Spot values at a glance:
Most Asian indices slipped into the red after US stocks declined overnight after the Senate revealed that its tax plan would delay cuts to the corporate rate until 2019. The US dollar tumbled, with the Dollar Index falling to near 2-week lows. Gold sneaked towards a 3-week high.
According to a Bloomberg report, Senate Republicans released their vision for a tax-cut plan Thursday that would cut the corporate tax rate to 20% from 35%, with a 1-year delay to 2019. Separately, the House Ways and Means Committee approved a list of tweaks that will reduce the cost of the legislation, including an increase to the rate companies would pay on repatriated profits, which may set the stage for a vote by all representatives next week.
US Stocks Sink:
All major US equity gauges fell following news of the delay to tax cuts, with selling heaviest in tech shares that had been on a 10-day surge. The S&P 500 Index was down more than 1% around noon New York time before recovering more than half its losses by the close; the Nasdaq Composite ended 0.6% lower on the day. Treasuries turned higher and the dollar extended losses.
The bond market took its main cue from technical factors, as sovereign debt halted a rally that started 2 weeks ago. Corporate credit faltered amid a glut of year-end issuance, with the starkest declines coming among the lowest-rated companies. Volatility spiked as investors appear to be growing increasingly pessimistic about the prospects for meaningful fiscal reform with both houses of Congress struggling to put forward tax proposals that have reasonable chances of becoming law.
Junk Bond Rally Unravels:
Exchange-traded funds that buy high-yield debt have plunged the most since August, with $563 million of retail outflows since the start of this week alone after a spate of bad news triggered sell-offs of a few big speculative-grade borrowers. Three of the biggest junk-rated borrowers, IHeartMedia Inc., CenturyLink Inc. and Community Health Systems Inc., posted disappointing earnings that sent their bonds plunging.
The telecom sell-off that was exacerbated by failed merger talks between Sprint Corp. and T-Mobile US Inc. has slowly crept into health-care bonds and the broader high-yield market as investors try to cash out before it’s too late.
Brexit Delay Possibility:
European Union officials have started questioning whether the UK could remain a member of the EU beyond March 2019 as a smoother alternative to a transition deal. UK Prime Minister Theresa May said in September that she wants a bridging period of around two years so that businesses have time to adapt to the new regime. Under the current plan, this would be a formal interim phase agreed as part of the overall Brexit deal to take effect after Britain leaves in 17 months’ time. Officials have started floating other ideas, including extending the UK’s EU membership to cover what would be the transition period. Germany’s Council of Economic Experts, which advises the chancellor, backed the idea on Wednesday.
RBA Trims Inflation Forecasts:
In its monetary policy statement released on Friday, the RBA reiterated its view of accelerating growth and sluggish inflation, suggesting interest rates will stay at a record-low 1.5%. Underlying inflation forecasts were revised slightly lower for 2018 and cut by half percentage point for 2019, mainly to allow for upcoming reweighting of CPI. According to a Bloomberg report, most analysts are not pricing in a strong chance of a rate increase until November 2018.
Singapore’s benchmark equity index, the Straits Times Index, has already notched up its best annual performance since 2012 even with almost 2 months of the year left to run amid an economic recovery and a stronger currency. Equity funds received some $2 billion in 10 straight months of inflows, the most annually since 2007, according to data from asset allocation tracking company EPFR Global. That’s more than the combined inflows of the past five years and the longest monthly rally since mid-2013, the data show.
The city-state has posted solid growth in the past 2 quarters as global trade continues to rebound, supporting its export-oriented economy. The central bank said last month the country’s economic growth will probably come in at the upper half of the 2% to 3% forecast range, its fastest rate since 2014. The property market has shown signs of a turnaround, while banks have benefited from stronger lending and improved interest margins.
Weekly Thematic News:
Smart Real Estate Singapore:
Singapore property stocks have outperformed the benchmark index’s 19% gain in 2017, with developers such as City Developments Ltd. and UOL Group Ltd. both advancing 47% each. En-bloc sales, or redevelopment deals, have exceeded S$5 billion this year, the most since 2007, according to OCBC, and home prices rose for the first time in 4 years in September. Investors looking to invest in the local real estate sector can buy into the Smart Real Estate Singapore portfolio on iAdvisor, which has returned a healthy 26.5% from a year ago and provides a dividend yield of 4.8%.
