March 26, 2018

Daily Observations:

Fears of a full-blown trade war between the US and China battered Asian shares again on Monday, keeping the safe haven yen near a 16-month peak as investors fretted over the fate of global growth. Gold lingered near a 1-month high while the benchmark 10-year Treasury held gained above the 2.80% support.

Trade War Concerns Mount:

US shares were clobbered last week, with the Dow Jones Industrial Average falling 1.8%, the S&P 500 Index declining 2.1% and the Nasdaq Composite off 2.4% on Friday. Global markets were shaken last week after US President Donald Trump moved to impose tariffs on Chinese goods, edging the world’s two largest economies closer to a trade war. The rout in global equities erased all of the recovery that ensued in the aftermath of the rout in early February.

Trump on Thursday also directed Treasury Secretary Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies the US views as strategic. He has said he also wants a $100 billion decrease in the US trade deficit with China. A day later, China unveiled tariffs on $3 billion of US imports in response to steel and aluminum duties ordered by Trump earlier this month. The White House then declared a temporary exemption for the European Union and other nations on those levies, making the focus on China clear.

The US and South Korea reached an agreement on revising the allies’ 6-year-old bilateral trade deal and President Donald Trump’s plan to impose tariffs on imported steel. Meanwhile, Treasury Secretary Steven Mnuchin said that the US can reach an agreement with China that will forestall the need to impose the tariffs that Trump has ordered on a least $50 billion of goods from that country. A Chinese Communist Party newspaper on Saturday listed US companies that’d be “most damaged” if a trade war began, including Apple Inc., Intel Corp. and Boeing Co.

China to Reduce Treasury Buying?

China’s ambassador to the US wouldn’t rule out the possibility of the Asian nation scaling back purchases of Treasuries in response to tariffs imposed by President Donald Trump. “We are looking at all options,” Ambassador Cui Tiankai told Bloomberg Television, when asked whether China would consider reduced purchases of US Treasuries.

China is America’s biggest foreign creditor. It held $1.17 trillion in Treasuries as of January, or about 19% of all foreign holdings of US government securities. In view of that, the US can ill-afford to see weaker demand for its debt from its major buyers. With budget deficits rising in coming years and tax cuts approved in December expected to hurt revenue, the Treasury has to sell more securities to pay the government’s expenses. The Fed is already scaling back purchases of Treasuries as it gradually reduces its $4.4 trillion balance sheet.

JPMorgan Remains Cautiously Optimistic:

Despite a harrowing week for US stocks, market conditions are looking favorable heading into the second quarter, according to JPMorgan Chase & Co. Conditions for stability will probably come together in the second quarter, and asset allocations should remain oriented toward growth, JPMorgan strategists led by John Normand wrote in a note Friday after the S&P 500 closed down 6% for the week. They also suggested, however, that a potential trade war is a threat to economic growth.

“Two of four conditions for market stability have been met (tamer inflation, not-so-hawkish Federal Reserve), and the two others could align in the second quarter (stable activity data, de-escalation of trade conflict),” the strategists wrote.

Chinese Oil Futures Commence Trading:

Today marks the day crude oil contracts began trading on the Shanghai International Energy Exchange. China, the world’s biggest oil buyer, is offering yuan-denominated futures that foreigners can buy and sell, a first in Chinese commodities, as China seeks to wield greater power over pricing and challenge benchmarks in the US and Europe.

China’s desire to open a domestic market to trade futures has grown as the country’s crude imports have boomed. It last year surpassed the US as the world’s biggest buyer of foreign oil. The contracts may not only help wrest some control over pricing from the main international benchmarks, but yuan-denominated contracts could also promote the use of its currency in global trade, a key long-term goal for Asia’s biggest economy.

Skeptics argue that hurdles such as capital controls, regulatory risk and market intervention in other Chinese securities have made investors cynical about the prospect of Shanghai futures becoming a regional price setter. Similar obstacles have kept foreign investors as bit players in the country’s giant mainland stock and bond markets. Meanwhile, crude futures that were tested in Singapore and Japan have since faded to obscurity due to low liquidity.

FX Updates:

USD/SGD:

Spot: 1.3122

USDSGD continued its slide after failing to regain above the 1.3200 handle last week. The pair continues to be driven lower by a weaker US dollar, pressured by lingering fears of a global trader war and political uncertainty stemming from within the White House.

The longer-term trend remains to the downside, as indicated by the downtrend channel since Dec 2016. Although the currency pair has halted making lower lows over the past 2 months, the risk remains to the downside; a break below 1.3100 could lead to swift retreat back to the 1.3000 support.

AUD/USD

Spot: 0.7724

AUDUSD remains below its 200-day moving average, although the pair edged higher above the 0.7700 handle early Monday. The longer-term trend’s base around the 0.7600 handle remains a key support region; a decline below it is likely to lead to a reversal in the 2-year old uptrend.

The pair has been stagnant of late, as recent weakness in the greenback helped negate the effects of weaker commodity prices which correlate strongly to the Australian dollar.

USD/CAD:

Spot: 1.2865

USDCAD retreated back below the 1.3000 level towards the end of last week, as a weaker greenback coupled with strengthening crude oil prices drove the currency pair lower.

The previous low of 1.2803 is likely to provide further support this week. Continued trade war worries is likely to continue to weigh on the US dollar; a pullback to 1.3000 is expected.

USD/CNH:

Spot: 6.3079

USDCNH decline back towards the 6.3000 handle amid recent weakness in the greenback, following heightened worries of a trade war. The pair has been ranging between 6.2500 and 6.3700 since end-January and is expected to continue its sideways trend over the near future.

USD/JPY:

Spot: 104.92

The dollar slipped to a 16-month low against the Japanese yen on Monday, pressured by lingering fears of a global trade war and caution towards political developments in Tokyo. Another close below the 105 level could lead to another leg down for the currency pair, with the 103 level the next support below.

GBP/USD:

Spot: 1.4165

GBPUSD edged higher Monday, following its recent run up in March which saw the pair gain over 3% from around 1.3750 3 weeks ago. The pair’s gain last week was driven after the UK agreed a Brexit transition deal and the BOE maintained expectations of a May rate hike. With little on the UK agenda calendar this week, the pair is likely to be largely influenced by the greenback’s direction over the near term.