July 26, 2017

Daily Observations:

Positive US corporate earnings and broad-based gains in commodities from oil to copper spurred a rally in US equities and dragged bonds lower as the Federal Reserve prepares to conclude its policy meeting. Crude oil extended oil overnight rally, while gold sank below its $1,250/Oz handle.

US:

• The Senate rejected Majority Leader Mitch McConnell’s health-care proposal late Tuesday UST at the start of several days of debate with no clear idea of what Obamacare-replacement plan the senators will ultimately be asked to pass. The 43-57 vote against a modified version of McConnell’s plan, with 60 required to adopt it, came hours after a dramatic 51-50 vote to begin debate. Vice President Mike Pence broke a 50-50 tie after Senator John McCain, who is undergoing brain-cancer treatment, flew in from his home state of Arizona to cast the tying vote to move the bill forward.
• The US Conference Board Consumer Confidence index rose to 121.1 in July, from 117.3 last month, exceeding the consensus estimate of 116.5.
• The benchmark 10yr Treasury yield rose by the most in a month, gaining 8bps to 2.34% in New York. According to a Bloomberg report, many traders pinned the move on some bullish positions being taken off after the recent rally rather than a sign of what they expect the Fed to say when it releases its latest decision on interest rates Wednesday.
• Following results of the Treasury Department’s auction of $26 billion in two-year notes, it was reported that investors put in bids for 3.06 times the amount being offered, the highest so-called bid-to-cover ratio for that maturity since 2015. The 2 takeaways, according to Peter Boockvar, chief market analyst at The Lindsey Group, are:
  • the results reflect little belief that the Fed is going to be raising rates anytime soon
  • bond investors expect only modest economic growth and inflation that is stuck well below the Fed’s 2% target
• The S&P 500 Index (+0.29%) and Nasdaq Composite Index (+0.02%) closed at all-time highs on Tuesday. Impressive quarterly results from McDonald’s Corp. and a positive outlook from Caterpillar Inc. helped fuel the gains. More than 80% of S&P 500 companies have delivered earnings that have beaten forecasts so far this reporting period, helping to support optimism in the global economy and bringing down volatility levels to fresh record lows.
• However, according to a Bloomberg survey of 30 fund managers and strategists on four continents, the rally just underscores that time is running out on the second-longest bull run in stocks on record, which will end by late 2018, when U.S. credit markets also will enter their first bear market since the global crisis.
• The US dollar gained broadly overnight after Treasury yields had their biggest rally in more than a month. The Bloomberg Dollar Spot Index rose 0.2%, while the DXY Index reversed an earlier decline to close 0.1% higher in New York.
• The Fed’s monetary policy decision tonight is expected to be a non-event, with all 83 economists surveyed by Bloomberg predicting the central bank to keep its target for federal funds rate in a range of 1% – 1.25%. Investors, however, will keep an eye out for the FOMC’s statement on its plan to shrink the central bank’s $4.5 trillion balance sheet.

China:

• China’s gross domestic product will expand by 6.7% from a year ago in the third quarter and 6.6% in the fourth quarter, according to the median of 57 economist estimates in a July 17-24 Bloomberg survey released Tuesday. Economists have raised their forecasts from a month ago.
• Copper enjoyed its highest close in more than 2 years and shares in producers of the metal rallied amid expectations for increased demand in China, the world’s top user of industrial metals.

Australia:

• Australia’s inflation gauges missed the bottom of the central bank’s target as lower oil prices dragged down the headline measure, signalling policy makers are likely to extend an almost yearlong interest-rate pause.
• Headline CPI in 2Q rose 0.2% quarter-on-quarter and 1.9% year-on-year, slowing from the prior gains of 0.5% and 2.1% respectively; this morning’s figures were also slower than the median estimate gains of 0.4% and 2.2% respectively. The RBA’s target is an annual inflation of between 2-3% on average.
• The probability the RBA will cut rates by May rebounded back above 50% to 55% earlier today, according to Bloomberg pricing data.

