June 29, 2017

Daily Observations:

Stocks in Asia advanced as investors bet the global economy can withstand tighter financial conditions as growth picks up. The US dollar continued its selloff, while currencies such as the euro, Canadian dollar and sterling pound rallied. Oil rebounded to $45/bbl while gold was slightly lower around the $1,250/Oz handle.

Global Policy Normalization:

• In a panel discussion on Wednesday, Bank of England Governor Mark Carney signalled that rate hikes may be coming relatively soon, setting the stage for an exciting meeting in August.
• EU officials sought to push back on the market’s hawkish interpretation of President Mario Draghi’s remarks Tuesday but couldn’t keep the currency down for long, with the euro advancing on the greenback.
• In addition, Bank of Canada chief Stephen Poloz reiterated his tightening bias, prompting traders to up their bets on the likelihood of a hike next month. Japanese, U.S., Canadian, German, and British 10-year yields all moved higher on the day.

US:

• Wholesale inventories in May rose 0.6% month-on-month, reversing from a 0.2% drop in April.
• Pending home sales over the same period declined 0.8%, slower than the 1.7% drop in month prior and less than the consensus estimate of a 1% rise.
• JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. led US firms in unveiling plans to boost dividends and stock buybacks more than analysts had projected, after every lender passed annual stress tests for the first time since the Fed began reviews in the wake of the 2008 financial crisis. Shares across the industry rallied.
• The S&P 500 Index rebounded from its biggest selloff in 6 weeks, driven by soaring bank shares; the gauge closed 0.9% higher.
• Technology firms snapped back to halt a recent selloff that dented confidence in the year’s biggest gainers. The Nasdaq Composite gained 1.4% overnight.
• The US dollar continues to be pressured, weakening against majors such as EUR, CAD, GBP and AUD. The Bloomberg Dollar Spot Index slipped 0.4% in New York, and a further 0.2% during Asia trade to reach its lowest level since Oct 2016.
• The yield curve steepened overnight, with the shorter-term 2yr yield lower and longer-term 30yr yield higher at last night’s close. The benchmark 10yr yield rose 2bps to 2.23%.

Canada:

• Bank of Canada Governor Stephen Poloz reiterated the central bank may be considering higher rates. Poloz commented that “rates are of course extraordinarily low” and that the 50bps cuts in 2015 to counteract the oil slump “have done their job”.
• Swaps trading suggests investors are placing a 69% chance of a rate hike at the bank’s July 12 rate decision, up from 39% Tuesday.

Europe:

• The euro and bond yields surged on Tuesday after the ECB president said the reflation of the euro-area economy creates room to pull back unconventional measures without tightening the stance. Policy makers noted the jolt that showed how hypersensitive investors are to statements that can be read as even mildly hawkish, according to 3 EU officials familiar with their thinking, Bloomberg news reported.
• Draghi’s speech at the ECB Forum in Portugal was intended to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed, said the officials, who spoke separately and who asked not to be named as internal discussions are confidential.

UK:

• Mark Carney said the Bank of England’s Monetary Policy Committee may need to begin raising interest rates and will debate a move in the next few months. Carney commented that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional”.
• According to Bloomberg news, the comments mark a shift in emphasis after the governor signalled last week that now was not yet the time to start that process. In his speech on Wednesday, he clarified that that was his position as of when the MPC last met on June 15. Lifting rates hinges on whether spare capacity in the economy erodes and the balance between supporting growth and tolerating faster inflation becomes less stark, he said.

Japan:

• Retail sales in May fell 1.6% month-on-month and rose 2.0% year-on-year, slowing from April’s gains of 1.4% and 3.2% respectively. Retail sales growth were also slower than consensus estimates, which were gauged at -1.0% from a month ago, and 2.6% from a year earlier.
• Poorer-than-expected retail sales growth indicate consumers are still reluctant to open their wallets. With wages stagnant or falling for years, and growth in private spending weak, it is unlikely that consumers will start spending more.

Precious Metals:

• Spot gold was steady around the $1,250/Oz handle, erasing most of an overnight loss earlier this morning due to a broadly weakening US dollar.
• Further upside momentum appears to be subdued. The yellow metal is poised for its first monthly decline this year, as central bankers from Europe to the US affirm that interest rates are heading higher.
• 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 0.5% to $16.8978/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 fifth straight session yesterday, and looks set to extend the streak for a sixth session today after futures rose by as much as 0.7% to $45.03/bbl.
• US production tumbled by 100,000 barrels a day last week, the most since early July, the Energy Information Administration said Wednesday.
• US oil exports in the first quarter this year exceeded those of 5 out of the 14 members of OPEC, according to data from Lloyd’s Apex.
  

Cyber Security:

• BNP Paribas, Mondelez, and FedEx are among the major companies afflicted by the ransomware attack that has swept the globe over the past two days. The worldwide shipping company said in a statement Wednesday that its TNT Express unit in Europe had been “significantly” affected. PureFunds ISE Cyber Security ETF managed to erase yesterday’s losses with a gain of 1.6 percent on the day.

USDSGD:

• Spot 1.3801
• USDSGD sank 0.4% to 1.3797 earlier, amid broad USD weakness today. The pair is set to cap its longest run of declines in 2 weeks.
• The currency pair is in the midst of a consolidation phase, largely ranging between 1.3800 and 1.3900 since end-May. A convincing break below 1.3800 should give way for the pair to test to next support at 1.3700.

AUDUSD:

• Spot 0.7656
• AUDUSD advanced 1.1% to 0.7665, its highest level in almost 3 months. The currency pair’s rise was largely driven by a persistently weakening USD, as well as the recent rebound in iron ore prices.
• The top boundary of the pair’s range since April 2016 is likely to be tested soon, and further resistance is expected around 0.7700 to 0.7750.

USDCAD:

• Spot 1.3036
• USDCAD extended its selloff, plummeting 0.6% to 1.3013 earlier today, following hawkish comments from BOC Governor Poloz.
• The immediate support lies around the psychological 1.3000 level.

USDCNH:

• Spot 6.7867
• The PBOC strengthened its fixing rate by 0.17% to 6.7940 per US dollar, the strongest in 2 weeks.
• USDCNH extended its recent drop, falling a further 0.3% to 6.7823 earlier.
• Onshore yuan has risen to its strongest this year against the US dollar. USDCNY fell to a 7-month low of 6.7732, amid rampant dollar weakness.

USDJPY:

• Spot 112.26
• USDJPY was steady, holding comfortably above the 112 handle, despite broad US dollar weakness today.
• There is likely to be a bias to the upside, as once the US dollar halts its selloff, the currency pair should manage to move higher towards the 113 handle.
• 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 1.2956
• GBPUSD soared 1.2% to 1.2975 earlier, testing a 1-month high and extending its bullish run into a third straight session following hawkish remarks from BOE Governor Carney.
• The 9-month high of 1.3050 should be tested soon.