March 8, 2018

Daily Observations:

Asian stocks rallied as worries surrounding a trade war dissipated following news that Trump’s tariff plans will spare select countries from much of the impact. The Dollar Index rebounded off a 2-week low. Attention now turns back to central banks with the ECB’s policy decision due later today and the BOJ’s due on Friday.

Trade Tariffs:

The US may exempt some countries from planned tariffs on steel and aluminum imports, White House Press Secretary Sarah Sanders said Wednesday. “There are potential carve outs for Canada and Mexico based on national security and possibly other countries as well,” she said. Treasury Secretary Steven Mnuchin said Wednesday he believes tariffs will benefit American workers, despite the risk of retaliation.

The Trump administration is considering clamping down on Chinese investments in the US and imposing tariffs on a broad range of imports to punish Beijing for its alleged theft of intellectual property, according to people familiar with the matter. An announcement by the US Trade Representative’s office about China’s IP practices is expected in the coming weeks, potentially handing US President Donald Trump further cause to impose trade restrictions, Bloomberg news reported.

Cohn Resigns:

Gary Cohn is resigning as President Donald Trump’s top economic adviser, leaving his post as the administration prepares to impose steep tariffs on steel and aluminum that Cohn has opposed. Cohn quit just hours after a confrontation with the president in the Oval Office, according to two people familiar with the episode, Bloomberg news reported. Trump asked for an assurance Cohn would publicly stand behind the tariff plan but Cohn didn’t answer, the people said.

His departure may cause further turbulence in financial markets, where investors saw him as a steady hand in an otherwise unpredictable administration. His resignation also leaves uncertainty about the president’s economic agenda.

Fed Expects Moderate Inflation:

A tight US labor market was helping lift wages across most of the country through late February and contributing to “moderate inflation” in most areas, a Federal Reserve survey showed. The central bank’s Beige Book economic report showed the nation’s “modest to moderate” expansion was spreading the benefits of higher pay more widely. The survey also contained evidence that a pickup in inflation was more broadly based.

The report may add to expectations among investors that the central bank could end up raising interest rates in 2018 by more than the three quarter percentage-point moves that officials projected in December.

One of the Fed’s more dovish policy makers, Atlanta Fed President Raphael Bostic, said earlier Wednesday he had upgraded his own projection to three hikes this year, from two. Fed Governor Lael Brainard, another official who has argued a cautious approach to raising rates, said late Tuesday the economic outlook is improving and signaled support for continued gradual rate increases.

Bank of Canada Refrains from Hiking Rates:

The Bank of Canada kept borrowing costs on hold Wednesday and indicated it’s in no rush to pursue aggressive interest rate hikes amid growing global trade tensions and softer housing data. The statement, which left the benchmark rate at 1.25%, repeated dovish language about moving cautiously in an economy that will require continued stimulus. The broader trade comment was new, though policy makers made no explicit mention of US President Donald Trump’s threats to impose tariffs on steel and aluminum.

While global growth is “solid and broad-based,” recent developments in trade policy have become “an important and growing source of uncertainty” for the Canadian economic outlook, the central bank said. Investors have pared bets on rate hikes after a run of soft economic data, turmoil in global equity markets and growing geopolitical concerns.

According to Bloomberg news, traders aren’t fully pricing in the next rate increase, which would be the fourth in the cycle, until July, according to overnight index swaps. A month ago, traders were pricing in at least one increase by May, with a good chance of an April hike. The market expects 2 to 3 more hikes later this year, with the odds of 2 being higher.

Japan GDP Growth Better than Expected:

Japan’s economy grew more than expected in the fourth quarter, as a year-long recovery in exports fueled business investment and inventories rose.

The economy expanded by an annualized 1.6% quarter-on-quarter, improving upon the prior gain of 0.5% and beating the 1.0% consensus. Business spending over the same period rose 1.0%, versus the estimate of 1.3% and the previous gain of 0.7%. Private consumption meanwhile gained 0.5%, in line with expectations.

According to a Bloomberg summary, the Japanese economy has grown for 8 straight quarters, its longest expansion in nearly 30 years, as global demand for its exports fueled record corporate profits and rising business investment. Yet wage gains and household spending have remained lackluster, and key January indicators, including industrial production, suggest growth may weaken or even disappear in the first quarter. A build-up in inventories during the fourth quarter could weigh on first-quarter results.

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 31.9% 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 17.4% over the past 12 months.

FX Updates:

USD/SGD:

Spot: 1.3150

USDSGD extended its drop below 1.3200 yesterday, briefly dipping below its 1-week low of 1.3145 earlier today. The bias remains to the downside as analysts see an increasing chance the Singapore dollar will remain near a 3-year high against the USD until the Monetary Authority of Singapore’s biannual policy review in April.

Further consolidation between 1.3000 and 1.3340 over the near future is possible.

AUD/USD

Spot: 0.7831

AUDUSD extended its recent rebound earlier today, following a wider-than-expected January trade surplus reported this morning.

However the bias remains to the downside for the currency pair; a retest of the 0.7700 handle is likely while a further leg lower towards 0.7600 is a possibility over the longer term.

USD/CAD:

Spot: 1.2875

USDCAD endured a seesaw session overnight. The pair initially gained to 1.3000 following a rather-dovish statement from the Bank of Canada, before reversing and trading below 1.2900 on the back of tariff exemption hopes.

Having broken above key resistances over the past few weeks, the momentum remains to the upside. According to Wall Street Journal reports, Trump is expected to sign the steel and aluminium tariffs into action later today.

USD/CNH:

Spot: 6.3305

USDCNH continues its consolidation, rebounding off the 6.3000 last night. The Chinese People’s Political Consultative Conference runs through Mar. 15 and overlaps with the National People’s Congress meetings in Beijing, through Mar. 20. 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: 106.49

USDJPY regained back above the 106 handle earlier today after optimism that Trump may limit tariffs emerged, amid reports that the US indicated some countries could be exempt from its tariffs plans, thus boosting the US dollar.

USDJPY’s failure to regain above 108 last month has set a more bearish tone for pair. The yen reached a 16-month high last week against the dollar and is expected to retest it again over the near term.

GBP/USD:

Spot: 1.3905

GBPUSD extended its recent rebound above 1.3900, and looks poised to gain for the fifth session in a row. A move back up to 1.4000 is a possibility, although future gains would depend on Brexit negotiations as the game of hardball between the UK and EU continues.

On Wednesday, EC president Donald Tusk advised UK PM May to “pink” her red lines on Brexit if Britain wants to maintain a close economic relationship with the bloc.