Issue#: 524/2019

Spot values at a glance:







Daily Observations:

Asian stocks were little changed in earlier trading Wednesday as traders await the next page in the US-China trade war and any fresh narratives on the Fed, which releases minutes from its last policy meeting today. Earlier, US stocks closed higher after the US decided to grant limited relief for consumers and carriers that do business with Huawei Technologies Co. Safe havens such as Treasuries and the yen were flat.


Trump Provides Limited Huawei Relief:

The Commerce Department on Monday granted a 90-day relief for certain US broadband companies and wireless customers using Huawei Technologies Co. equipment. The temporary license covers continued operation of existing networks and equipment as well as support to existing handsets and other limited actions, according to a notice published in the Federal Register Monday.

 “This license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks,” Commerce Secretary Wilbur Ross said in an emailed statement on Monday.

The Trump Administration blacklisted Huawei on Friday, jeopardizing its supply of American components from semiconductors to the Google apps that run on its smartphones. For Huawei phone users, the temporary reprieve means Google will be able to provide key Android security updates during the 90-day time frame, but future Huawei phones will still lack Google’s apps.

Ross said last week on Bloomberg Television that the administration had a plan in place to deal with rural providers that use the Chinese company’s equipment in existing 4G networks.

The move comes after the Trump administration placed the Chinese telecoms giant on an export blacklist that requires American companies to apply for a special license to sell products to the world’s largest networking gear maker. The impact of the Trump administration’s threats to choke Huawei reverberated across the global supply chain on Monday, hitting some of the biggest component-makers.


China Surveillance Giant Tanks on US Ban Report:

Hangzhou Hikvision Digital Technology Co. plunged as much as the daily  limit after New York said the Trump administration was considering curtailing the flow of American technology to China’s top maker of video surveillance gear.

The stock fell as much as 9.6% lower as of 9:50a.m. in Shenzhen. The White House will make a final decision in coming weeks on whether to limit exports of US components to Hikvision, as it’s done with Huawei Technologies Co., the Times reported, citing unidentified people familiar with the matter.

Hikvision has grown into a surveillance giant, selling its cameras around the world after cashing in on China’s obsession with monitoring its citizens. Its devices use artificial intelligence, enabling them to conduct facial recognition on a vast scale. That’s helped it build a dominant position in a market that BIS Research says was worth $32billion in 2017 and will grow 16% a year by 2023. Hikvision doesn’t have a a global counterpart close to its scale and Zhejiang Dahua Technology Co., its closest rival, is about a sixth of its size.


Theresa May’s New Brexit Referendum Plan Unwelcomed:

Theresa May made a desperate final gamble to get her Brexit deal through the British Parliament before she’s thrown out of office, but her efforts looked doomed.

In a hastily arranged speech on Tuesday, the embattled prime minister promised to give members of Parliament a vote on whether to call another referendum to ratify Britain’s divorce from the European Union. It’s something many MPs, including scores in the opposition Labour Party, have been calling for, but she made it conditional on them backing her deal first.

Within minutes of her speech ending, the backlash began. Pro-Brexit Conservative MPs joined the opposition leader Jeremy Corbyn and May’s Northern Irish allies to condemn her proposals. They vowed to vote against them in the House of Commons next month.

The failure of May’s deal would throw the UK into renewed turmoil and uncertainty. The outcome of Brexit would be almost impossible to predict as it will be left to May’s successor as Tory leader and prime minister to complete the process.

Leaving the EU with no deal, or even remaining inside the bloc could be back on the table once May is gone. Boris Johnson, who has said he’d be prepared to leave without an agreement, is the front-runner in the leadership race that’s unofficially under way. Johnson was quick to come out against May’s latest plan, as was pro-Brexit rival Dominic Raab.


Bullard Admits Hike Last December Was “Slightly Overdone”:

US policy makers may have “slightly overdone it” by raising interest rates in December, though it’s premature to talk about a rate cut, said Federal Reserve Bank of St. Louis President James Bullard.

“Rates are at a good place in the US right now, if anything we are a little restrictive I would say,” Bullard said in an interview with Bloomberg Television Wednesday in Hong Kong. “I am concerned we may have slightly overdone it with our December rate hike but I was pleased that the committee pivoted.”

Bullard, a voter this year on the FOMC, has been consistently among the more dovish members of the policy panel, arguing against raising rates in the absence of clear inflation pressures.

Describing low inflation expectations as a concern, Bullard said he argued against the December hike and pegged the neutral level at 2%, “so we are a little bit tight right now.” While a rate cut would send an important signal that the Fed is determined to hit its inflation target, such a move would be premature at this point, Bullard said. On the US trade war with China, Bullard said farmers are very concerned about rising tariffs, though he added it may take some months before the duties begin to impact Fed policy.

