June 23, 2017

Daily Observations:

Asian equities are ending the week on a tepid note, with oil remaining below $43/bbl, after a series of Fed speakers this week did little to alter projections for the path of US interest rate hikes. Chinese equities remain in the limelight as regulators raise scrutiny on some of the country’s biggest dealmakers. Crude oil halted its losing streak, while gold maintained a rebound from a recent 1-month low.

US:

• 34 of the largest banks operating in the US cleared a Federal Reserve stress test of their ability to withstand economic shocks, showing firms are getting the hang of the once-dreaded reviews, a trend that may continue if the Trump administration dials them back. Every bank subject to the annual tests’ first phase exceeded minimum thresholds, though Morgan Stanley trailed the rest of Wall Street on a key measure of leverage.
• Senate Republicans’ proposal to replace Obamacare would provide an additional $50 billion over 4 years to stabilize insurance exchanges, though 4 of the party’s members voiced opposition, threatening the passage of the bill. The Nasdaq’s biotech ETF pushed its 4-day rally past 9%.
• The Fed’s St. Louis President James Bullard said on Thursday that he sees no further need to raise interest rates, however, argued that the central bank should begin cutting its $4.5 trillion portfolio “sooner rather than later”. Bullard is not a voting member of the FOMC this year.
• The US dollar was mostly muted overnight, other than gaining against oil-linked currencies. The Bloomberg Dollar Spot Index retreated 0.2% in New York, closing lower for a second straight day.
• The 10yr Treasury yield slipped to 1bp to 2.15%, paring a decline which saw the yield sink briefly below 2.14%.
• US stocks pared gains in late trading to end the day little changed as financial shares fell with Treasury yields. The S%P 500 Index ended 0.1% lower after trading in a narrow band most of the day. A slump in bank shares overshadowed a rally in health-care shares amid the Senate’s version of a reform bill for the industry.

Canada:

• Retail sales in April rose 0.8% month-on-month, accelerating from the prior month’s gain of 0.5% and beating the median estimate of 0.3%.
• Excluding auto sales, retail sales over the same period gained 1.5%, reversing a 0.1% drop in March and exceeding the consensus forecast of 0.7%.
• Berkshire Hathaway will buy a 38% stake for about C$400 million and provide a $C2 billion credit line to backstop Home Capital with an interest rate of 9%. There had been speculation gains in the country’s real estate market were unsustainable, leading to elevated levels of debt and posing a risk to stability.

China:

• Despite a backdrop of robust economic growth, stable employment and rising factory prices, Chinese stocks and bonds are lagging behind almost all their global peers this year as investors grapple with a series of regulatory surprise. The latest bombshell came Thursday, when shares slumped on news that the government had stepped up scrutiny of the nation’s most active overseas acquirers – including companies run by billionaires Wang Jianlin and Guo Guangchang.
• Regulators had asked banks to report their exposures to the companies after last year’s unprecedented outbound takeover spree, or more specifically, lonas made to Dalian Wanda Group, Anbang Insurance Group, HNA Group, and Fosun International, according to a Bloomberg report.

Precious Metals:

• Spot gold remained steady, fluctuating around the $1,250/Oz handle, after rebounding the previous day.
• Recently plunging crude oil prices have stoked concerns that the Fed may balk at further raising interest rates for the rest of the year due to a weaker inflation outlook.
• 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.
• Gold may be in a longer-term bullish trend signalled by the formation of a rare golden in cross in December, when the 50-week average moved above the 200-week average. The previous time it happened was in 2002. After that gold climbed more than sixfold in 9 years.
  
• Silver for immediate delivery rose 0.5% to $16.6594/Oz.
• Gold is most expensive relative to silver in more than a year. The metal is little changed in the second quarter while silver lost 9%. The current gold-silver ratio is about 75, which is above the 10-year average of 62.5.

Oil

• Crude oil futures expiring in August pared an advance of as much as 1.9%, to end its session 0.5% higher at $42.74/bbl, and is heading for a fifth weekly decline.
• US crude production has extended gains above 9.3 million barrels a day, while Libya is pumping the most in 4 years and oil stored in tankers reached a 2017-high earlier this month.
• A committee tasked with monitoring compliance to the OPEC-led deal gave only cursory attention to the possibility of deepening the existing curbs, according to delegates familiar with the meeting this week.
• Some support is expected around the $42/bbl level, and some consolidation is expected between here and the previous support at $44/bbl.

USDSGD:

• Spot 1.3895
• USDSGD pared an overnight rise above the 1.3900 handle, falling back below it earlier today. Despite limited headway over the past days, the Singapore dollar is heading for its biggest weekly decline in 7 weeks, as higher expected yields boosted the US dollar.

AUDUSD:

• Spot 0.7549
• AUDUSD gained 0.1% to 0.7549, and looks poised to snap a 4-day losing streak which saw the Australian dollar face headwinds due to lower commodity prices.
• The 200-day moving average, last tested a week ago, looks to provide some interim support.

USDCAD:

• Spot 1.3223
• USDCAD sank 0.8% to 1.3208 following better than expected retail sales reported last night.
• Additional tailwinds for the loonie were provided by Berkshire’s investment in Home Capital, allaying fears of a housing collapse.

USDCNH:

• Spot 6.8444
• The PBOC weakened its fixing rate by 0.06% to 6.8238 per US dollar.
• USDCNH advanced 0.2% to 6.8449, a 1-month high; the pair is poised for its biggest weekly gain in more than 3 months after rising for 8 consecutive sessions.
• Further upside may be capped, with a key resistance level lying at 6.8450.

USDJPY:

• Spot 111.34
• USDJPY was little changed earlier today, with the pair continue its consolidating phase between the 111 and 112 levels.
• Key for the currency pair next week is whether oil prices will continue to fall, with a slump below $40/bbl possibly weighing on Treasury yields and thus the USDJPY.

GBPUSD:

• Spot 1.2702
• GBPUSD gained 0.3% to 1.2704 earlier today, following recent hawkish comments from BOE’s chief economist Any Haldane.
• The 1.2600 support is holding well, a move back up above 1.2800 is expected.