Issue#: 529/2019

Spot values at a glance:







Daily Observations:

Asian stocks saw muted trading Tuesday after their US counterparts slipped overnight, with Treasuries little changed. S&P 500 futures edged lower as investors took a cautious approach ahead of key testimony this week from Fed Chair Jerome Powell, and as investors dialled back expectations of aggressive monetary easing following Friday’s solid US jobs report.


Strong June Jobs Report Prompt Fed Cut Debate:

The Fed’s debate shifted from how much to cut interest rates later this month to whether to move at all after hiring in June trumped the expectations of economists. Nonfarm payrolls climbed a solid 224,000 last month, the most since January, after a disappointing 72,000 May advance, a Labor Department report showed Friday. At the same time, the jobless rate ticked up to 3.7% from a half-century low of 3.6% and average hourly earnings increased a less-than-projected 3.1% from a year earlier.

Fed funds futures, which had been indicating some possibility of a half-point rate cut in July before the Labor Department’s data, are now pricing a quarter-point reduction this month, and at one point on Friday even showed that outcome was less than 100% certain.

Fed Chairman Jerome Powell, who has said uncertainties in the US outlook could call for lower rates, will give his read on the job market this week in 2 days of semi-annual testimony before Congress. Officials will also take pains to stress that they’re not responding to political pressure. Despite what he termed “great jobs numbers,” President Donald Trump on Friday repeated his call for the Fed to cut interest rates, saying it would make growth “be like a rocket ship.”

“It is going to be a pretty well-debated meeting,” said Michael Feroli, chief US economist at JPMorgan Chase & Co. in New York, who said a half-point cut is now off the table. “I think ultimately they ease because they signaled it so strongly. It is an insurance ease. The cost of such of an ease isn’t high because inflation doesn’t present any kind of near-term risk.”


Growing Concerns on Trump’s USD Influence:

According to Bloomberg news earlier today, a growing chorus of Wall Street foreign-exchange analysts is writing about the risk that US President Donald Trump may move beyond words in his quest for a weaker dollar.

From ING to Canadian Imperial Bank of Commerce, more analysts in recent weeks have been openly contemplating the wild-card notion that the administration could intervene to cheapen the dollar. The research comes as Trump has intensified criticism of both the Federal Reserve and other countries’ currency practices. The US leader tweeted last week that Europe and China are playing a “big currency manipulation game,” and called on the US to “MATCH, or continue being the dummies.”

The US last intervened in FX markets in 2011, when it stepped in along with international peers after the yen soared in the wake of that year’s devastating earthquake in Japan. While that effort boosted the dollar, ING says the American administration may move to do the opposite, and weaken the greenback should the European Central Bank pursue further monetary stimulus. The US hasn’t taken that step since 2000.

The market has yet to put any stock in the notion of US intervention; global currency volatility is at a 5-year low, and the Bloomberg dollar index is barely changed this year. But a Fed trade-weighted measure of the dollar is not far below the strongest since 2002, underscoring the headwind American exports face overseas.


Temasek’s Assets Expected to Take a Hit from Trade War:

Temasek Holdings Pte may report its first decline in assets under management since 2016 as global trade uncertainties and volatile equity markets take their toll. Singapore’s state investor, which had S$308 billion in AUM as of March 2018, will release its 2019 annual report Tuesday. CIMB Private Banking economist Song Seng Wun, who has been covering Temasek for over a decade, predicts the figure may dip to S$300 billion.

Investors globally are facing a tough environment as the trade war between China and the US clouds the market outlook and other issues like Brexit dent returns. Singapore’s sovereign wealth fund GIC Pte last week said overhyped valuations in developed markets were also a concern.

While an AUM decline in that vicinity would be within the range envisaged by Temasek in its 2018 annual report, it would only represent the fund’s third fall in a decade (AUM dipped in 2016 and again in 2009 during the global financial crisis).

Temasek struck a 3 billion euro deal to buy a substantial stake in Bayer AG in April 2018, only to see the German healthcare and agricultural giant lose more than one-third of its value amid a flurry of lawsuits relating to claims a weedkiller brand it acquired when it took over Monsanto Co. causes cancer. The Singapore fund also holds a large interest in US telecoms provider CenturyLink Inc., whose shares slumped 27% in the 12 months through March 31 (Temasek’s financial year-end) after a string of setbacks including a customer lawsuit alleging fraud.


Gold Volatility on the Rise:

The gold market is seeing the biggest price swings since late 2016 as traders and investors struggled to read when the Federal Reserve may cut interest rates.

Bullion futures settled little changed in New York Monday just days after the metal surged near the highest since 2013 on bets the Fed will lower borrowing costs either at the end of this month or later. The appetite for gold began to wane after data on Friday showed US payrolls topped economists’ estimates, weakening the case for policy makers to reduce rates.

Until Friday, gold had been on a tear since Fed officials last month opened the door to a rate cut, boosting the appeal of the metal that doesn’t pay interest. While the latest jobs data fueled doubts policy makers will reduce borrowing costs this month, President Donald Trump continued to apply pressure on Fed Chair Jerome Powell to do just that, saying the current monetary policy has put the US at a disadvantage versus Europe.

Powell and James Bullard, who was the only dissenting vote in favor of a rate cut at the Fed’s meeting in June, are scheduled to address events this week, potentially providing some clue on the policy makers’ next move.


A Lesson on Liquidity Risk:

London-based investment firm, H2O Asset Management, enjoyed surging assets and stellar returns for almost a decade up until last week. After many years of near-constant inflows, clients last week started to yank money from some its funds over concerns about illiquid holdings tied to a controversial German businessman. The carnage worsened on Friday, the latest day for which figures are available, with assets in 6 of its funds down more than 3 billion euros over just 3 days to less than 19 billion euros.

