July 4, 2017

Daily Observations:

Most stocks in Asia rose after American equities hit a fresh record and better-than-expected ISM manufacturing bolstered optimism in the world’s largest economy. The US dollar held onto gains from an overnight rally, while gold broke below a key level.

Geopolitics:

• President Xi Jinping’s complaint about a “negative” turn in China’s relationship with the US showed the challenge facing Donald Trump when the two leaders meet in Germany this week. Xi’s comment during a phone call with Trump on Monday followed several assertive U.S. moves in Asia, including a naval patrol past a Chinese-controlled islet a day earlier. The American president called in part to advance talks on curbing North Korea’s nuclear weapons program, which have progressed little since Xi’s April visit to Trump’s Florida resort.
• North Korea launched a ballistic missile Tuesday morning, Japan’s coast guard said, adding the projectile could fall into waters that are the nation’s exclusive economic zone.

US:

• US ISM manufacturing for June jumped to 57.8, from 54.9 in the previous month, to register its highest reading since August 2014 with external demand supporting a broad-based expansion. ISM new orders improved greatly to 63.5, from 59.5 in the month prior.
• Construction spending in May registered zero growth, which was less than the 0.3% rise predicted.
• The US dollar rallied strongly following better-than-expected manufacturing data last night. The Bloomberg Dollar Spot Index advanced 0.5% in New York.
• Treasuries sold off broadly, as yields rose higher across the curve. The benchmark 10yr Treasury yield added 5bps to 2.35% overnight, its highest close since 11 May.
• US stocks were mixed as a rally in banks took the Dow Jones Industrial Average to a fresh record, while technology shares tumbled anew. Energy and financial shares lifted the S&P 500 Index, though the measure erased more than half of its gain in the final hour of trading to end 0.2% higher.
• The Dow rose as much as 243 points to an intraday record before closing higher by 130 points. The Nasdaq 100 Index dropped 0.9 percent. Markets closed at 1pm (NYT) ahead of the July 4 holiday.
• Trading volumes in many markets were light before Tuesday’s US holiday and as investors await Friday’s report on the American jobs market. Economic data may provide a key insight for traders in the wake of a hawkish shift from central banks that roiled markets last week.

Canada:

• Investors are keeping a close eye on next week’s Bank of Canada’s policy meeting. The central bank last month began talking about the prospects of raising interest rates amid strong employment and output numbers that are quickly absorbing the economy’s excess capacity. Markets are pricing in an 84% chance of a hike next week.

UK:

• PMI in June fell to 54.3, from a downwardly-revised 56.3 in May, and lower than the median estimate of 56.3 as well.

Europe:

• Chancellor Angela Merkel presented her campaign platform on Monday, pledging to keep Germany a reliable partner in an unsettling world, hold the euro area to its fiscal pact and deliver a 15 billion-euro tax cut mostly for mid-level incomes.

Australia:

• The RBA looks set to keep its target rate unchanged at 1.5% when it releases its monetary policy decision later. Expectations of a hawkish tilt in Tuesday’s statement may prove unfounded, given the last thing Governor Philip Lowe and his board want to do is fuel further currency appreciation. Part of the Aussie story is renewed strength in commodity prices that helped propel 6 consecutive trade surpluses, including a record one in December. Another is the weakness in the greenback as markets bet against the Fed meeting its rate hike forecasts; in addition, an upswing in Europe and elsewhere prompted talk of broader tightening.
• Retail sales in May rose 0.6% month-on-month, slowing from a 1.0% gain in April but better than the 0.2% growth predicted.

Singapore:

• PMI in June edged higher to 50.9, from 50.8 in May and better than the median estimate of 50.6.
• The electronics sector index fell to 52.1, from 52.4.

Precious Metals:

• Spot gold slumped 1.2% to a low today of $1,218.26/Oz, registering its biggest fall this year as a rise in global yields continue to dampen demand for the precious metal.
• With a break below the 200-day moving average, the next support level to be tested lies around the $1,200/Oz psychological handle.
• Silver for immediate delivery tanked 2.6% to $16.0495/Oz, marking a break below the $16.25/Oz level and signalling a technical breakout of the multiyear wedge pattern formed since end 2015.
• Global outflows from ETFs that invest in miners of gold, silver and platinum hit $4.4 billion in the second quarter of this year – the largest on record, according to data from HIS Markit. The sum is the biggest since the financial crisis and dwarfs the second largest on record – $800 million in 4Q 2015.

Oil

• Crude oil futures expiring in August rose 2.2% to $47.07/bbl in New York last night, registering its longest winning streak this year. Futures pared gains during Asian trade though, falling 0.6% back below the $47/bbl handle.
• OPEC production in June climbed to the highest level this year as Libya and Nigeria pumped more, according to data compiled by Bloomberg. The nations are not required to reduce supply under the OPEC-led deal.
• US crude inventories is forecast to drop by 2.5 million barrels last week, A Bloomberg survey showed before a government report on Thursday.

Self-driving Cars:

• Tesla Inc., the maker of electric cars and energy-storage devices, shipped more than 22,000 cars and SUVs in the second quarter this year to meet its first half sales guidance. A record 25,051 vehicles were shipped in the first quarter.
• The sales report comes as Tesla enters a critical quarter. The Model 3, set to begin production this week, is key to Tesla’s goal of reaching mainstream consumers with a smaller, more affordable electric sedan. With prices slated to start at $35,000 before any incentives or options, the Model 3 is the youngest publicly traded U.S. automaker’s best chance at mass-market penetration.

USDSGD:

• Spot 1.3824
• USDSGD pared last week’s selloff, rising 0.4% Monday and by another 0.1% to a session high of 1.3831 earlier.
• Momentum continues to remain biased to the downside. The support remains at 1.3700.

AUDUSD:

• Spot 0.7665
• AUDUSD seems to be consolidating between 0.7650 and 0.7700 ahead of RBA’s policy decision due in a while.
• The top boundary of the pair’s range since April 2016 may be tested soon; further resistance is expected between 0.7700 and 0.7750.

USDCAD:

• Spot 1.2993
• USDCAD briefly recovered above the 1.3000 handle, but failed to maintain above it earlier today. The pair on Monday snapped a 6-day losing streak.
• Some consolidation is expected around current levels before the pair’s next move.

USDCNH:

• Spot 6.7792
• The PBOC weakened its fixing rate by 0.17% to 6.7889 per US dollar earlier today.
• USDCNH added 0.1% to 6.8030 earlier.

USDJPY:

• Spot 113.25
• USDJPY advanced 0.4% to 113.47, its highest level since 17 May, before paring gains earlier today following reports of North Korea’s firing of a ballistic missile.
• Upside bias for the currency pair remains; further strengthening of the US dollar will likely push the currency pair higher towards the 115 handle.

GBPUSD:

• Spot 1.2941
• GBPUSD extended Monday’s drop, declining 0.2% to 1.2932 earlier today, amid US strength and weaker-than-expected PMI released yesterday.
• Continued USD strength could derail sterling bulls’ hopes of breaking above the key 1.3000 handle.