March 14, 2018

Daily Observations:

Asian shares eased on Wednesday amid fears of rising US protectionism as President Donald Trump fired his Secretary of State, regarded as a moderate in his administration, and eyes hefty tariffs on Chinese imports. The news left investors scurrying for safety as global equities took a knock; the US dollar fell and bonds rose.

Trump Fires Tillerson:

US President Donald Trump ousted Secretary of State Rex Tillerson on Tuesday, ending a rocky tenure in an abrupt move that stunned the former Exxon Mobil Corp. CEO and set in motion a shakeup of the administration’s foreign policy team. Trump announced Tillerson’s firing in a tweet shortly before 9 a.m. Washington time after weeks of staff turmoil, saying he would nominate CIA Director Mike Pompeo to fill the void. But it was several hours before Trump discussed his decision with Tillerson, who never really clicked with Trump.

Last week, Director of the National Economic Council Gary Cohn decided to exit, as did Director of Communications Hope Hicks at the end of last month. With Maggie Haberman of the New York Times reporting even more major staffing changes on the way, it’s hard to think of a historical comparison to this level of staff turmoil. Nor is there any reason to believe that the reboot will achieve any kind of stability. After all, two of those rumored to be in trouble, White House Chief of Staff John Kelly and National Security Advisor H.R. McMaster, are already replacements for the original picks for those two positions.

US CPI Matches Expectations:

CPI in February gained 0.2% month-on-month and 2.2% year-on-year, in line with analysts’ expectations. The former slowed from January’s gain of 0.5%, while the latter edged higher from the previous month’s 2.1% gain.

Core CPI, which strips our the volatile effects of food and oil prices, gained  0.2% from a month earlier and 1.8% from a year ago, as expected.

According to Bloomberg news, last month’s “not too hot, not too cold” CPI rise was just right to reinforce the outlook by Federal Reserve policy makers for three interest-rate hikes this year. Fed officials are widely anticipated to raise borrowing costs by a quarter percentage point next week, and they will update projections for the economy and interest rates.

Gundlach Warns of Treasury Yield 3% Mark:

According to Jeffrey Gundlach, chief investment officer of DoubleLine Capital, if yields on the 10yr Treasury break above 3%, there’s a high chance US stocks will end the year down. Yields on 10yr Treasuries closed Tuesday at about 2.84%, down from their 4-year high of 2.95% on Feb. 21. Gundlach commented chances of yields exceeding 3% are increasing amid rising US deficit and the Fed reducing its balance sheet while raising its benchmark short-term interest rate.

Among Gundlach’s other comments:

• The US deficit is likely to exceed $1.1 trillion in fiscal 2019 because of a combination of tax cuts and rising entitlement expenses. “It’s going to be more like $1.2 or $1.3 trillion,” he said.
• Leading economic indicators show no signs of a recession within the next 12 months.
• Core inflation is likely to increase above the Fed’s 2% target.
• Be prepared for further weakening of the dollar. “The odds are good that the next big move in the dollar is lower,” he said

Poloz Sees Economic Growth without Fueling Inflatoin:

Bank of Canada Stephen Poloz said the nation’s economy carries plenty of untapped potential that allows policy makers to prolong an expansion without fueling inflation. He commented that the nation is at the “sweet spot” of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an “obligation” to nurture. He also estimated there are currently about half a million Canadians who can still be drawn into the labor force under stronger economic conditions.

His comments were interpreted as dovish as he tried to talk down rate hike expectations, leading to the Canadian dollar being the worst performer among G10 currencies.

PBOC Overhaul:

In the midst of an historic 3-year battle against systemic financial risks threatening to crash China’s economy, President Xi Jinping has become the latest strong leader to take on entrenched interests in the country. China is giving its central bank the power to write the rules for the financial sector, as part of a sweeping overhaul aimed at closing regulatory loopholes and curbing risk in the $43 trillion banking and insurance industries.

The China Banking Regulatory Commission and the China Insurance Regulatory Commission will be merged in the biggest industry overhaul since 2003. Some of their functions, including drafting key regulations and prudential oversight, will move to the People’s Bank of China, according to a proposal unveiled Tuesday during the National People’s Congress.

China Reports Upbeat Economic Data:

China’s factory output and investment growth unexpectedly accelerated in the first 2 months of the year amid robust global demand. Industrial output climbed 7.2% year-to-date from a year ago, compared with the 6.2% surveyed. Retail sales over the same period rose 9.7%, beating the 9.8% expected. Fixed-asset investment excluding rural households rose 7.9%, versus a 7% projection.

