March 1, 2018

Daily Observations:

Asian stocks were mixed Thursday, after US equities fell the night before, as traders awaited a second appearance rom Federal Reserve Chairman Jerome Powell, whose comments riled markets earlier this week. The 10yr Treasury yield held under 2.9% while the Dollar Index lingered near a 5-week high.

US Equities’ Worst Month in 2 Years:

US stocks suffered their worst monthly decline since January 2016 as markets continued to digest Tuesday’s testimony of Federal Reserve Chairman Jerome Powell. The S&P 500 Index dropped more than 1%, ending February with a decline of 3.9%. After a torrid January, the stock market sank into a recession a week later, only to claw back half of the rout just as quickly. Trading was heavier than normal Wednesday, with shares swinging between gains and losses for much of the day.

Markets Await Powell’s Second Speech:

US Treasuries and the dollar held gains earlier today as traders awaited a second appearance from Federal Reserve Chairman Jerome Powell, whose comments riled markets earlier this week. Powell had provided a generally upbeat assessment of the US economy, and left investors wondering if the central bank will hike more than the intended 3 times in 2018. Powell testifies before the Senate Banking Committee later today.

Yield Gap Predicted to Narrow Again:

The gap between 2- and 10-year Treasury yields has resumed narrowing in recent weeks, and is back around 61 basis points after steepening from 50 to 78 basis points earlier this year. A shrinking yield curve is typically associated with a slowing economy or a recession, should it invert.

The recent narrowing yield gap is partly due to disappointing economic data around the world as of late. The Citigroup global economic surprise index, which measures the data that exceed forecasts relative to those that miss, has tumbled to its lowest since September.

Trump Warns China:

President Donald Trump is warning the US will use “all available tools” to prevent China’s state-driven economic model from undermining global competition, the latest warning to Beijing as America readies a host of trade actions. China hasn’t lived up to the promises of economic reforms it made when it joined the World Trade Organization in 2001, and actually appears to be moving further away from “market principles” in recent years, according to the president’s annual report to Congress on his trade-policy agenda. China’s “statist” policies are causing a “dramatic misallocation” of global resources that is leaving all countries poorer than they should be, said the report.

Chinese President Xi Jinping has dispatched one of his top economic advisers, Liu He, this week to Washington to meet with senior administration officials amid signs of growing tension between the world’s two biggest economies. Xi has called for countries to avoid protectionism and stick to the current path of globalization. At the same time, Chinese officials are weighing raising tariffs on US soybeans as tensions escalate.

May Rejects EU Brexit Draft Deal:

UK Prime Minister Theresa May vowed she will never accept a draft Brexit agreement published by the European Union on Wednesday, raising the prospect that the negotiations are heading for a breakdown.

The EU commission set out in minute detail how it wanted to arrange Britain’s withdrawal, but key passages on avoiding new customs checks at the UK’s land border with Ireland made the 118-page draft impossible for May to support. It proposes keeping Northern Ireland in the bloc’s customs union, under the jurisdiction of the European Court of Justice, both of which May wants the whole of the UK to leave.

With time running out to reach a solution before the UK leaves in March 2019, May gave her verdict that the plan would undermine the integrity of the British economy and constitution, announcing that “no UK prime minister could ever agree to it”.

Weekly Thematic News:

Water:

Water scarcity made worse by climate change is a growing issue worldwide, and no place knows that better than Cape Town, the South African city contending with the worst drought on record. According to Sisa Ntshona, CEO of South African Tourism, the city’s tools for reducing water consumption, though, could be used around the world to preserve limited resources.

He added that world class cities such as Los Angeles, Beijing and Sao Paulo, are going through the same thing and a lot of them have had to put in water restrictions. Currently the world is looking at Cape Town to build some form of a playbook to use in response to a water crisis.

Water scarcity is becoming an increasingly pressing problem for countries and is predicted to come under greater focus in the future. Investors can seek to profit from iAdvisor’s water-themed portfolio, which includes companies that derive revenues from activities like water distribution, water infrastructure and water purification. The portfolio has returned 19.6% over the past 12 months.

FX Updates:

USD/SGD:

Spot: 1.3265

USDSGD rose to a 2-week high Thursday as speculation of faster Fed rate increases drove up US yields and strengthened the US dollar. The long-term trend continues to remain to the downside although the pair failed to make a lower low last week, indicating that consolidation between 1.3000 and 1.3340 over the near future is possible.

AUD/USD:

Spot: 0.7725

AUDUSD slid below the key 0.7800 handle earlier today, taking out its 200-day moving average in the process as well, following a surprising decline in 4Q capital expenditure and home prices falling for a fifth straight month in February.

Today’s break lower is likely to drive the currency pair towards the 0.7600 handle, the base of the pair’s uptrend over the past 2 years.

USD/CAD:

Spot: 1.2844

USDCAD extended its gain above its 200-day moving average after closing above it for the first time since June last year on Wednesday. The pair’s rise has been amplified further by declining crude oil prices, which declined around 3.5% since Monday.

The key resistance at 1.2920, is expected to be tested over the near term. A break higher could signal more weakness for the Canadian dollar against its US counterpart.

USD/CNH:

Spot: 6.3389

USDCNH extended its rebound from 6.3000 for a third consecutive session, although the region around 6.3500-6.3800 could cap near-term gains. The currency pair is expected to continue to range between 6.2500 and 6.4000 over the medium term, with a slight bias to the upside due to recent USD strength.

USD/JPY:

Spot: 106.75

USDJPY’s failure to regain above 108 last week has set a more bearish tone for the near term. A lower range of 106-108 has been established, with the pair fluctuating between over the past 2 weeks. Newly-elected Fed Chairman Powell appears before the Senate later today and could reinforce expectations of 4 hikes this year, which may drive USDJPY towards its lows.

GBP/USD:

Spot: 1.3756

GBPUSD slid to a 6-week low, declining below its 50-day moving average in the process, after the European Union published a draft Brexit treaty, with Prime Minister Theresa May squaring off for a fight. Further Brexit uncertainty is likely to take the pair lower towards the next support region of 1.3500-1.3600.