June 21, 2017

Daily Observations:

Asian shares retreated as crude oil tumbled into a bear market on concern a global supply glut will persist. Chinese equities remain the lone positive following MSCI’s addition of mainland-listed stocks to its emerging-markets index. Gold and Treasury yields maintained near overnight lows.

US:

• Treasury Secretary Steven Mnuchin said the US government only intends to introduce ultra-long bonds if there’s an audience for regular issuances of the debt. Mnuchin said in May that ultra-long bonds “absolutely make sense” and formed an internal working group to study maturities of 50- and 100-year debt.
• The Fed’s Chicago President Charles Evans concedes that he is “nervous” regarding recent softness in inflation even though it is “likely” that he will see more inflationary pressures.
• His counterpart, Dallas Fed chief Robert Kaplan said he wants to take “muted” 10-year yields, which suggest expectations for sluggish economic growth, into account when thinking about future rate hikes.
• President Donald Trump said Tuesday that efforts by China to rein in North Korea have failed, suggesting he’s weighing new options to deal with Kim Jong Un’s regime. Trumps comments come a day after a 22-year old college student died in Ohio following more than a year of imprisonment in North Korea.
• The US dollar continued to strengthen, as the Bloomberg Dollar Spot Index rose 0.3%, largely due to sterling and commodity currencies’ weaknesses.
• Treasury yields fell; the benchmark 10yr yield slid 3bps to 2.16% overnight, having failed to breach the 2.20% mark yesterday.
• The difference in yield between 5- and 30-year Treasuries tumbled Tuesday to as low as 97bps, the narrowest since Dec 2007. Shorter-term US debt has underperformed this week as Fed officials reiterated plans to stick to their pat of rate hikes, even as market-based measures of inflation expectations fall. 5-year Treasury notes are among the most sensitive to Fed policy outlook.
  
• US stocks fell the most in a month, retreating from all-time highs as crude oil slid into a bear market on concern the global supply glut will persist. The S&P 500 Index lost 0.7% for its biggest decline since May 17 as energy producers and consumer discretionary stocks led declines.

Canada:

• Federal Finance Minister Bill Morneau hosted provincial counterparts for closed-door meetings Monday in Ottawa, hearing from Governor Poloz and his deputy Wilkins. Topics included housing and marijuana taxation, with ministers saying afterward the central bankers outlined the broad risks of an elevated housing market.
• Morneau told reporters Poloz talked about housing “as something that he’s watching closely as a risk to the economy”. The meetings underscore housing’s lynch-pin status in Canada’s economy – directly, and through consumer spending with Canadians taking on more debt as home values climb.
• The nation’s budget watchdog warned Tuesday that debt levels, and servicing costs, are set to rise. With the bank now signalling rates could begin to climb, finance ministers are worried about fallout.

UK:

• BOE Governor Mark Carney ended more than a month of silence with a major speech that pushed back against rate hawks and re-emphasized his concerns about the impact of Brexit on the economy.
• In a speech on Tuesday, Carney highlighted Brexit risks to consumer spending, business investment, the current-account deficit and financial services. More importantly, he indicated he’s in no rush to raise interest rates, and added that he wants to see how the economy responds to the “reality of Brexit negotiations” first.

China:

• MSCI Inc. announced Tuesday China’s domestic equities will join its benchmark indices. The decision will give China’s $6.9 trillion stock market a bigger role in everything from ETFs to retirement plans and advances President Xi’s ambitions to make the yuan a global currency.
• China’s locally-traded A shares will comprise just 0.7% of MSCI’s global emerging-market gauge, with 222 companies being added. The weighting could increase over time if the country enacts further reforms.
• The inclusion will be done in 2 steps – first in May 2018, and the second in August 2018.

Australia:

• According to a Bloomberg survey, economists have lowered Australia’s 2017 GDP outlook following a slow first quarter growth this year. 6 out of 27 economists surveyed predicts the chance of a recession happening over the next 12 months is 20%.

Precious Metals:

• Spot gold slid held near its lowest in 5 weeks, paring an earlier decline of as much as 0.4% which saw it slide to $1,241.34/Oz, as investors weigh outlooks on interest rates, inflation and the US dollar.
• The support around the $1,240/Oz is coming into play, and further consolidation is expected around current levels before the yellow metal commences on its next move and direction. To the downside, the next support comes in at $1,215/Oz.
• Silver for immediate delivery pared an earlier decline of 1.1% to $16.4035/Oz, recovering back above the $16.5000/Oz handle earlier today.

Oil

• Crude oil futures expiring in August held losses after tumbling into a bear market, sliding 2.1% to $43.51/bbl in New York, as rising global supply offsets efforts by OPEC and its allies to drain a glut.
• Libya, exempt from the OPEC-led output cuts, is pumping the most in 4 years while oil stored on tankers reached a 2017 high this month.
• US crude inventories dropped by 2.72 million barrels last week, the American Petroleum Institute was said to report. Government data due tonight is forecast to show a 1.2 million barrel decline.

USDSGD:

• Spot 1.3893
• The Singapore dollar slid to its weakest level in 4 weeks against the US dollar; USDSGD rose 0.3% to 1.3907 overnight, although the pair retreated back below the 1.3900 handle earlier today.

AUDUSD:

• Spot 0.7566
• AUDUSD descended below its 0.7600 handle for the third day in a row, as the pair’s bearish momentum gains traction. The pair was 0.6% lower at 0.7563 earlier, mainly driven by a stronger greenback across the board and a cautious tone delivered by the RBA minutes a day before.

USDCAD:

• Spot 1.3276
• USDCAD gained 0.3% to 1.3285, following an overnight crude oil slump which drove the Canadian dollar weaker.
• A rebound in crude oil could drive the currency pair back towards the 1.3200 support.

USDCNH:

• Spot 6.8286
• The PBOC earlier weakened its fixing rate by 0.14% to 6.8193 per US dollar.
• USDCNH edged 0.1% higher to 6.8333, with the pair poised to close higher for the sixth consecutive day.
• Further upside may be capped, with a key resistance level lying at 6.8450.

USDJPY:

• Spot 111.24
• USDJPY slid 0.3% to 111.20, with demand for safe-haven assets such as the yen higher today due to risk-off sentiment in financial markets.

GBPUSD:

• Spot 1.2634
• GBPUSD fell to a 2-month low, declining 0.5% to 1.2604 last night.
• Downward momentum seems to have taken a breather for now, although the bias is towards the downside following latest reports of PM May’s Conservatives party’s failure to reach a deal with the Domestic Unionist Party.
• The next support beyond 1.2600 comes in at 1.2350.