May 29, 2017

Daily Observations:

Stocks in Tokyo and Seoul rose, while equities in Singapore and Sydney fell, amid low trading volumes. The US dollar gained after Fed official John Williams reiterated his belief of 3-4 rate hikes this year. Gold retreated from a 4-week high.

US:

• The US economy expanded 1.2% quarter-on-quarter during the first 3 months of 2017, accelerating from its prior rise of 0.7% and exceeding economists’ estimates of 0.9%. Growth was driven by consumer and business spending, as well as a less-material drop in government spending.
• Personal consumption during the first quarter of the year rose 0.6% from 0.3% previously, beating the consensus estimate of 0.4%.
• Core PCE, the Fed’s preferred measure of inflation, gained 2.2% last quarter, slower than the prior quarter’s rise of 2.3% and less than the median estimate of 2.3%/.
• Durable goods orders last month slipped 0.7% after rising 2.3% in March; analysts had predicted a larger drop of 1.5%.
• Homeland Security Secretary John Kelly said he may ban laptop computers in the cabins of all international flights into and out of the US amid continuing terrorists’ threats to bring down airplanes, but that a final decision hadn’t been made.
• The Fed’s San Francisco President John Williams said 3 interest-rate increases this year makes sense as the central bank takes gradual steps to tighten monetary policy and shrink the central bank’s balance sheet to prevent the economy from overheating. He added the economy is “as close to the Fed’s dual mandate goals as” they’ve ever been, and that it’s important for monetary policy to work toward “an economy that doesn’t run too hot or too cold”.
• The US dollar gained Friday, with the Bloomberg Dollar Spot Index rising 0.1%. The dollar has somewhat steadied over the past week, ahead of a widely-expected rate-hike by the Fed next month.
• US Treasuries were little changed following mixed economic data from the US last Friday; the benchmark 10yr Treasury yield ended 1bp lower at 2.25%.
• Equities ended mostly flat, but higher for the week. The benchmark S&P 500 Index eked out a 0.03% gain to close at it a fresh record high.

Europe:

• German Chancellor Angela Merkel gave the strongest indication yet that Europe and the US under President Donald Trump are drifting apart, saying reliable relationships forged since the end of World War II “are to some extent over”. Merkel offered a glimpse of her world view after trump’s 9-day trip, during which he hectored NATO allies for not spending enough on defence, called Germany’s trade surplus “very bad”, and brought the US to the brink of exiting the global Paris climate accord.

UK:

• The situation appears to have worsened further for UK Prime Minister Theresa May’s Conservatives party. The various polls published over the weekend showed May’s Conservatives party lead is narrower than previously thought. According to a weekend poll by ORB, the Conservatives led the Labour party by 6 points, much narrower than a 12 point lead in the week before.

North Korea:

• North Korea conducted another missile test earlier today, drawing condemnation from South Korea and Japan just days after leaders vowed to take tougher measures against Kim Jon Un’s nuclear weapons development.

China:

• According to a Bloomberg report, the first hints of China’s economic performance this month suggest that a slowdown in growth is taking hold, as policy makers beef up efforts to clamp down on financial risks.
• The international-investor optimism that dominated in the earlier part of the year is now souring, as curbs on leverage push up the cost of domestic borrowing. Small and medium-sized companies are also reporting dented confidence, and sentiment among sales managers and in the steel market worsened.

Singapore:

• Industrial production in April rose 6.7% from a year earlier, slowing from the upwardly-revised 11.0% rise in March, and beating the consensus estimate of 6.0%.
• Monetary Authority of Singapore Managing Director Ravi Menon said an increase in non-performing loans, especially in the oil and gas sector, is contained. He reassured that local banks, whose exposure to the sector is about 6-7%, have “adequate” provisions to NPLs.

Precious Metals:

• Spot gold gained 0.8% to $1,266.76/Oz, its highest close in a month, as growing concerns over the UK election next month counter an impending interest rate increase in the US.
• After consolidating between the $1,250/Oz and $1,260/Oz handles, last Friday’s break above $1,260/Oz may signal further upside for the yellow metal.
• 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 reached a 1-month high as well, advancing 1.1% to $17.3520/Oz last Friday.

Oil

• Crude oil futures expiring in July gained 1.8% to $49.80/bbl Friday, and continues to be capped at the $50/bbl handle today as investors tempered their disappointment over an agreement by OPEC and its allies to extend production cuts without deepening them.
• After the market was left unimpressed with the accord last Thursday to prolong output curbs, Saudi Arabia’s Energy Minister Khalid Al-Falih said the strategy is working and global stockpiles will drop faster in the third quarter. US explorers added 2 rigs, Baker Hughes Inc. said Friday, which is the smallest increase this year and a sign that surge in American production may be slowing.

USDSGD:

• Spot 1.3841
• USDSGD rebounded from Friday’s low, gaining 0.2% to 1.3841 earlier today along with a strengthening US dollar.
• A break below 1.3800 and the next level of 1.3725 may be tested soon.

AUDUSD:

• Spot 0.7444
• AUDUSD fell by as much as 0.3% to 0.7428 earlier today, before erasing declines heading into midday.
• The Australian dollar faced renewed pressure earlier iron ore fell below a key level to trade at its lowest since last October.

USDCAD:

• Spot 1.3462
• USDCAD gained 0.2% to 1.3470 earlier amid a stronger US dollar today and as crude oil finds some resistance at its $50/bbl handle.
• To the upside, the pair should find some resistance around 1.3540.

USDCNH:

• Spot 6.8180
• USDCNH declined for a third straight session, falling 0.3% to 6.8034, its lowest level since early-February. The exchange rate has surged more than 1% since last Thursday amid suspected intervention from the PBOC and surging funding costs in Hong Kong.
• In the derivatives market, the currency’s one-month implied volatility is heading for the biggest 3-day jump since the August 2015 devaluation. Markets on the mainland are closed Monday and Tuesday.

USDJPY:

• Spot 111.33
• USDJPY was little changed earlier today, following 0.5% fall to 111.33 last Friday.
• 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 1.2821
• GBPUSD declined 1.2% to 1.2804 last Friday, its lowest level since April 25 after the UK election polls showed Conservatives are losing ground.
• 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.