May 26, 2017

Daily Observations:

A slump in crude oil weighed on energy shares, as indices in Tokyo, Sydney and Singapore fell with energy producers dropping the most. Commodity currencies retreated against the dollar, while gold remained little changed.

US:

• Wholesale inventories last month slipped 0.3% month-on-month, contracting from a prior increase of 0.1% in the month prior.
• Initial jobless claims for the week ended May 20 gained to 234,000 from 233,000, less than the expected gain to 238,000.
• Mohamed El-Erian, Allianz SE’s chief economic adviser, said he’s become less confident that President Donald Trump has properly prioritized his plans to reverse a period of relatively low growth in the US. He added that the US is falling into “the trap of getting the sequencing wrong”, and said that from an economist’s point of view, Trump should’ve started with pro-growth measures first instead of revamping health care. El-Erian further said the recent budget proposal, which calls for $3.6 trillion in spending cuts including reductions in food stamps, Medicaid health insurance payments and disability benefits, suffers from a “design problem” in that it wasn’t put together with a focus on the right goals.
• US stocks rose to fresh records as retailer results boosted confidence in American consumers’ ability to jump start economic growth. The S&P 500 Index pushed its longest rally since February to 6 days, rising 0.4%, as Best Buy co. and PVH Corp. results topped estimates.
• The US dollar strengthened, reversing from a previous day’s selloff, in the wake of the Fed’s minutes which showed officials remained unperturbed by recent signs of slower economic growth. The Bloomberg Dollar Spot Index advanced 0.2% in New York and a further 0.1% in earlier trading today.
• The benchmark 10yr Treasury yield slipped 1bp to 2.25% earlier today, erasing its overnight gain.
• According to a Bloomberg report, stubbornly low Treasury yields have spurred banks to slash forecasts for the months ahead, regardless of whether the Fed hikes or not. Reasons include:
  • The Trump trade is close to dead as gridlock grips Washington. The 10yr breakeven rate, which gauges market expectations for inflation over the next decade, is close to the lowest since November – a sure sign that bond-market bets on faster growth and inflation have run its course.
    
  • Treasuries as safe-haven assets have been in demand due to increasing geopolitical concerns as well as the unfolding political drama between Trump’s campaign and Russia.
    
  • Financial conditions, according to Goldman Sachs, have actually eased since the Fed hike in Match, thus helping limit upward pressure on yields.
    
  • US yields are among the highest among its peers; in a world where the Bank of Japan and ECB are still buying debt, US Treasuries are considered to be relatively cheaper.
    
  • Other factors include an aging global population that still craves fixed income, and sovereign governments running up budget deficits.

UK:

• In the first quarter this year the UK economy expanded 0.2% quarter-on-quarter, slowing from its prior rise of 0.3% and missing out on analysts’ projections of a 0.3% gain. On a year-on-year basis, GDP rose 2.0%, less than the 2.1% consensus estimate. Growth in services, the biggest part of the economy, and production were both revised down compared with the initial estimate
• Exports last quarter declined 1.6% from the previous quarter, worse than the 0.5% pickup expected. Net trade knocked 1.4 percentage points off GDP, equalling a record drag.
• Consumer spending weakened, with household activity adding the least to the economy since 2014.
  
• The sharper-than-expected slowdown is another sign that Brexit is hitting the economy as accelerating inflation coupled with muted wage growth puts the squeeze on households.
• A recent poll showed the lead held by the Conservatives party has fallen to 5 percentage points, the narrowest since Theresa May became prime minister last July.

Japan:

• CPI for April, excluding fresh food, increased 0.3% from a year earlier, the fastest pace since April 2015, less than the median consensus of 0.4% and accelerating from the prior increase of 0.2%
• Excluding fresh food and energy, prices remained flat at 0.0%, compared to a 0.1% drop in March.
• Headline CPI over the same period rose 0.4%, matching economists’ forecasts and at a faster pace compared to last month’s 0.2% gain.
• The figures for April offer some encouragement but remain distant from the 2% target and underscore that price gains are lagging behind modest growth in the economy, which has expanded for 5 straight quarters.

China:

• Authorities have issued an official statement in response of Moody’s recent downgrade, by arguing Moody’s has underestimated the resilience of the Chinese economy and effect of undergoing deleveraging effort led by the government.

Precious Metals:

• Spot gold edged 0.2% higher to $1,258.73/Oz earlier this morning, erasing an overnight fall. The yellow metal seems to be consolidating between the $1,250/Oz and $1,260/Oz handles and a convincing break out in either direction may signal the direction of its next move.
• From a technical analysis point-of-view, a golden cross has formed and could be a bullish signal. A golden cross is formed when the 50-day moving average crosses above the 200-day moving average, and has only occurred 4 times in the past 5 years for gold and typically marks a multi-week trend.
• Silver for immediate delivery was little changed from its previous day’s close of $17.1720/Oz.

Oil

• OPEC and its allies extended oil production cuts for 9 more months after last year’s landmark deal failed to eliminate the global oversupply or achieve a sustained price recovery.
• The producer group together with Russia and other non-members agreed to prolong their accord through March, but no new non-OPEC countries will be joining the pact and there was no option set out to continue curbs further into 2018.
• The market was unimpressed, as crude oil futures expiring in July sank 4.8% to $48.90/bbl, its biggest drop in 3 weeks.

USDSGD:

• Spot 1.3859
• USDSGD seemed to have steadied, finding support above the key level of 1.3800 over the past week. The pair rose 0.2% to 1.3872 last night.
• A break below 1.3800 and the next level of 1.3725 may be tested soon.

AUDUSD:

• Spot 0.7432
• AUDUSD fell 0.6% to a 1-week low of 0.7423, amid US dollar strength today in response to rising June Fed rate hike odds.
• Furthermore, the Aussie dollar faces headwinds from iron ore’s continued languishing near 6-month lows.

USDCAD:

• Spot 1.3490
• USDCAD rebounded sharply, rising 0.5% to 1.3497, paring almost all of its previous day’s decline to the 1.3400 handle.
• The pair has been driven high by an overnight slump in crude oil, after the market was left unimpressed by the outcome of yesterday’s OPEC meeting.

USDCNH:

• Spot 6.8837
• The PBOC earlier set its daily reference rate at 6.8698 per US dollar, which was little changed from the previous day.
• USDCNH fell 0.3% to 6.8360; the yuan is headed for its strongest weekly gain against the dollar in 4 months amid speculation that Chinese officials had intervened to pull the spot rate closer to their daily fixing.
• China plans to change the way it calculates the yuan’s daily fix against the dollar, adding a “counter-cyclical adjustment factor” that my blunt the impact of big market swings, according to people familiar with the matter, Bloomberg news reported.

USDJPY:

• Spot 111.58
• USDJPY declined 0.3% to 111.55, despite a stronger USD across the board today. Yen bulls remain in command following the release of solid inflation figures released out of Japan earlier today.
• The 115 handle is expected to be a region of resistance, while the 200-day moving average of 110 is likely to provide support.

GBPUSD:

• Spot 1.2888
• GBPUSD declined 0.7% to 1.2868, after a poll showed the Conservative party lead narrowed after the Manchester attack, and as investors in Asia sold the currency after the UK’s first quarter economic growth missed estimates yesterday.
• With a decline back below the key 1.3000 level, an 11-week rally in GBPUSD looks poised to come to an end should the pair breach back below 1.2800.