May 11, 2018

Daily Observations:

Asian markets started on a firm footing and the dollar eased on Friday as softer-than-forecast US inflation data tempered expectations for faster Federal Reserve interest rate rises this year. The dollar steadied following last night’s drop which was its biggest since March.

US Inflation Slows:

US inflation rose less than expected in April as costs for cars and flights declined, reducing chances that consumer prices will run significantly above the Fed’s target in coming months.

CPI in April gained 0.2% month-on-month, after falling 0.1% in March and faring lower than the predicted 0.3% surveyed by analysts. Core CPI, which excludes the volatile effects of food and energy, rose 0.1% over the same period, below the anticipated 0.2% gain.

The US dollar weakened broadly from a 4-month high following last night’s tepid inflation print which prompted traders to pare bets of faster US rate-hikes this year. The benchmark 10yr Treasury yield retreated from the 3% mark for the third time in a month.

Trump-Kim Meeting to be Held in Singapore:

US President Donald Trump said on Thursday he had high hopes of “doing something very meaningful” to curtail North Korea’s nuclear ambitions at a summit in Singapore next month, after Pyongyang smoothed the way for talks by freeing three American prisoners.

The date and location of the first-ever meeting of a sitting US president and a North Korean leader were announced by Trump on Twitter. “The highly anticipated meeting between Kim Jong Un and myself will take place in Singapore on June 12th. We will both try to make it a very special moment for World Peace!” Trump wrote.

BOE Holds Rates, Cuts Growth Forecast:

The Bank of England held interest rates on Thursday and said weak growth during a snowy start to 2018 was likely to be only temporary, but it wanted to see a pick-up in the economy in the next few months before raising borrowing costs. In sharp contrast to widespread expectations just a few weeks ago that it would raise rates, the BoE said its 9 rate-setters voted 7-2 to keep them at 0.5%. That was in line with forecasts in a Reuters poll of economists.

Britain´s economy grew more slowly than most of its peers last year after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment. Growth slowed even more sharply in the first quarter of 2018 due to a mix of unusually snowy weather and headwinds from Britain´s impending exit from the European Union. Surveys have suggested little rebound last month. The BoE on Thursday cut its forecasts for inflation and for growth, especially in 2018, reflecting the weak first-quarter figures which the central bank said would probably be revised up. For now, most policymakers wanted to wait to be sure that the weakness passes quickly.

Malaysian Election Shock:

Mahathir Mohamad won a stunning victory in Malaysia’s election, ending the six-decade rule of Prime Minister Najib Razak’s party in a landmark shift for the Southeast Asian nation. Mahathir, Malaysia’s longest-serving premier who defected to the opposition to take on Najib, will return to power at the age of 92. His 4-party Pakatan Harapan alliance won at least 112 of 222 parliamentary seats in Wednesday’s vote, official figures from the election commission showed. The outcome may be bad news for investors who had bet on a Najib victory. The US traded iShares MSCI Malaysia ETF dropped 6% to $32.40 Wednesday, the lowest since December, as trading volume jumped to $144 million, about six times the average daily turnover in the past year. It pared losses last night, gaining 1.8%.

Iran Fallout Continues:

Global leaders continued to sound off on Trump’s scrapping of the Iran accord. The president warned of “very severe” consequences should Tehran restart nuclear activities that were halted as part of the 2015 agreement that the US president abandoned on Tuesday. Russia’s Deputy Foreign Minister urged a summit between Trump and Vladimir Putin, saying a meeting is “extremely important” to safeguard global stability. Israeli Prime Minister Benjamin Netanyahu told President Vladimir Putin that Iran is out to destroy his country, pressing his appeal for Russian help to keep Tehran from using Syria as a launching pad to attack the Jewish state. Oil surged amid speculation the move could unravel the OPEC supply deal.

Emerging Market Funds Post Largest Outflows since 2016:

US fund investors are wavering on one of their favorite bets of the last year, walloping emerging-market stocks and hunkering down in short-term bonds. Funds offered in the United States but invested in shares in emerging markets recorded $870 million in withdrawals, the most since November 2016, during the week ended May 9, research service Lipper said on Thursday.

