July 28, 2017

Daily Observations:

Asian stocks declined after last night’s tech selloff in the US weighed on investor sentiment. Attention remains on corporate results ahead of a report on US second-quarter growth due later tonight. The US dollar held onto gains following its rebound overnight, while gold retreated from a 5-week high. Crude oil earlier broke above the $49/bbl handle.

US:

• Durable goods orders for June rose 6.5%, more than the median estimate of 3.9% and reversing from a 0.1% decline in May.
• Wholesale inventories last month advanced 0.6% month-on-month, gaining pace from May’s 0.4% rise, and exceeding economists’ estimates of 0.3%.
• Congressional Republicans are starting to pivot toward talks on an overhaul of the tax code despite the lack of firm results on health care legislation or a 2018 budget resolution. The border-adjusted tax championed by House Speaker Paul Ryan and White House senior adviser Stephen Bannon is now dead in the water after facing stiff opposition from retailers. But another Bannon proposal — hiking the top income-tax rate — is reportedly still under consideration.
• The Nasdaq 100 Index (-0.6%) endured a frenzied afternoon selloff, with Amazon leading the way lower. Amazon’s retreat continued in the after-hours session after earnings missed expectations.
• The S&P 500 Index (-0.1%) retreated as well, although the Dow Jones Industrial Average (+0.4%) closed at a record high once again, helped on by a rally in the energy sector. Other major earnings stories for the day were largely positive, including strong results from Starbucks and Verizon.
• A note from a well-followed quant, JPMorgan’s Marko Kolanovic, warning of a potential bottom for volatility was credited with contributing to the market angst. Kolanovic wrote that the big risk is a reversal in volatility, which has plunged in almost all asset classes, raising concerns about too much complacency permeating markets. The fact that volatility is at such historically low levels “indicates that we may very close to a turning point”, he added. In particular, he highlighted the risks involved in strategists boosting leverage when volatility declines, such as option hedging, risk parity accounts (basically a strategy that weights asset classes based on riskiness and volatility).
• The US dollar held onto gains as profit-taking helped it rebound from a fresh 14-month low set in Asian trading yesterday, following a drop of more than 1% after Wednesday’s Federal Reserve decision. The Bloomberg Dollar Spot Index rose 0.4%, while the DXY gained 0.2% but failed to hold above the 94.00 handle.
• The benchmark 10yr Treasury yield rose 2bps to 2.31% in New York, but fell lower to 2.30% in Asia trade earlier today as investors weigh the outlook of US interest rates after the Fed indicated concerns about subdued inflation earlier this week.

Canada:

• Officials within Prime Minister Justin Trudeau’s government are concerned the Bank of Canada is moving too quickly to raise interest rates, fearing higher borrowing costs could inadvertently trigger a downturn, Bloomberg reported. Governor Stephen Poloz raised the central bank’s key overnight rate this month for the first time since 2010, and another increase is expected by the end of the year. The officials, speaking anonymously because they’re not authorized to comment, are concerned a series of rate hikes would lead consumers to claw back spending, stunting a recovery from a 2-year oil shock.
• While Trudeau and Finance Minister Bill Morneau have steadfastly declined to comment on monetary policy, as is customary, some officials privately think Poloz hiked too soon. The concern comes amid global warnings that an era of rock-bottom interest rates has left consumers and countries alike over-leveraged and more vulnerable than ever to hikes.

Japan:

• The jobless rate in June fell to 2.8%, from 3.1% in May, lower than the median estimate of 3.0%.
• Headline CPI for June rose 0.4% from a year ago, matching expectations and maintaining the same pace as in May. Stripped of the effects of fresh food, CPI gain was the same at 0.4%, matching the prior month’s pace and in line with estimates.
• Retail sales last month rose 0.2% from a month ago, rebounding from a 1.5% decline in May, but less than the consensus gain of 0.4% Year-on-year, retail sales matched May’s gain of 2.1% but lagged expectations of 2.4%.

Australia:

• The previous quarter’s producer prices index rose 0.5% quarter-on-quarter, and 1.7% year-on-year; compared to the prior quarter’s gains of 0.5% and 1.3% respectively. No estimates were provided.

Singapore:

• The unemployment rate in the second quarter of this year maintained at a seasonally adjusted 2.2%, lower than the expected rate of 2.3%.

Precious Metals:

• Spot gold retreated from a 5-week high, falling by as much as 0.6% to $1,254.61/Oz last night, although it has since pared its decline back toward the $1,260/Oz handle.
• Spot gold is currently testing a key downward multiyear trendline, in play since 2011. An upward move above the $1,300/Oz handle should confirm the break above the trendline and signal the start of a new long-term upward trend.
• Silver for immediate delivery retreated as well, sliding 1.2% to $16.5540/Oz, finding support above the $16.50/Oz level.

Oil

• Oil is headed for the biggest weekly gain this year as sliding US inventories and signs of stronger demand raise speculation a supply glut in the US may ease. Crude oil futures expiring in September extended its rally, gaining 0.6% to $49.04/bbl.
• Inventories declined by 7.2 million barrels last week to the lowest level since Jan 6, according to an Energy Information Administration report released on Wednesday.  The American Petroleum Institute said Thursday the nation’s fuel use in June surged to the highest for that month in a decade.
• Kuwait has agreed this week to trim sales for 2017, joining the UAE in promising to pump less and after Saudi Arabia called on OPEC producers to cut more.

USDSGD:

• Spot 1.3591
• USDSGD rebounded from a 10 month-low of 1.3543, but failed to hold above the 1.3600 handle as a rebound in the US dollar faltered earlier today.
• The next key support lies at 1.3500, where the base of a double-top formation on the pair’s multiyear technical chart lies.

AUDUSD:

• Spot 0.7973
• AUDUSD retreated back below its 0.8000 level, falling by as much as 0.8% to 0.7953 earlier.
• The momentum continues to remain to the upside, with the next resistance target residing at the 2-year high of 0.8164.

USDCAD:

• Spot 1.2560
• USDCAD rebounded from a 2-year low of 1.2414, erasing its declines for the week and rising 1.1% to 1.2576 last night.
• The pair is slated for more volatility later today, as investors await the release of GDP numbers from Canada and the US.

USDCNH:

• Spot 6.7444
• The PBOC weakened its fixing to 6.7373, from 6.7307 per US dollar yesterday.
• USDCNH rebounded off its key support level of 6.7250, paring previous day’s decline by 0.1% to 6.7463 amid a broad rebound in US dollars last night.

USDJPY:

• Spot 111.07
• USDJPY retreated 0.4% to 110.93 earlier today, reversing an overnight rebound.
• The currency pair looks on course to retest the 110 level.

GBPUSD:

• Spot 1.3083
• GBPUSD gave up most of its previous session’s gains to slide back below the 1.3100 handle. The pair fell 0.7% to a low of 1.3052 last night.
• The next resistance lies around 1.3450, however further upside for the currency pair may be limited given that investors are keeping an eye out on next week’s BOE policy decision.