July 31, 2017

Daily Observations:

Asian equities were mixed; stocks mostly gained in Shanghai, Sydney and Hong Kong, while indices in Seoul, Singapore and Tokyo retreated. Raw-material producers advanced following a rally in commodity prices. Oil extended last week’s strongest rally this year, while gold retreated from a 6-week high.

Geopolitical:

• US Secretary of State Rex Tillerson singled out China and Russia as “economic enablers” of North Korea after Kim Jong Un on Friday test-fired an intercontinental ballistic missile for the second time in a matter of weeks. While Tillerson said the US wants a peaceful resolution to the tensions, the top American general called his South Korean counterpart after the launch to discuss a potential military response.
• China on Saturday condemned the latest test while calling for restraint from all parties, a muted reaction to Pyongyang’s progress on an ICBM capable of hitting the US mainland. Kim claimed that every part of the US is within its shooting range.
• Despite Kim’s provocations, analysts said Beijing still sees the collapse of his regime as a more immediate strategic threat, and doubts Trump would pull the trigger given the risk of a war with North Korea that could kill millions.
• Australian authorities foiled a plot to “bring down” a plane, Prime Minister Malcom Turnbull said on Saturday evening. Four men were arrested over the alleged plan to blow up an aircraft with an improvised device, which is believed to have been inspired by the Islamic State. Security at the nation’s airports has been tightened, with passengers being warned to expect delays.
• The Saudi-led alliance that severed ties with Qatar reinstated a list of 13 demands that must be met before talks to resolve the 8-week crisis could start, just as fresh economic data highlighted the impact of the unprecedented boycott on the Gulf nation.

US:

• US GDP in the second quarter this year expanded 2.6% quarter-on-quarter, improving upon the downwardly-revised 1.2% gain in the prior quarter and slightly missing out on the median consensus of 2.7%.
• Consumer spending over the same period rose 2.8%, matching expectations, and improving upon the prior gain of 1.9%.
• Core PCE, which excludes the effects of food and energy prices, rose 0.9% from the previous quarter, exceeding the 0.7% consensus estimate, but slowing from 1Q’s 1.8% gain.
• According to Bloomberg news, Friday’s GDP results confirm that the slowdown at the start of 2017 was temporary and show an economy growing in the first half of the year at around 1.9%, compared with the expansion’s 2.2% average pace through the end of 2016.
• Consumer spending was helped by a steady job market and household finances were boosted by stock and home-equity gains. Disposable incomes, adjusted for inflation, posted the best back-to-back quarters since the first half of 2015.
• More political drama within the White House unfolded on Friday, as US President Donald Trump announced via Twitter that Reince Priebus would be leaving the administration, with John Kelly (former head of Department of Homeland Security) taking over as White House chief of staff. Critics contend that the military background of Kelly, a retired general, leaves him ill-disposed to serve in this highly political role.
• The US dollar floundered near its multi-month low following its drop on Friday amid more political uncertainty in Washington. The Bloomberg Dollar Spot Index retreated 0.5% Friday. The Dollar Index registered its lowest close since May 2016 on Friday, sliding 0.7% to 93.247.
• Treasury yields fell slightly, by 2bps to 2.29% on Friday and another 1bp to 2.27% earlier today.
• The S&P 500 and Nasdaq Composite indices both ended 0.1% lower on the day to end the week. The Dow Jones Industrial Average bucked the trend to close 0.2% higher, led by Chevron Corp. which rallied on earnings.

Canada:

• GDP in May beat all forecasts as oil production rebounded, providing another sign policy makers can probably continue unwinding monetary stimulus as the economy moves towards full output.
• GDP rose 0.6% month-on-month and 4.6% year-on-year, gaining pace from the prior gains of 0.2% and 3.3% respectively and surpassing median estimates of 0.2% and 4.2% respectively. Growth in the oil, gas and mining industry accounted for about two-thirds of the increase.

UK:

• Customs checks at the border after the UK leaves the European Union could cost 1 billion pounds a year and cause delays for goods being shipped in both directions, according to a report by Oxera, an economic consultancy. The estimate assumes low regulation but high levels of enforcement and is based on World Trade Organization data on the cost of trading across borders.

Japan:

• Industrial production in June gained 1.6% from a month ago and 4.9% from a year before, surpassing consensus estimates of 1.5% and 4.8% respectively.

China:

• Official July manufacturing PMI slid to 51.4, from 51.7 in June, and missed out on the median estimate of 51.5. The non-manufacturing PMI fell as well, from 54.9 in the month prior, to 54.5 for July.

Precious Metals:

• Spot gold is on course to clock its biggest monthly advance since February, following a 0.6% gain to $1,269.64/Oz on Friday. The precious metal is currently facing some resistance around the $1,270/Oz handle. 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.
• Demand for gold bars in China, the world’s biggest bullion market, soared by more than half in the first 6 months of the year as investors sought a haven from financial and geopolitical risks. Sales climbed 51% to 158.40 metric tons from a year earlier, the China Gold Association said in a press statement. Overall gold consumption climbed almost 10% to 545.2 tons, including 330.8 tons for jewellery sales, while industrial demand and other uses increased 9%.
• 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 ended Friday largely unchanged for the day and retreated slightly earlier this morning, falling 0.1 % to $16.7388

Oil

• Crude oil futures expiring in September briefly rose above $50/bbl for the first time since May earlier today after OPEC said the group and its partners will meet next week to discuss why some nations are falling behind on their pledge to cut production. Futures rose by as much as 0.7% to $50.06/bbl earlier today, before sliding back below the psychological handle.
• The Abu Dhabi meeting, co-chaired by Kuwait and Russia, is set to take place after Saudi Arabia last week said it would step up pressure on countries that aren’t complying.
• The US is said to be considering increasing sanctions against Venezuelan’s oil industry, the Wall Street Journal reported.

USDSGD:

• Spot 1.3572
• USDSGD retreated back below 1.3600 Friday, and maintained losses during Asia trade 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 0.7983
• AUDUSD remains little changed on the day, following slightly poorer-than-expected PMI data emerging from China, Australia’s biggest trading partner, this morning.
• The currency pair continues to hold below the psychological resistance of 0.8000.; the next resistance target resides at the 2-year high of 0.8164. To the downside, 0.7875 provides some near-term support.

USDCAD:

• Spot 1.2469
• USDCAD retreated back below the 1.2500 handle on Friday, following better-than-expected GDP data and continued strengthening in crude oil prices.
• The pair has since pared some of its decline, rising 0.4% to 1.2487 earlier today.
• There has been recent concerns of the Canadian dollar being overbought, with a rebound back up to 1.2600 a likely scenario if the pair continues to struggle to break below 1.2400.

USDCNH:

• Spot 6.7315
• The PBOC strengthened its fixing by 0.13% to 6.7283 per US dollar earlier today.
• USDCNH retreated 0.1% to 6.7276, and is poised to retest the key support level of 6.7234 for the second time since Thursday. The pair is headed for its third monthly decline, its longest run since October 2014.

USDJPY:

• Spot 110.54
• USDJPY earlier declined to its lowest in almost 6 weeks, before erasing most of its drop to recover back above 110.50.
• Bias to the downside remains as the currency pair looks on course to retest the 110 level.

GBPUSD:

• Spot 1.3126
• GBPUSD recovered back above the 1.3100 Friday following renewed USD weakness after the US GDP report. The pair slipped slightly lower earlier, by 0.1% to 1.3118.
• 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 for Thursday’s BOE policy decision.