The risk-averse move in emerging markets was paired with a rush into short-term debt as US President Donald Trump pulled out of an international nuclear deal with Iran, raising the risk of conflict in the Middle East and casting uncertainty over global oil supplies.

Emerging markets have been on their hottest run since their relief rally in 2009 after the apex of the global financial crisis. Over the last 16 months, the funds have pulled in nearly $67 billion, according to Lipper.

Weekly Thematic News:

Solar Energy:

Companies are buying renewable power at a record pace. AT&T Inc. and Walmart Inc. are among 36 businesses, government agencies and universities that have agreed to buy 3.3 gigawatts of wind and solar power so far this year. That’s on track to shatter the previous high of 4.8 gigawatts of disclosed deals last year, according to a report last week by Bloomberg New Energy Finance.

One of the key reasons is that smaller companies are more comfortable doing these deals now. “There’s a blueprint now,” said Kyle Harrison, a New York-based analyst at Bloomberg New Energy Finance. “So it’s a lot easier for other companies to do it.” In addition to the 4.8 gigawatts in announced deals last year, BNEF also estimates 600 megawatts of undisclosed contracts were signed in Asia. The gains are also due to local renewables program and growing demand in international markets like Mexico and Australia. There are several reasons clean power is attractive. Renewable energy is often the cheapest source of electricity. Long-term contracts to buy clean power from wind and solar farms can also act as hedges against uncertain wholesale prices.

Google and other big technology companies have driven the trend, but the pool of clean-power buyers is deepening. Smaller companies have benefited from growing standardization in the ways companies agree to buy clean energy. Sometimes these companies are recruited to buy wind and solar power from the same power plant as larger buyers that function “like anchor tenants,” Harrison said.

Investors looking to invest in the solar energy space can purchase the Solar Energy US portfolio on iAdvisor, which has outperformed all our portfolios over past 12 months, returning 47.7% as of Thursday.

FX Updates:

USD/SGD:

Spot: 1.3385

USDSGD declined back below 1.3400, after weaker-than-expected inflation data weighed down on the US dollar. The currency pair had risen to register a new 2018-high of 1.3490 yesterday.

The momentum continues to remain to the upside, with the pair recently breaking above its 200-day moving average, the first time it has done so in a year. The next resistance of 1.3540 may be tested soon.

AUD/USD

Spot: 0.7528

AUDUSD looks to be gaining for the second consecutive session, rebounding from an 11-month low near the 0.7400 handle reached on Wednesday. From a longer-term perspective, the main trend for AUDUSD remains to the downside with the recent bullishness in the Aussie likely to be short-lived.

USD/CAD:

Spot: 1.2762

USDCAD extended Thursday’s decline earlier today, descending to a 2-week low. The pair looks poised to fall for a third consecutive day, extending its rejection slide from the key 1.3000 psychological mark touched on Wednesday. Further downside may be likely, with the Canadian dollar likely to be given a further boost by strengthening crude oil prices, and as the US dollar continues to be weighed down by traders paring bets for faster rate-hikes this year.

USD/CNH:

Spot: 6.3400

USDCNH rebounded from a 1-week low earlier today after the PBOC raised its daily reference rate by the most in 6 weeks following the US dollar’s overnight decline. The key resistance remains at 6.3800, a break out above could signal a reversal of the currency pair’s downtrend which has lasted for about a year.

USD/JPY:

Spot: 109.48

USDJPY is headed for a seventh straight weekly gain, its longest run since 2014. The pair retreated overnight following weaker-than-expected US CPI data, but has since pared some of its declines. The 110 handle remains a key resistance psychological level, a region where the 200-day moving average resides as well. A break above is likely to lead to a further move up to 112.

GBP/USD:

Spot: 1.3524

GBPUSD declined to the 1.3500 handle following the BOE’s monetary policy decision yesterday to keep rates on hold and lower growth forecasts. A bearish break below the overnight low of 1.3460 could signal more downside for the pair, with the next resistance coming in around 1.3310.