Spot values at a glance:
Asian stocks rebounded after two days of declines as yields on benchmark government bonds retreated from recent highs and US futures recovered from earlier losses. The dollar slipped after President Donald Trump’s delivered his first State of the Union speech in Washington.
The S&P 500 last night suffered its biggest 2-day decline since last May, extending Monday’s 0.4% drop by another 1.1% last night. Screens flashed red across most asset classes, with investors on edge ahead of a slew of earnings, a US rate decision, the president’s address to Congress and major economic data. All major US equity indexes sank a second day, with investors pocketing profits from a 4-week rally that greeted 2018. Treasury bonds, crude oil and industrial metals and gold all turned lower. The slide comes amid growing worries that rising bond yields will lead to slower growth and perhaps cause strategists to start reining in their lofty earnings estimates.
Since the MSCI All-Country World Index reached a record high on Friday it’s posted its largest 1-day loss since August. Still, it’s a mere 1.5% below that peak and remains 5.7% higher year-to-date. That’s the best January on record going back to at least 1987. The market drop has been broad-based with all sectors in the MSCI World declining. Energy and healthcare stocks have fallen the most, with consumer discretionary and real-estate shares the relative outperformers.
Meanwhile, volatility across asset classes have risen; the VIX index gained 34% in 2 days, while measures of currency market volatility and swings in bond prices are also climbing.
White House Downplays Stock Selloff:
White House economic adviser Gary Cohn, speaking on the eve of a Federal Reserve monetary policy decision, downplayed several risks to the US economy, including two straight days of declines in equity markets, rising long-term interest rates and concerns that inflation may soon accelerate.
“We need to look at markets over trends and cycles. We are clearly in a bull market trend,” Cohn said Tuesday in an interview on Fox News Channel. “Since President Trump got elected, the market has been on a consistent upward trend and upward trajectory. The last two days have been a break from that upward trend, but if you look at the overall performance of markets, markets have performed exceptionally well during the Trump administration.”
Mnuchin Clarifies his Position on the Dollar:
Treasury Secretary Steven Mnuchin, in his testimony to the Senate Banking Committee on Tuesday, said that he “absolutely supports a strong dollar as being in the long-term best interest of the country”, in an effort to resolve an issue that’s roiled currency markets in recent days. On Tuesday, Mnuchin recounted to lawmakers how in Davos, Switzerland, last week he gave a press briefing and delivered a three-part comment “that was extremely balanced and very specific,” adding that it was “not anything new.” The press, he said, focused on one aspect and kept on playing it over and over, an apparent reference to his line that “obviously a weaker dollar is good for us as it relates to trade and opportunities.” The dollar fell before recovering, drawing a rare rebuke of the US by ECB President Mario Draghi.
Trump’s State of the Union Address:
US President Donald Trump boasted about the economy, job growth and his “America first” policy during his first State of the Union address, which was met by protests both inside and outside of Congress. “This, in fact, is our new American moment,” Trump said on Tuesday evening as he addressed the current state of the US and laid out his top priorities for the year ahead. “There has never been a better time to start living the American dream,” he added.
The president addressed a wide-range of issues from job growth and tax reform to infrastructure, immigration reform and national security. The US president also took the opportunity to congratulate himself and Congress on passing a massive tax overhaul, which has been criticised by Democrats and rights groups for unfairly benefiting wealthy Americans, while raising taxes for middle class families. It will also add nearly $1.5 trillion to the federal deficit over the next 10 years.
Trump again called on Congress to pass a immigration reform package that includes creating “a path to citizenship” for 1.8 million undocumented people who were brought to the US as children, “fully securing the border” by building a wall on the US-Mexico border, ending the diversity visa lottery programme, and stopping immigration based on family ties, which Trump often refers to as “chain migration” – a phrase rights group and Democrats call “unhelpful” and “racist”.
The US president also called for the modernisation of the US nuclear arsenal, warning that: “North Korea’s reckless pursuit of nuclear missiles could very soon threaten our homeland.” He also named China and Russia as rivals.
More than a dozen Democratic Congress members did not attend the speech, which local media reported could be the biggest boycott of its kind for a State of the Union address.
Korea – US Trade Talks:
A week after the US government imposed safeguard tariffs that hit South Korean washing machine makers, negotiators from the two nations meet in Seoul on Wednesday to discuss how to revise their free-trade deal. The two days of negotiations, which follow a first round in Washington earlier this month, are likely to focus on resolving barriers to American exports, according to US Trade Representative Robert Lighthizer. While the conflict over washing machines isn’t specifically on the agenda, Korea disputes the US action and it could cloud the broader FTA talks.