Investors are betting on a rate cut before the end of the year, according to prices in interest rate futures contracts.


China Dollar-Loan Market Slumps This Year:

Dollar loans to Chinese borrowers have cratered this year, thanks to both a decline in demand and increased wariness among lenders amid escalating US-China tensions.

Syndicated dollar loan issuance to Chinese borrowers has tumbled 62% from the start of the year through May 17, to $7.3 billion, according to data compiled by Bloomberg. That’s the lowest level since 2012.

Many instead are turning to domestic funding, taking advantage of policy makers’ moves to bolster credit growth as China’s economy slows. Yields on weaker companies’ bonds have fallen near the lowest in 30 months, luring issuers including developers back home for funding. Local corporate-bond issuance has jumped 33.5% so far, to a record high of 4.4 trillion yuan.

A weakening exchange rate has also enhanced the appeal of yuan borrowing, and raised the risk of servicing overseas debt. Dollar-bond issuance has also slowed this year, though not by as much as in the loan market. Chinese entities’ dollar-note sales are just 5.7% down on last year, according to data compiled by Bloomberg.


Most Unloved Sector is Most Favored by Hedge Funds:

According to a Bloomberg article, despite the increased political risk in the health-care industry of late, hedge funds have been increasing their exposures in this sector to the highest since 2010.

In a quarter when calls for drug pricing and “Medicare-for-All” grew louder, hedge funds raised their holdings in stocks from drugmakers to health insurers. At the end of March, their exposure increased to the highest since 2010, making the group the most crowded among 11 industries, regulatory filings compiled by RBC Capital Markets showed.

Though the worst industry in the S&P 500 this year, health-care has its devotees. The stocks are cheaper than the market, their revenues appear more resilient amid an economic slowdown or a trade war, and dealmaking is reviving. But the bets haven’t worked and the industry’s growing popularity leaves some skeptical.

Health care has trailed all other major industries in the S&P 500, rising 3% this year, compared with a 14% gain for the broad benchmark. Hedge funds are unbowed. At the worst point of the rout in April, they were aggressively buying the dip, data compiled by JPMorgan’s prime brokerage unit showed.

Investors may also be turning to the sector in the wake of escalating geopolitical tensions and a pick-up in volatility in broader markets. As a domestic industry, health care has been a haven for trade-weary investors. But prepare for more turbulence in coming months as political pressure is likely to resurface, sector analysts warned. For one, the Democratic presidential primary debates are set to start in June. A ruling from an appeals court on the future of Obamacare is also pending.



Sources: Bloomberg

FX Updates:


Spot: 1.3778

USDSGD continued today to fluctuate near a 5-month high, just shy of its 1.3800 handle. The pair has gained 1.3% so far this month, but looks set to pare some of the gains over the near term. A retracement back to 1.3700 is likely before the key resistance of 1.3873 is reached.



Spot: 0.6882

AUDUSD remained on the back foot, near 0.6880 following poorer-than-expected Australian construction data earlier today, strengthening the case for a rate cut in June. RBA Governor Lowe had earlier said the central bank will consider cutting its cash rate next month  to bolster the labor market and help return inflation to target. More Aussie weakness is expected over the medium term; the next support at 0.6828 is not expected to hold over the next few weeks.



Spot: 1.3402

USDCAD slipped back to the 1.3400 handle, following a stronger Canadian dollar which was boosted after the US reached an agreement with Mexico and Canada to cancel steel and aluminium tariffs. The FX pair is expected to maintain within the 1.3400-1.3500 range over the near term.



Spot: 6.9322

For the third straight day, USDCNH pared its sharp rise in May, which saw the pair gain as much as 3.1% since end-April. The pair continues to hold above the 6.9000 handle. The 2018-high at 6.9805 remains the key resistance target. Up and down side risks continue to loom large, as traders await fresh narratives on the US-China trade dispute.



Spot: 110.63

As predicted last week, USDJPY has completed its rebound back up to the 110.80 region. Continued safe haven demand should drive the pair back below 110; a retest of 109 is possible.



Spot: 1.2715

GBPUSD remains supported at the 1.2700 level, despite renewed Brexit uncertainty. UK PM May’s recent proposal to offer parliament a vote on holding a second Brexit referendum was met with strong scepticism among key lawmakers. 1.2700 is not expected to hold for long; a break below is likely to lead to a retest of the 1.2441 low last reached earlier this year.


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UEN: 201419754M

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