June 27, 2019

Daily Observations:

Asian stocks advanced on optimism that the US and China will declare another truce in their trade war at a presidential meeting on Saturday. The yen extended losses after the biggest drop since April. U.S. stock futures also climbed after reports that the current plan is for the US to hold fire on hiking tariffs on another swathe of Chinese imports. 10yr Treasury yields edged up, while safe haven assets such as gold remain lower.

Trump Warns of More Tariffs Ahead of Xi Meeting:

President Donald Trump said substantial additional US tariffs would be placed on goods from China if there’s no progress on a trade deal after his planned meeting with Chinese counterpart Xi Jinping at the G-20 Summit in Japan.

“My Plan B with China is to take in billions and billions of dollars a month and we’ll do less and less business with them,” Trump said Wednesday during an interview with Fox Business Network. The White House announced his meeting with Xi would take place at 11:30 a.m. on Saturday in Osaka.

Trump has previously said he may decide to raise tariffs on the remaining $300 billion of Chinese imports if he doesn’t like what he hears from Xi at this weekend’s summit in Osaka. The president’s latest remarks added an element of doubt to Treasury Secretary Steven Mnuchin‘s comment earlier Wednesday on CNBC that he’s “hopeful” about US-China trade negotiations.

An alternate course as the trade talks resume may be that US suspends the next round of tariffs on the additional $300 billion of Chinese imports, Bloomberg reported Tuesday. If the tariffs on the broader set of goods does go into effect, it could be at a 10% rate rather than 25%, Trump said in the television interview Wednesday.

Trump criticized a range of trading partners in the interview, including Germany and Vietnam, which he called an “abuser” when responding to a question about companies relocating production from China to that country following US-imposed tariffs.

US Yield Forecasts Cut:

Goldman Sachs Group Inc. joined JPMorgan Chase & Co. in pulling down its forecasts for US Treasury yields, incorporating expectations for a prolonged hit from the U.S.-China trade war, along with the dovish shift by key central banks.

Goldman’s strategists slashed their year-end 10-year US yield call to 1.75%, matching JPMorgan’s updated prediction from May 31. That’s down from Goldman’s 2.80% projection reiterated last Sunday. Goldman also cut its yield forecasts for Japan, the euro region and other developed nations.

The “substantial” forecast changes reflect both the new policy developments and global risks, and “a sense that the near-term trajectory of many of these drivers makes fading the bond rally a difficult proposition,” the Goldman strategists wrote. “In the US, we believe reassuring growth data and an eventual reduction in trade war risks are probably necessary for the Fed to cease easing once it begins,” they also said.

G20 Leaders Aim to Defuse US-Iran Tensions :

World leaders are set to hold emergency talks in an attempt to rescue the Iran nuclear deal and avert a major international security crisis when they meet at the Group of 20 summit in Japan this week. Leaders will hold discussions on the sidelines in an effort to reduce the tension between the US and Iran, which has escalated following President Donald Trump’s decision last year to pull out of the 2015 accord and impose sanctions.

In recent days, fears have grown over the risk of armed conflict in the region, after the US blamed the Iranian military for attacks on oil tankers, and following the shooting down of an unmanned American drone. As Trump announced more sanctions, Iran was warning it will break the terms of the 2015 nuclear agreement by breaching the limits on its enriched uranium program as early as Thursday.

The leaders of the world powers who struck the agreement with Iran – the US, China, the UK France, Germany and Russia will all be present at the G-20 summit, which takes place Friday and Saturday.

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.

Singapore Recession Predicted:

According to Maybank Kin Eng Research, Singapore’s economy will probably experience a “shallow technical recession” in the third quarter as the global trade outlook worsens.

The escalating US-China trade conflict is weighing on Singapore’s export-reliant economy, which Maybank expects will grow 1.3% this year, down from a previous projection of 1.6% and lower than the government’s forecast range of 1.5% to 2.5%. “Disruptions to the supply chain will likely intensify as the trade war broadens to tech and the US imposes export controls on more Chinese tech firms,” Maybank economists noted.

The slump in exports has hit manufacturing, which contracted more than expected in May, data on Wednesday showed. The outlook for electronics, which make up 27% of factory output, is particularly weak since US export controls may hit chip makers like Broadcom Inc. and Intel Corp., which operate in Singapore, the bank noted.

Industrial production in May, which was reported yesterday, slumped 2.4% year-on-year, faring worse than the 1.8% drop predicted.

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3548

USDSGD found some recent support near its 3-month low following its tumble from 1.3725 in mid-June. The SGD might weaken following an earlier Maybank report indicating a possible recession next quarter, which would in turn increase the probability of MAS easing monetary policy in October. A break below 1.3520 is likely to lead to a retest of 1.3443, the pair’s year-to-date low.  

AUD/USD

Spot: 0.6994

AUDUSD rose to its 0.7000 handle, the highest it has reached since June 10, amid rising optimism that the US and China will declare another truce in their trade war this weekend. The pair is on course to rise for a seventh straight session. With little news domestically heading into the weekend, any hopes of breaching resistance at 0.7000 will be dependent on tonight’s final US Q1 GDP number. From a technical point of view, the longer-term trend continues to point to the downside.  The support remains along 0.6828.

USD/CAD:

Spot: 1.3136

USDCAD dipped to a 4-month low Thursday, driven by a stronger Canadian dollar and crude oil. A break below 1.3069 could signal the end of the pair’s uptrend, in play since Sep 2017. Weighing on the FX pair is the possibility the Fed may cut rates in the short term, while the Bank of Canada remains on the sidelines at 1.75% and not follow other major central banks down a monetary easing path.

USD/CNH:

Spot: 6.8801

USDCNH was little changed ahead of a key meeting between Trump and Xi this weekend. The pair rebounded off its 200-day moving average at 6.8384 last Friday. Despite improving sentiment, yuan volatility going into this weekend remains high.

USD/JPY:

Spot: 108.11

USDJPY bulls reclaimed the 108 handle Thursday, arresting some of last week’s slide heading into the weekend, due to reports the US and China have agreed to another truce in their trade war. South China Morning Post earlier reported the 2 biggest economies have agreed to a tentative truce ahead of this weekend’s G20 summit, paving way for fresh negotiations.

GBP/USD:

Spot: 1.2682

GBPUSD lingered below 1.2700, little changed from its previous days close despite continued political and Brexit uncertainty. The bias remains to the downside with the key support at 1.2500.