June 28, 2017

Daily Observations:

A selloff in technology stocks extended into Asian trading, with most indices in the red. Bank shares were broadly stronger with government bond yields on the prospect of higher interest rates. Gold and oil gained as well, following a slump in the US dollar.

US:

• Federal Reserve Chair Janet Yellen gave no indication her plans for continued monetary policy tightening had shifted despite acknowledging that some asset prices had become “somewhat rich”. In a statement made in London, she added it will “be appropriate” to “raise interest rates very gradually”.
• Her colleague, Federal Reserve Vice Chairman Stanley Fischer, pointed to higher asset prices as well as increased vulnerabilities for both household and corporate borrowers and warned against complacency when gauging the safety of the global financial system, in a speech delivered in Washington yesterday.
• Fischer had said “it would be foolish to think we have eliminated all risks”, and described the overall level of vulnerabilities as “moderate”. He further added that the price of risky assets had increased in most major asset markets in recent months, including equities, which now stand in the top quintile of historical distributions.
• The IMF cut its outlook for the US economy, removing assumptions of President Trump’s plans to cut taxes and boost infrastructure spending to spur growth. Growth forecast for this year was cut to 2.1%, from 2.3% previously; 2018 growth was cut as well, to 2.1%, from 2.5%.
• The US dollar slumped overnight, largely against the euro following Draghi’s hawkish comments which led to a 0.5% loss in the Bloomberg Dollar Spot Index. The more concentrated Dollar Index slumped 1.1%, nearing its year-to-date lows.
• Treasury yields rose, minimally from Yellen signalling the economy is robust enough withstand higher interest rates and largely due to surging European yields. The benchmark 10yr Treasury yield soared 7bps to 2.21%, rising by the most in 3 months.
• US equities fell the most in 6 weeks, led by tech stocks. The Nasdaq Composite shed 1.6%. Alphabet Inc. fell 2.5% after EU regulators slapped the tech giants with a 2.4 billion euros antitrust fine. Nvidia Inc. fell 3.7% after it unveiled more partnerships in the hot self-driving car arena, including joint ventures with Volvo and Autoliv.

Canada:

• Central bank Governor Stephen Poloz said in an interview with CNBC that rates are “extraordinary low” following 50bps of cuts in 2015, further adding that “those cuts have done their job”.

Europe:

• ECB President Mario Draghi said that deflationary forces had been replaced by reflationary ones, sending yields in the region’s core and peripheral economies soaring. While the central bank is committed to bond purchases through December, investors took his remarks to mean that the ECB may announce a tapering of its package of stimulus measures as early as autumn.
• Draghi repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. At the same time, there’s room to tweak existing measures.

UK:

• The BOE plans to increase capital requirements for UK lenders by 11.4 billion pounds to tackle risks posed by the recent rapid growth in consumer credit and prepare for the uncertain outcome of Brexit talks. Governor Mark Carney said the risks regarding Brexit warrants contingency planning which needs not only to be put in place but also activated.
• Carney also said that monetary policy is “the last line of defence to address financial stability issues” and that the actions of the Financial Policy Committee “allow monetary policy to focus on its jobs, which is returning inflation sustainably to target”. Carney’s move to keep a lid on consumer credit growth could support his argument for keeping rates on hold.

Singapore:

• Regulators have proposed rules that will make it easier for banks to conduct or invest in non-financial businesses such as e-commerce and digital-payment platforms, helping them to better compete with non-bank firms in these areas, Finance Minister Heng Swee Keat said Tuesday.
• Under such proposals, lenders will no longer need regulatory approval to invest in such businesses. The MAS will cap the investment to 10% of the bank’s capital funds.

Precious Metals:

• Spot gold held onto gains earlier today, after ending its previous session 0.7% higher at $1,251.45/Oz. The precious metal is benefitting from a weak US dollar today, however, the upward moves may be limited due to increasing hawkishness among central banks around the world such as the ECB.
• Support around the $1,240/Oz continues to remain resilient, 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 rose by as much as 0.6% to $16.7935/Oz earlier, testing a 1-week high.
• 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 74, which is above the 10-year average of 62.5.