H2O, founded with the backing of French investment bank Natixis SA, fought back hard with a series of measures meant to assure investors it can meet redemptions while making it more painful for those seeking to get out. Among the measures taken hastily over the weekend: the sale of some 300 million euros of unrated private bonds and a mark-down of the remaining ones. It’s an unusual step for a firm that last year introduced entry fees of as much as 5% to limit the inflow of new cash after rapid growth left several funds near full capacity. Now the firm, whose total assets under management exceeded $32 billion at the end of 2018, is dropping the entry fees altogether and said it will appoint an independent auditor to restore investor confidence.

H2O’s troubles started after the Financial Times showed the exposure of several of its funds to companies related to Lars Windhorst, a German financier with a history of troubled investments. Morningstar Inc., an influential research firm used by investors as a guide to buy or sell funds, subsequently suspended its bronze rating on the H2O Allegro fund on Wednesday over concerns about the “liquidity and appropriateness” of some of its holdings.

In the 3 days after Morningstar put the fund’s rating under review, Allegro’s assets under management have dropped by around 650 million euros, according to data compiled by Bloomberg. The Allegro fund, which returned 10% through June 19 this year on top of a 28% gain last year, suffered a record drop in assets on Wednesday and another one on Thursday.

Worries over the ease with which securities in open-ended funds can be traded have caused investors to head for the exits in the last year. H2O faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets that are rarely or ever traded.


Iran Threatens to Enrich Uranium Further:

Iran said it had already begun enriching uranium beyond the cap set in the landmark 2015 nuclear deal and threatened to boost enrichment to 20% purity, escalating tensions with European partners who are struggling to salvage the accord in the face of tightening US sanctions.

Iran announced on Sunday that it would abandon the 3.67% limit for uranium enrichment as it scales back its commitments in response to US penalties reimposed after US President Donald Trump withdrew from the agreement last year. It said more steps would be taken to scale back compliance every 60 days unless European parties find ways to ensure it can continue to trade its oil.

“Earlier today, the level of enrichment reached 4.5%,” Behrouz Kamalvandi, the spokesman for the Atomic Energy Organization of Iran, told the state-run Iranian Students News Agency. In a separate report, Kamalvandi said Tehran may consider boosting enrichment to as much as 20% purity or using more advanced centrifuges at a later stage. It’s “among the options considered,” he said, according to the official Islamic Republic News Agency. Centrifuges are fast-spinning machines used to enrich uranium.

Uranium must be enriched to 90% to build weapons, though lesser levels would be considered significant steps toward that capability. The International Atomic Energy Agency said Monday that its inspectors have verified that Iran has breached the 3.67% limit.

The latest slew of announcements from Tehran raises pressure on European nations who’ve urged it to stick with a multi-party deal that the US has shunned but have struggled to come up with a vehicle that would allow the Iranians to keep selling their oil. French President Emmanuel Macron is sending his top diplomatic adviser to Iran this week, seeking to find ways to get the Islamic Republic to dial back its violations of the nuclear accord and defuse the escalating tensions. 


FX Updates:


Spot: 1.3609

USDSGD extended its recent rebound off its 3-month low near 1.3500, last seen on 1 July. Currency watchers will be monitoring closely Fed Chair Powell’s congressional testimony this week. Until then, USDSGD is expected to fluctuate around its 1.3600 handle.  



Spot: 0.6959

AUDUSD retreated to a 1-week low earlier today following release of a weaker business confidence survey number by National Australia Bank. The RBA cut 25bp to a record low of 1.25% in June, but the move, according to NAB, failed to boost business confidence. A stronger USD, stemming from last Friday’s stellar jobs report has also helped to push the AUDUSD lower this week. The longer-term trend remains to the downside.  The support remains along 0.6828.



Spot: 1.3102

USDCAD remained supported above its key 1.3069 support, rebounding off it last night following diverging jobs reports between US and Canada last week. Canada lost 2,200 jobs in June, while the US added a massive 224,000 positions to rebound from the disappointing May report. The Bank of Canada is expected to keep the benchmark interest rate unchanged at 1.75% on Wednesday, and later in the day the Fed will release the notes from its June FOMC meeting. A break below 1.3069 could signal the end of the pair’s uptrend, in play since Sep 2017, and indicate more downside for USDCAD is in store.



Spot: 6.8891

USDCNH was little changed Tuesday, hanging around just below its 6.9000 handle, even as the US Commerce Department recently announced it will collect extra deposits from importers of Chinese steel. US and Chinese diplomats are up for fresh negotiations this week.



Spot: 108.85

USDJPY bulls rejoiced further Tuesday as the pair reached a 5-week high, driven by a stronger USD as investors continue to dial down expectations of an aggressive rate cut from the Fed this month. The resistance at 109 is likely to hold over the next couple days, until Powell’s congressional testimony concludes on Thursday.



Spot: 1.2508

GBPUSD remained stuck near its 6-month low, as Brexit uncertainty continues to weigh the pound. While the candidates for the British Prime Minister post, Boris Johnson and Jeremy Hunt, have been crossing wires through various appearances, both of them seem firm on the UK’s departure from the EU on October 31. However, Johnson seems a bit tough while standing ready to face no-deal scenario and refrains from seeking any cross-party help during his latest comments on the Telegraph.

On the other hand, the opposition Labour party is luring trade unions and have mostly won the battle. The BBC conveys that major 5 of the UK’s trade unions are supporting a deal on Brexit and a second referendum if the general election delivers Labour as a winner. Risks remained highly skewed to the downside; a significant break below 1.2500 is likely to push the pair lower to post-2016 referendum levels.


Sources: Bloomberg

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UEN: 201419754M

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