Healthcare Disruption on the Cards:
Bloomberg news reported yesterday that Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chas & Co. plan to join forces to change how health care is provided to their combined 1 million US employees, in turn sending shock waves through the healthcare industry.
The plan, while in early stages and focused solely on the three giants’ staff for now, seems almost certain to set its sights on disrupting the broader industry. It’s the first big move by Amazon in the sector after months of speculation that the internet behemoth might make an entry. The Amazon-Berkshire-JPMorgan collaboration will likely pressure profits for middlemen in the health-care supply chain.
It was enough to sink health-care stocks. Express Scripts Holding Co. and CVS Health Corp., which manage pharmacy benefits, slumped 6.9% and 4.9%, respectively. Health insurers such as Cigna Corp. and Anthem Inc. and biotechnology companies also dropped.
Carney to Focus on Inflation Battle:
Bank of England Governor Mark Carney said on Tuesday he can fully focus on tackling inflation as the drag from Brexit on investment and the economy starts to recede. “As slack in the economy has been taken out, we’ve moved into a more conventional area for monetary policy where the focus is increasingly on returning inflation sustainably to target over an appropriate horizon,” Carney commented.
The BOE will announce its next policy decision next Thursday alongside new economic predictions. Strong employment figures alongside better-than-forecast growth data have increased the chance of a summer interest-rate hike. While November was once seen as the most likely month, bets on a hike in August, or even as soon as May, have risen in recent weeks.
Carney expects a pickup in investment in 2019, in part because of stronger global growth and demand. “There are some headwinds to this economy that we all want to see cleared,” he said, referring to Brexit uncertainty.
Australian CPI Miss:
Inflation has fallen short of market expectations, prompting traders to wind back bets that the RBA will begin normalising monetary policy in 2018.
Headline CPI in the fourth quarter last year rose 0.6% from the previous quarter, when it increased by the same amount; the median estimate was 0.7%. Year-on-year, CPI gained 1.9%, missing the 2.0% expected.
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 28.6% over the past year.
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 13.5% from a year ago as of Thursday.
USDSGD looks on course to snap a 3-day winning streak, declining back below the 1.3100 handle following Trump’s state of the union address earlier today. The US dollar weakened against most major and Asian currencies, possibly due to a sense of relief that Trump didn’t elaborate much on trade issues or announce anything new on that front.
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.
AUDUSD neared a 3-day low earlier today, after last quarter’s missed inflation numbers prompted traders to pare bets that the RBA will hike rates sooner than later.
AUDUSD has recently failed to hold above the key 0.8100 handle, indicating some exhaustion in the pair’s rally from 0.7500 since last December. Strong resistance continues to remain at 0.8125.
Analysts are continuing to stick with their bearish outlook for the Australian dollar, according to Bloomberg news. Factors such as falling iron ore prices, a gradual but discernible deceleration in Chinese growth and widening interest-rate differentials between Australia and the US are expected to contribute to AUDUSD’s decline in the future.
USDCAD continues to be supported above its 1.2300 handle, despite as crude oil’s overnight drop. The FX pair is expected to trend sideways over the near term, between the range of 1.2300 and 1.2600. A break below the recent low of 1.2282 is likely to lead to further downside, the next support target residing at 1.2062.
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 last Thursday. Offshore yuan is currently trading near at its strongest level against the USD since the PBOC devalued the yuan in August 2015, and is poised to complete its best month in at least 10 years amid a weakening US dollar.
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.
The yen declined from nearly its strongest level since last September, weakening to 109 against the US dollar as Governor Kuroda reaffirmed a commitment to his ultra-loose monetary policy. The BOJ offered to buy more bonds at a regular operation for the first time since July, helping to bring down yields and weaken the yen.
USDJPY remains in a major sideways trend, as it has been the whole of last year. The key support remains at 107.50.
GBPUSD resumed its recovery after BOE Governor Carney said the central bank was turning its focus back to bringing down inflation, supporting investors betting that the central bank would rein in monetary policy faster than expected.
The quarterly inflation report, due next week alongside the BOE’s first rate decision of the year, could signal a shift with the bank focusing on a healthier outlook for economic growth rather than worrying about stagflation, Credit Agricole said.
The currency pair rebounded strongly off the 1.4000 psychological support yesterday, and is expected to have another go at the recent high of 1.4350.