March 16, 2018

Daily Observations:

A recent rally in Asian stocks petered out on Friday, with most indices in the as investors considered the implications of continuing personnel turmoil in the Trump administration and the prospect of a global trade war. The Dollar Index maintained above 90 while the 10yr Treasury yield held above 2.80%, ahead of next week’s widely-expected rate hike by the Fed.

IMF Denounces Trade Wars:

IMF Managing Director Christine Lagarde urged countries to avoid being sucked into a global trade war in the wake of U.S. tariffs on steel and aluminum, disagreeing with President Donald Trump’s views that such conflicts are easy to win.

“Policy makers need to work constructively together to reduce trade barriers and resolve trade disagreements” without resorting to such tactics, Lagarde said in a blog post released Thursday. “They should ensure that the recently announced US import tariffs do not lead to a wider escalation of protectionist measures. Economic history clearly shows that trade wars not only hurt global growth, but they are also unwinnable.”

Lagarde issued the warning as finance ministers and central bank governors from the Group of 20 prepare to meet in Buenos Aires from March 19-20.

Trump Threatens Military Withdrawal Out of Seoul:

President Donald Trump hinted his administration might roll back military support for South Korea, putting new pressure on the Asian country as it resumes talks with the US to overhaul their trade deal and seeks tariff exemptions. “We have a very big trade deficit with them, and we protect them,” Trump said Wednesday, according to an audio recording obtained by the Washington Post. “We lose money on trade, and we lose money on the military. We have right now 32,000 soldiers on the border between North and South Korea. Let’s see what happens.”

Trump’s remarks on South Korea were part of a 30-minute speech in which he criticized several top trading partners, including other US allies like Canada and Japan, of unfair trade practices. His linkage of trade talks to military support on the Korean peninsula comes as he prepares to meet with North Korean leader Kim, a potentially historic encounter brokered by the South Koreans.

Chinse Holdings of US Treasuries Fall:

China’s holdings of Treasuries fell to the lowest level since July as investors soured on US fixed-income securities and the dollar at the start of the year. China’s portfolio of US bonds, notes and bills sank to $1.17 trillion in January from $1.18 trillion a month earlier, according to Treasury Department data released Thursday. China remains the largest foreign creditor to the US, followed by Japan, whose holdings rose for the first month since July, to $1.07 trillion from $1.06 trillion. Overall, foreign ownership of Treasuries receded in January for a third straight month, falling to $6.26 trillion, after reaching a record-high $6.32 trillion in October.

Threats by Trump to crack down on trade with China have sparked concerns that the Asian nation could use American debt as a tool for retaliation. In January, Chinese officials said that as part of a foreign-exchange review, the government is considering slowing or halting purchases of US Treasuries as they became less attractive relative to other assets.

Bullishness on Asian Equities Highest Since 2011:

Among more than 18,000 analyst ratings for stocks in the MSCI Asia Pacific Index, 60% are buy recommendations, the highest since October 2011, according to data compiled by Bloomberg. While earnings are still expected to grow this year, there has been a slight deceleration in the pace of profit upgrades, the data show. There is some risk the overflowing optimism points to a vulnerability for equity investors if markets shift, although the improving economic outlook in the region suggests that is unlikely at the moment, strategists said.

FANG Rally Heats Up:

An index of 10 tech growth shares pushed its advance to 23 percent so far this year, giving the group an annualized return since early 2016 of 67 percent. That frenzied pace tops the Nasdaq Composite Index’s 66 percent return in the final two years of the dot-com bubble. In addition to the quartet of Facebook, Amazon, Netflix and Google, the NYSE index also includes Apple, Twitter, Alibaba, Baidu, Nvidia and Tesla. Analysts expect their profits to increase 22 percent over the next three to five years, double the pace in the S&P 500, estimates compiled by Bloomberg show.

It’s not the first time that Wall Street voiced warnings on FANG stocks. In November 2016, Jeff Gundlach, CEO at DoubleLine Capital LP, urged investors to avoid the group. 8 months later, Howard Marks, the co-chairman of Oaktree Capital Group LLC, listed addiction to FAANG-fomented gains among a handful of investor vulnerabilities that could spell doom for the bull market.