Waymo, the autonomous car unit of Google parent company Alphabet Inc., said on Tuesday it will soon start chauffeuring people in minivans without “safety drivers,” staffers that man the steering wheel. For almost a decade, self-driving cars have graced public roads, but always with a person behind the wheel. The move, a first for any company, is a major milestone for the internet giant’s bid to lead the crowded pack trying to commercialize driverless technology. The Alphabet arm has racked up more autonomous test miles on roads than others developing the tech, including Ford Motor Co. and Uber Technologies Inc.
The Self-Driving Car US portfolio on iAdvisor has been one of the top 5 performers over the past year, returning an impressive 53.7% from a year ago.
According to a Bloomberg Businessweek article, the kind of cyberattack that companies will finally take seriously is coming. Security experts call such an attack a cyberphysical, meaning it spills into the real world, causing property damage and perhaps deaths. It happened in western Ukraine two years ago. The attack used malicious software to briefly take out an electrical grid, causing a blackout that affected several hundred thousand people.
So far, most Americans and Europeans haven’t been forced to deal with the dangers of a large-scale cybersecurity breach. Although close to half of the US population had their personal data stolen from Equifax Inc. recently, the usual round of press outrage and congressional finger-wagging didn’t yield any serious charges.
Experts have recently found evidence that hackers responsible for Ukraine’s outages have been quietly rolling into the systems that run US energy grids. On Oct. 20, government officials issued an alert warning of a “multistage intrusion campaign” aimed at industrial control systems in critical infrastructure, including in “energy water, aviation, nuclear and manufacturing sectors”. US companies are said to be unprepared for such attacks; industrial control systems have been connected to the internet in recent years, with little thought given to securing them.
With such a backdrop, the growth of the cybersecurity is expected to grow exponentially. Investors can choose to park some money in this increasingly important trend by buying into the Cybersecurity US portfolio on iAdvisor, which has returned 12.1% year-on-year as of Friday.
Investors are accessing the possibility that tax credits for solar power may be removed by the US government should policy makers seek avenues to make up for lost revenue following the anticipated tax reform proposal.
The International Trade Commission offers owners of solar systems a tax credit worth 30% of their systems’ costs, and both companies would be adversely affected if it was reduced or eliminated. Wind and solar have been the fastest growing sources of US electricity since 2014, spurred by federal tax credits. The credits are scheduled to be mostly phased out in the 2020’s.
With the move to clean energy being a global and increasingly heavily-emphasized trend, the multi-year growth of the solar energy industry is expected to continue nonetheless. Investors can purchase the Solar Energy US portfolio on iAdvisor, which has outperformed every other portfolio over the last 30 days, returning 13% as of Friday.
USDSGD slipped below the 1.3600 handle Friday following overnight weakness in the US dollar. The bias remains to the upside, after the pair broke above its year-to-date downward trend channel in end-October. The key resistance remains at 1.3690. A strong break above it could lead to a push for 1.3900.
AUDUSD’s fall below its old support/resistance level of 0.7750 2 weeks ago has led to renewed technical bearishness for the pair. 0.7600 will be key – a move below it signals more pain for Aussie bulls. The pair has been well-supported above 0.7600 this past week and was slightly higher bid Friday morning following the release of the RBA’s monetary policy statement.
USDCAD extended a recent decline Friday despite steadying oil prices. The weaker USD looks to be the main driver of the FX pair. Some support could come in around 1.2600.
The Canadian dollar is not expected to strengthen greatly after recent dovish comments from BOC Governor Poloz. Poloz had stated his confidence inflation will reach the 2% target, bolstering the market view the central bank won’t tighten at the next meeting on Dec. 6.
USDCNH was little changed following Trump’s China visit, with the pair maintain just below the 6.6500 handle on Friday. The currency is expected to remain within the range of 6.6000 and 6.7000 over the near term.
USDJPY declined back below the 113 level Thursday night amid broad USD weakness. A move below 113 could trigger a quick decline back to the 112 handle.
The all-important resistance of 114.50 remains to be broken, there is a fading chance of that happening by the weekend as the recent US dollar rally continues to falter. A break above it could result in the currency pair embarking on a longer-term move upwards, with the double-top at 118.60 a realistic possibility within the next year.
The pound is likely to be driven in the near term by the state of Brexit negotiations and UK politics, after losing support last week from bets on central bank policy tightening. The pair has fallen for 3 straight weeks on concerns about Brexit and as the BOE failed to signal the start of a tightening cycle after raising rates last Thursday.
The 1.3000 handle remains the key level to watch; below that, the next support lies at the 200-day moving average of 1.2850.