Despite the stronger-than-expected readings, economists project growth to moderate this year after accelerating last year. Policy makers meeting this month have stepped up plans to curb debt risk while also cutting the budget deficit target and setting a growth goal of around 6.5%, which omitted last year’s aim for a faster pace if possible. Yet amid rising trade tensions, international shipments have remained robust.

Immigration in Australia:

Australia is standing firm amid growing calls for immigration curbs, even as the US and Europe succumb to rising populism. It has little choice if it’s to continue a period of record economic expansion. A flood of arrivals that’s swelled the population by 50% over the past three decades has underpinned economic growth and allowed a succession of governments to boast of avoiding recession since 1991. Populists are blaming immigrants for over-burdened infrastructure, soaring housing prices and low wage growth.

Australia’s former Prime Minister Tony Abbott, now on the government’s backbench, is among those saying “enough.” He wants to slash the annual allowance to 110,000 migrants from 190,000, a move the government says could shrink its coffers by as much as A$5 billion over 4 years. Anti-multiculturalism senator Pauline Hanson is calling for zero net migration.

However, as a Bloomberg news article reported, introducing such curbs in Australia, which has one of the fastest-growing populations in the developed world, could derail economic growth that’s already lingering below its 10-year average.

Governments from the US to the UK to Europe have clamped down on immigration as voters are increasingly drawn to populist parties blaming foreigners for widening social and economic inequality. Australia has taken the opposite route: it welcomed almost 184,000 new arrivals in fiscal 2017.

RBA chief Philip Lowe last year said population growth was flattering economic data. Indeed, digging beneath the past quarter century’s unbroken gross domestic product record reveals a somewhat bleaker picture: on a GDP per person basis, the growth in economic output was zero at the end of last year and the weakest since the third quarter of 2016.

Weekly Thematic News:

Cyber Security:

As SEC officials debate stronger actions to require public companies to disclose preparations for cybersecurity risks and incidents, the pressure is on institutional investors to keep pushing, industry sources said.

The SEC voted unanimously on Feb. 21 to update its 2011 guidance for public companies that aimed to tell public companies how to disclose cybersecurity risks and procedures. SEC Chairman Jay Clayton said the update “will promote clearer and more robust disclosure by companies about cybersecurity risks and incidents, resulting in more complete information being available to investors”. The update added two topics: the importance of having cybersecurity policies and procedures in place, and bans on stock trading by board members and executives after a cybersecurity incident.

With cybersecurity becoming an increasingly important component of businesses, industry growth is expected to continue expanding at an exponential rate. Investors can choose to park some money in this growing trend by buying into the Cybersecurity US portfolio on iAdvisor, which has returned 34.5% from a year ago as of last Friday.

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 23.9% over the past 12 months.

FX Updates:

USD/SGD:

Spot: 1.3097

USDSGD fell to a 1-month low as the pair declined back below the 1.3100 handle earlier today, following USD weakness amid political uncertainty stemming from the White House. The February low of 1.3058 looks likely to be tested over the near future.

AUD/USD

Spot: 0.7876

AUDUSD ticked higher following relatively upbeat economic data from China released earlier today, paring some of its overnight declines. The 50-day  moving average at the 0.7900 handle is likely cap short-term gains for the currency pair.

Interest rate differential is expected to continue to drive the currency pair, with the Fed expected to tighten monetary policy again next week, while the RBA meanwhile is predicted to keep rates on hold this year.

USD/CAD:

Spot: 1.2946

USDCAD approached the key 1.3000 resistance last night following comments from BOC Governor Poloz cooling hawkish policy bets. Having broken above key resistances over the past few weeks, the momentum remains to the upside. A break above 1.3000 is likely to lead to a next leg higher to 1.3250 over the medium term.

USD/CNH:

Spot: 6.3127

USDCNH fell towards a 2-week low, taking cues from a weaker greenback following the exit of US Secretary of State Rex Tillerson. The yuan showed little reaction to China’s sweeping government restructuring.

The pair has been ranging between 6.2500 and 6.3700 since end-January; the trend is likely to continue over the medium term.

USD/JPY:

Spot: 106.45

USDJPY reversed its previous session’s climb, retreating back below the 107 handle following overnight greenback weakness. The momentum continues to remain to the downside, a retest of the recent lows around 105.35 is looking likely.

GBP/USD:

Spot: 1.3984

GBPUSD extended its recent rebound as the pair approaches the psychological 1.4000 handle. A break above 1.4070 is likely to drive the currency pair to retest its January high of 1.4345.