Spot values at a glance:
Asian stocks were mixed, failing to follow their US counterparts higher, as traders sought fresh leads amid an apparent easing in trade tensions. Index gains in Hong Kong, Singapore and Seoul were overshadowed by declines in Shanghai, Tokyo and Sydney. Crude oil futures topped $72.50/bbl, while gold held above a $1,280/Oz.
Trade War Fears Subside:
The US and China declared a truce in their trade dispute over the weekend, but that will prove temporary if the world’s 2 largest economies fail to deliver on their vague commitments to rebalance trade.
“We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday after the 2 sides released a joint statement a day earlier. “Right now, we have agreed to put the tariffs on hold while we execute the framework.” President Donald Trump had recently threatened to slap tariffs on up to $150 billion in Chinese imports, and Beijing vowed to respond in kind.
US stocks surged Monday, led by industrials, on the news that the trade war is on hold for now. Treasuries edged higher, while the Dollar Index extended a decline after testing the 94 handle yesterday. Crude oil futures climbed to its highest since November 2014.
Crude Rises to Multiyear High on Venezuela Oil Worries:
US crude hit its highest level since 2014 on Monday amid rising concerns that Venezuela’s oil output could fall further following the country’s presidential election and potential sanctions on the OPEC-member nation. WTI futures topped $72.50/bbl last night after Trump had discussions with Russia and China about issuing new debt to Venezuela. Trump had signed an executive order on Monday restricting Venezuela’s ability to liquidate state assets, a senior administration official told reporters. Any restriction on Venezuela’s financing, logistics or power supply could further depress the country’s crude output.
Venezuela’s socialist President Nicolas Maduro faced widespread international condemnation on Monday after his re-election in a weekend vote his critics denounced as a farce cementing autocracy in the crisis-stricken oil producer. The US is actively considering oil sanctions on Venezuela, where output has dropped by a third in 2 years to its lowest in decades.
US Corporate Bonds Tumble:
Debt of American companies just posted their third-worst 100-day returns since 2000, according to a JPMorgan Chase & Co. index, as tighter monetary conditions leave their mark on high-quality bonds with longer maturities. With negative returns likely to scare off retail investors, the outlook for the asset class looks grim, JPMorgan strategists said in note to clients last Friday. But they find a silver lining -the highest yields in almost 5 years are likely to discourage new bond supply, which would at least help the technical picture.
The selloff in corporate credit is now on par with the rout in emerging markets. A Bloomberg Barclays index of US investment-grade credit is down 3.9% so far this year, while dollar bonds of developing nations have declined at about the same clip.
The 2 markets are caught up in different problems. In developing economies, it’s a resurgent dollar and concerns over credit quality after a debt binge. While corporate America’s earnings trajectory looks healthy, rising benchmark rates threaten investment-grade debt with average duration of over 7 years. Securities with longer duration typically gain more when rates drop, but suffer stiffer losses when they climb.
Fed’s Kashkari Worried About Over-Aggressive Hikes:
Minneapolis Fed President Neel Kashkari said Monday he was worried the central bank might get too aggressive with interest-rate hikes and push the economy into recession. “Let’s not overdo it,” Kashkari said during a question-and-answer session in Escanaba, Mich. Low wage growth suggests there is still slack in the labor market, he said. “If we see wages pick up, we can always respond then,” Kashkari said.
The Minneapolis Fed president said he would be watching the yield curve closely. An inversion of the yield curve was the “very best predictor of recession,” he said. Kashkari is one of two regional bank presidents urging caution on further rate hikes. The majority at the Fed is targeting at least two more quarter-percentage point moves this year. Kashkari is not a voting member of the Fed’s interest-rate committee this year.
Coalition Parties Propose Italian PM Elect:
The leader of the 5 Star Movement said Monday that he proposed to Italy’s president the academic Giuseppe Conte as prime minister of a government supported by his party and the League. Luigi Di Maio told journalists after meeting the president that Conte, a little-known professor of private law who isn’t elected to parliament, is the premier of choice of both parties.
USDSGD retreated back to its 1.3400 handle following profit-taking in US dollar position overnight, after the US Dollar Index reached its 94 resistance level. The momentum continues to remain to the upside though, with the pair’s 200-day moving average at 1.3375 now serving as a line of support. The next resistance of 1.3540 may be tested soon.
AUDUSD gained to a 3-week high Tuesday, and looks poised to test the 0.7600 handle soon following broad gains in the commodity space. The year-to-date down trend for the currency pair remains intact although a recovery back above 0.7700 may signal a break in trend.
USDCAD declined below 1.2800 overnight, driven by a weaker US dollar across the board particularly against commodity and EM currencies, as well as a stronger Canadian dollar supported by rising crude oil prices.
The loonie has also been boosted by recent comments from White House Economic Adviser Larry Kudlow, who mentioned that it is in Washington’s interest to reach a good deal on NAFTA and that many of items are currently being negotiated.
The next downside support barrier lies around the 1.2700 area. Any breakdown below 1.2700 could open the way for further downside towards the 1.2528 low of mid-April.
USDCNH has been capped below its key 6.3800 resistance in recent weeks, despite continued broad USD strength. A break out above could signal a reversal of the currency pair’s downtrend which has lasted for about a year.
USDJPY reversed Monday’s gains, declining back below 111 following overnight US dollar weakness. The pair has risen considerably over the past 2 months, gaining about 6% from its low in March. Having breached its 200-day moving average last week, the momentum remains to the upside. The next resistance point lies at 111.60.
GBPUSD pared some of Monday’s decline, which saw the pair reach a fresh 2018 low, breaking below the 1.3450 support in the process. This bearish break took place after news that Scottish Prime Minister, Nicola Sturgeon, pledged to restart a drive for Scottish independence, adding yet another twist to the Brexit-saga.
With the next round of Brexit talks, key UK economic reports, and the still-unfolding Italian coalition drama set to converge in the coming days, volatility in GBPUSD is set to pick up. The next support below comes in around 1.3310.