That hasn’t stopped investors from flocking to these high flyers. In fact, their gains have been accelerating. The NYSE FANG index has risen 76% in the past year, picking up pace from 41% in the previous 12 months.

And their valuations are rivalling those that tech stocks fetched during the heyday of the dot-com era. At 64 times earnings, the companies in the NYSE FANG+ Index are valued at a multiple that’s almost 3 times the broader gauge’s, compared with 2.7 in March 2000.

Canadian Debt Remains a Worry:

Canada’s closely-watched ratio of consumer debt to income held near a record high in the fourth quarter as incomes and borrowing rose at about the same pace. The amount of credit-market debt in the household sector as a percentage of disposable income was 170.4%, down slightly from 170.5% in the third quarter.

The amount of debt Canadians are holding, which now rests at about the size of Canada’s total output, remains a primary concern for policy makers. The nation has relied on consumption for growth, and rising interest rates could dampen that strength.

Singapore NODX Declines:

Singapore’s non-oil domestic exports slumped the most since October 2016, signalling growth risks to one of Asia’s most trade-dependent economies. Exports dropped 5.9% in February from a year earlier, compared with the Bloomberg survey median for a 4.8% gain. Shipments of electronics plunged the most since July 2016, while sales of non-electronics also fell.

Weekly Thematic News:

Cyber Security:

Russian hackers are conducting a broad assault on the US electric grid, water processing plants, air transportation facilities and other targets in rolling attacks on some of the country’s most sensitive infrastructure, US government officials said Thursday.

The announcement was the first official confirmation that Russian hackers have taken aim at facilities on which hundreds of millions of Americans depend for basic services. Bloomberg News reported in July that Russian hackers had breached more than a dozen power plants in seven states, an aggressive campaign that has since expanded to dozens of states, according to a person familiar with the investigation.

With cybersecurity becoming an increasingly important component of businesses and national security, cybersecurity 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 31.3% from a year ago as of Thursday.

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: 1.3149

USDSGD rebounded off a 1-month low, following a stronger USD overnight, although the momentum for USDSGD continues to remain to the downside with the greenback expected to remain under pressure amid political uncertainty stemming from within the White House. The February low of 1.3058 looks likely to be tested over the near future.

AUD/USD

Spot: 0.7789

AUDUSD tumbled below its 200-day moving average of 0.7804 earlier today, following fresh global trade wars concerns. Reports emerged that Trump was considering tariffs on Chinese goods; White House trade adviser, Peter Navarro, said he would be making recommendations to address China’s “theft and forced transfer” of American intellectual property.

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. The bias remains to the downside for the currency pair; 0.7700 remains a possible target over near term.

USD/CAD:

Spot: 1.3060

USDCAD broke above the psychological 1.3000 last night to trade at its highest since last July. Ongoing Nafta concerns should continue to weigh on the Canadian dollar and thus supporting the currency pair. A close above 1.3000 could set the momentum for USDCAD to test its next resistance of 1.3250 next week.

USD/CNH:

Spot: 6.3262

The offshore yuan weakened to a 1-week low against the greenback after White House trade advisor Peter Navarro said Trump would consider actions against China’s intellectual property theft “in coming weeks”.

The pair has been ranging between 6.2500 and 6.3700 since end-January, although the pair could turn higher should US trade policy uncertainties persist.

USD/JPY:

Spot: 105.89

USDJPY dipped back below 106, extending its weekly drop after Trump was reported to be ready to remove his national security adviser, adding to signs of turmoil inside his administration. The momentum continues to remain to the downside, a retest of the recent lows around 105.35 is looking likely.

GBP/USD:

Spot: 1.3929

GBPUSD edged lower earlier today after failing to break above the 1.4000 handle for the third consecutive day. Sterling pound’s recent rise against the greenback has stopped short in recent days, ahead of next week’s expected rise in US interest rates, while scepticism regarding a smooth Brexit transition deal also weighed on sentiment.