Singapore:

• According to a Bloomberg report, artificial intelligence, once fully adopted, might lift Singapore’s annual growth rate to 5.4% in 18 years. That would be the largest increase among 33 countries studied and would translate into an additional $215 billion in gross value added. Without AI, the economy is predicted to expand 3.2%.
• Singapore’s drive to become a global high-tech hub has seen the government, agencies, and companies actively encourage the study and implementation of technology across industries. Current uses range from self-driving buses and taxis to robots assisting the elderly with exercise. Recently, the government has also begun to place greater emphasis on developing artificial intelligence and data analytic capabilities.

Precious Metals:

• Spot gold extended a previous session’s 0.4% decline, falling a further 0.4% to $1,246.52/Oz earlier today and retreating from a 1-month high and resistance level of $1,260/Oz.
• Further downside, closer to the 200-day moving average support at $1,230/Oz, is possible.
• Silver for immediate delivery pared an earlier session gain of as much as 1.8%, retreating back below the $16.50/Oz level for the second time in as many days.
• The resistance at $16.50/Oz continues to be key, with downside risk remaining high if silver fails to break above it; the next support below comes in around $15/Oz.

Oil

• Crude oil futures expiring in September rallied 3.3% in New York, and a further 1.4% earlier today to $48.54/bbl, after industry data showed US crude stockpiles plunged.
• Inventories tumbled by 10.2 million barrels last week, the American Petroleum Institute was said to report. If the decline is replicated in government data later today, it would be the biggest decrease since September.
• The UAE reiterated its commitment to the OPEC agreement on production cuts and said it would deepen its own curbs.

Cryptocurrencies:

• Companies that raise money through the sale of digital assets must adhere to federal securities laws, the Securities and Exchange Commission said Tuesday. Issuers must register the deals with the government unless they have a valid excuse, as should exchanges that offer trading of cryptocurrencies like bitcoin and ether, the regulator said.
• Bank of America Merrill Lynch is looking past the increase in bitcoin trading volume to caution against a surge in optimism surrounding the digital currency. “A key step for bitcoin would be for it to become pledgeable collateral,” the bank said in a note published Tuesday. “However, large inherent risks to digital tokens such as fraud, hacking, theft, new protocol adoption, limited acceptance, and that it is not legal tender many places in the world make it an unlikely development.”

USDSGD:

• Spot 1.3624
• USDSGD gained 0.2% to 1.3637 following broad US dollar strength today.
• The pair seems to have some footing around the 1.3600 handle. The next important support handle below comes in around 1.3500, although a rebound back up to either 1.3700 or 1.3750 is likely to occur beforehand.

AUDUSD:

• Spot 0.7912
• AUDUSD retreated briefly below the 0.7900 handle earlier, falling 0.6% to 0.7893 after slower-than-expected inflation Australian data was reported today, and thus increasing speculation the RBA is likely to extend an almost yearlong interest-rate pause.
• Downside risk for the pair remains high. The resistance at 0.8000 remains key, while below, the support lies at 0.7835.

USDCAD:

• Spot 1.2508
• USDCAD was largely unchanged for the day, and continues to hold above the 1.2500 handle. Broad USD strength have largely been offset by strength from the Canadian dollar as well due to crude oil’s overnight rally.
• The Canadian dollar has been the best performing currency in the world over the past 2 months. The next bastion of support lies at 1.2460 – the pair’s 2-year low.

USDCNH:

• Spot 6.7532
• The PBOC weakened its fixing by 0.07% to 6.7529 per US dollar earlier today.
• USDCNH pared an earlier gain and retreated back below its 6.7600 handle to remain relatively unchanged for the day.
• The 9-month low of 6.7234, established in early June, continues to act as a key support.

USDJPY:

• Spot 111.95
• USDJPY extended its rebound from a 5-week low, gaining 0.7% to 112.09 earlier and recovering back to the pair’s 200-day moving average.

GBPUSD:

• Spot 1.3022
• GBPUSD erased an earlier session gain to retreat back to the 1.3000 handle, as investors await second quarter preliminary GDP figures from the UK due to be released later today.