July 6, 2017

Daily Observations:

Equities from Japan to Singapore registered declines, with Chinese shares traded in Hong Kong leading the losses. The S&P 500 Index posted small gains Wednesday and technology shares boosted the Nasdaq 100. The yen climbed against all its major peers. Gold gained, while crude oil futures maintained overnight declines.

Geopolitics:

• North Korea’s successful test launch of an intercontinental ballistic missile is the talk of the globe. An emergency United Nations Security Council meeting was held, with U.S. Ambassador Nikki Haley saying America would go its “own path” if needed to counter this aggression, while France’s UN ambassador pushed for fresh sanctions against the isolated state. Many world leaders, including Germany’s Angela Merkel, South Korea’s Moon Jae-in, and UK Foreign Secretary Boris Johnson have condemned the test, but agreeing on a course of action may continue to prove difficult. Russia, for its part, said it was against a deployment to North Korea and that sanctions aren’t the solution. This missile test is also putting pressure on the US to bolster the defense system that would be used to counter a potential attack.
• The 4-nation alliance that severed ties with Qatar said Wednesday that Doha’s response to its demands to end the crisis had been “negative” and failed to recognize the gravity of the situation — but stopped short of announcing new punitive measures. Qatar’s reply “showed complacency and non-seriousness to deal with the root of the problem and reconsider their policies and practices,” Egyptian Foreign Minister Sameh Shoukry said as he read out a statement on behalf of the allies.

US:

• The minutes from the Federal Reserve’s latest meeting showed growing concern over persistently soft inflation—though it wasn’t enough to keep the central bank from hiking rates in June or penciling in another hike by year end. Fed officials are divided on when to begin the process of slimming down the balance sheet as well as whether the initiation of the unwind should prompt them to increase rates at a slower pace going forward. In the communique, monetary policymakers also expressed worry about low levels of implied and realized volatility in equities.
• However, since officials continue to view tepid inflation rates as transitory, the minutes did little to alter market expectations for a third rate hike later this year.
• Factory orders in May fell 0.8%, accelerating upon April’s 0.3% drop and more than the median estimate of a 0.5% decline. Durable goods orders slipped 0.8%, as expected.
• The benchmark 10yr Treasury yield ended 2.32% in New York, down 3bps from Monday’s 2.35% close, and paring an earlier rise to 2.36%.
• The US dollar was slightly stronger overnight, with the Bloomberg Dollar Spot Index ending 0.1% higher on the back of the FOMC minutes and increased geopolitical tensions.
• The S&P 500 Index ended 0.2% higher amid a rebound in the technology sector which propelled the Nasdaq Composite 0.7% higher.

Australia:

• Soaring home prices in Australia’s biggest cities are driven by strong demand and a lack of supply, rather than indicating a “bubble,” according to HSBC’s local Chief Economist Paul Bloxham.
• Five years of red-hot growth have left prices in Sydney and Melbourne up 80% and 60% since mid-2012, fuelling bubble concerns. In June, Moody’s Investors Service cut the long-term credit ratings of Australia’s four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.
• Trade surplus in May widened to A$2.5 billion, beating the estimated A$1 billion and widening from a downwardly-revised A$90 million in April. Seasonally adjusted exports jumped 9% month-on-month, while imports rose 1% over the same period.

Japan:

• The EU and Japan overcame their differences on farm and car exports, paving the way for a free-trade agreement between 2 partners that make up more than a quarter of the world’s economic output. Their respective leaders are expected on Thursday to endorse the preliminary accord, which has been in the works since 2013.

Singapore:

• The Monetary Authority of Singapore notified local banks of the delay to the so-called “fundamental review of the trading book”, which is meant to tackle trading risks, in a letter last month that also flagged a number of other regulatory issues, according to Reuters news. A MAS spokesman said the regulator is “committed to a full implementation” of Basel III reforms.

Precious Metals:

• Spot gold rebounded from a 7-week low to advance by as much as 0.8% to $1,229.35/Oz earlier today as demand over safe haven assets remains steady amid continued geopolitical concerns in North Korea as well as in the Middle East.
• On a longer-term basis, following a break below the 200-day moving average earlier this week, the next support level to be tested lies around the $1,200/Oz psychological handle.
• Silver for immediate delivery pared some of its previous session’s decline, climbing 0.9% to $16.1122/Oz. However, following its break below the $16.25/Oz level earlier this week, the metal has completed a technical breakout to the downside from the multiyear wedge pattern formed since end 2015; momentum stays firmly to the downside with the next support coming in around $15.50/Oz.

Oil

• Crude oil futures expiring in August slumped 4.1% to $45.13/bbl in New York, following yesterday’s reports of Russia’s opposition to deeper production cuts. Futures rebounded earlier this morning but has since pared most of its initial gains.
• State-owned Saudi Arabian Oil Co., known as Saudi Aramco, lowered official pricing for Arab Light crude to Asia by 20 cents to 45 cents a barrel below the regional benchmark, it said in an emailed statement.
• US strategic crude stockpiles have dropped to the lowest level in more than 12 years as the shale boom reduces the nation’s need for an emergency buffer against shortages. Inventories declined by about 13 million barrels over 17 consecutive weeks as the Energy Department delivered supplies it sold in.

Self-driving Cars:

• Tesla Inc. sank more than 7% —its biggest loss in more than a year—after the firm’s second-quarter production and deliveries report showed shipments declined relative to the first three months of the year.
• Volvo Car Group said it expects to soon start phasing out vehicles powered solely by fossil fuels, joining a parade of manufacturers in shifting toward electrics more quickly than most in the industry expected a few years back. The automaker says it plans to offer only hybrid or full-electric motors on every new model launched in 2019 or later, including five electrics it expects in its line-up by 2021.

USDSGD:

• Spot 1.3815
• USDSGD slipped 0.3% to 1.3799 earlier but has since pared some of its drop as the pair continues to consolidate around the 1.3800 handle.
• On a longer-term basis, momentum continues to remain biased to the downside. The support remains at 1.3700.

AUDUSD:

• Spot 0.7599
• AUDUSD’s 3-straight days of declines seems to be coming to an end, with the pair currently 0.1% higher at the 0.7600 handle. Further support for the Australian dollar may come into play following the country’s better-than-expected trade surplus numbers earlier today.
• The top boundary of the pair’s range since April 2016 lies around 0.7750 – a key resistance point.

USDCAD:

• Spot 1.2974
• USDCAD failed to hold above its key 1.3000 handle for the third time in a week, paring overnight gains of as much as 0.4% and falling to 1.2950 early this morning.
• Further weakness in crude oil prices could be the catalyst to push the pair back above 1.3000.
• To the downside, the next support comes in around 1.2800.

USDCNH:

• Spot 6.7748
• The PBOC weakened its fixing rate for a fourth consecutive day, by 0.05% to 6.7953 per US dollar earlier.
• USDCNH was little changed, maintaining around the 6.8000 handle.

USDJPY:

• Spot 112.92
• USDJPY reversed its previous session’s gain, declining 0.7% to 112.89 earlier today on the back of geopolitical concerns involving North Korea.

GBPUSD:

• Spot 1.2938
• GBPUSD advanced 0.3% to 1.2944, rebounding from the 1.2900 handle overnight. The 1.3000 resistance region looks to be tested again over the medium term.