Oil

• Crude oil futures expiring in August rose for a fourth straight day, ending its session last night 2.0% higher at $44.24/bbl. Futures declined back to the $44/bbl handle earlier today after US stockpiles expanded by 851,000 barrels last week, the American Petroleum Institute was said to report on Tuesday.
• Government data later today is forecast to show inventories extended declines from a record reached at the end of March.
• Strong support was seen at the $42/bbl level last week; further consolidation is expected between here and the previous support at $44.50/bbl.

Cyber Security:

• A new cyberattack similar to WannaCry is spreading from Europe to the U.S. and South America, hitting port operators in New York, Rotterdam and Argentina, disrupting government systems in Kiev, and disabling operations at companies including Rosneft PJSC, advertiser WPP Plc. and the Chernobyl nuclear facility.
• More than 80 companies in Russia and Ukraine were initially affected by the Petya virus that disabled computers Tuesday and told users to pay $300 in cryptocurrency to unlock them, Moscow-based cybersecurity company Group-IB said. About 2,000 users have been attacked so far, according to Kaspersky Lab analysts, with organizations in Russia and the Ukraine the most affected.

Cryptocurrency:

• Bitcoin bull Michael Novogratz suggested that cryptocurrencies could be worth more than $5 trillion in five years, unfazed by any association the asset class could have with the cyberattacks. To get there, though, companies need to develop sound business principles to satisfy regulators and lend legitimacy to the budding industry, he added. That’s proving an uphill battle amid Bitcoin’s growing reputation as a currency favoured by black marketeers and hackers. The industry took another reputational hit Tuesday after a cyberattack spread around the world, disabling computers and demanding users pay $300 in cryptocurrency to unlock them.

USDSGD:

• Spot 1.3859
• USDSGD edged 0.1% lower to 1.3850 to test its 1-week low.
• The currency pair is in the midst of a consolidation phase, largely ranging between 1.3800 and 1.3900 since end-May.
• According to UOB, the Monetary Authority of Singapore is expected to maintain its current dovish monetary policy stance at its next meeting in October; the bank is expecting USDSGD to rise to 1.42 by the end of the year.

AUDUSD:

• Spot 0.7605
• AUDUSD erased an overnight decline of as much as 0.4% to remain largely unchanged from its previous close around the 0.7600 handle.
• Gains in the Australian dollar today were supported by advancing iron ore prices today.
• The 200-day moving average, currently at 0.7530, continues to provide strong support.

USDCAD:

• Spot 1.3149
• USDCAD slumped to a 4-month low, 0.6% down to 1.3139 earlier, following further improvement in crude oil prices and a weaker US dollar.
• With a break below the 1.3200 support confirmed, the next key support lies at the psychological 1.3000 handle.

USDCNH:

• Spot 6.8034
• The PBOC strengthened its fixing rate by 0.35% to 6.8053 per US dollar, the most in almost 4 weeks.
• USDCNH extended its 0.6% drop yesterday, falling a further 0.3% to 6.7966 earlier today. The pair is poised for its biggest 2-day drop since Jun 1, fuelling speculation that the PBOC was actively supporting the currency yesterday afternoon.

USDJPY:

• Spot 112.10
• USDJPY gained 0.6% to 112.47 overnight, a 1-month high, before paring gains back to the 112 handle earlier today.
• The downtrend line since January this year looks likely to be tested again soon; a convincing break above 113 should render the trend line broken.

GBPUSD:

• Spot 1.2818
• GBPUSD broke out of its 2-week range, gaining 0.9% to 1.2861 last night following broad USD weakness.
• The pair should find some support against the old resistance of 1.2800, and in due time, should test the 1.3000 handle again.