

Congressional leaders were unable to strike a deal to end a partial shutdown of the federal government at a meeting with Donald Trump on Wednesday, and the president invited them to return to the White House on Friday for further negotiations. But incoming House Speaker Nancy Pelosi said Democrats in her chamber would pass legislation to re-open the government on Thursday, pressuring Senate Republicans to follow suit. She and other Democratic leaders did not commit to a second meeting with Trump.

The White House staged the meeting as a briefing on border security for congressional leaders in the situation room. But it quickly turned contentious, according to accounts from people familiar with the matter. Top Democrats and Republicans in the House and Senate emerged from the talks giving no indication they’ve changed their positions on Trump’s demand for $5 billion to fund a border wall. Senate Majority Leader Mitch McConnell said the standoff could go on for weeks.

China Expected to Ease:

China will cut the reserve requirement ratio and improve funding conditions this month, as liquidity tightens toward the Spring Festival holidays, the country’s largest securities firm says.

Fresh demand for funds will amount to nearly 4.3 trillion yuan in January, according to Citic Securities Co. and Bloomberg calculations. Mainland residents will withdraw 1 trillion yuan of cash in preparation for the holiday, when money is gifted in red envelopes. Corporate tax payments and maturities of lenders’ interbank debt will also mop up liquidity, prompting authorities to step up cash injections.

“The PBOC will inject a significant amount of cheap funds to plug the liquidity hole,” said Ming Ming, Citic’s head of fixed-income research. Authorities will reduce the reserve requirement ratio and provide funding for lenders that make loans to private companies in January, he said.

China cut the amount of cash banks need to set aside as reserves 4 times last year as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the US. The latest easing sign came Wednesday evening, when the PBOC adjusted a rule to boost the impact of previous RRR cuts. China International Capital Corp. said that may release as much as 400 billion yuan of liquidity.

FX Updates:

USD/SGD:

Spot: 1.3658

USDSGD extended its recent bounced off its key 1.3600 support earlier today, following a firmer USD yesterday.  USDSGD has largely maintained within the 1.3600-1.3875 range over the past 6 months. A breach below the 1.3600 support will likely result in an accelerated selloff towards the 1.3400 region.

AUD/USD

Spot: 0.6939

AUDUSD tumbled to its lowest in almost 10 years amid concern over slowing global growth and as rising US rates sapped demand for the high-beta currency. The pair sank to as low as 0.6741 amid wild fluctuations that roiled FX markets in early Asian trading Thursday. With the key 0.7000 support soundly breached, the momentum remains strongly to the downside.

USD/CAD:

Spot: 1.3634

USDCAD remains little changed this year so far, steadying above the 1.3600 handle. The Loonie gained Wednesday, underpinned by crude oil’s recovery, although it’s retreat today and last night’s softer-than-expected Canadian manufacturing data sent the Canadian dollar weaker. 1.3793 represents the pair’s next resistance level, last tested in 2017 May.

USD/CNH:

Spot: 6.8867

USDCNH gained by as much as 0.3% earlier today, after analysts saw the nation’s monetary policy loosening after China’s manufacturing gauge signaled a further slowdown to come. The  pair’s upside could be capped around its 50-day moving average at 6.9159. To the downside, 6.8260 represents a key support.

USD/JPY:

Spot: 107.18

USDJPY tumbled some 420 pips from the beginning of the overnight session to a low of 104.70, where fade action bounced the pair back to between 107 and 108, where the pair looks set to continue churning.

GBP/USD:

Spot: 1.2549

GBPUSD sank to a fresh 20-month low earlier today, amid heightened risk aversion as well as continued Brexit uncertainty. In the Brexit form, opposition Labour wants its leader, Jeremy Corbyn to back a second Brexit referendum, although PM May’s had clearly stated that there won’t be another people’s vote. Corbyn is reluctant to call for another referendum but rather prefers to call for a general election in the hopes he will replace Mrs. May. The Brexit deal will go into the Parliament for approval later this month.  A break below 1.2500 could lead a fall further to the next support target at 1.2351.

Sources: Bloomberg