November 13, 2018

Daily Observations:

Asian stocks traded lower Thursday following a tech-led slump on Wall Street overnight though the worst of the losses were pared on hopes for progress in the US-China trade dispute. Treasury yields dropped and the dollar slipped from an 18-month high. Key indexes slid from Tokyo and Seoul to Sydney, with Apple Inc. suppliers under pressure. Stocks came off their lows on a report that China’s Vice Premier will visit the US to pave the way for a meeting between Trump and Xi later this month.

US and China Said to Resume Talks on Trade:

US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He have resumed talks on trade, and a potential Washington visit by Liu is being considered before the nations’ top leaders meet later this month. The two officials spoke by phone on Friday, according to people briefed on the matter, who asked not to be named due to the sensitivity of the topic. The conversation didn’t yield any concrete results, the people said. The Hong Kong-based South China Morning Post reported Tuesday that Liu was “expected” to visit Washington shortly. The Wall Street Journal first reported the phone call Monday.

The phone discussion followed a call between President Donald Trump and China’s Xi Jinping 2 weeks ago, the first publicly disclosed call in 6 months. The 2 leaders are slated to meet at the Group of 20 nations summit in Argentina, which is scheduled to take place from Nov. 30 to Dec. 1.

US-China talks have made little progress since May, when Trump put a stop to a deal that would have seen China buy more energy and agricultural goods to narrow the trade deficit. In Beijing, Trump’s move was seen as an insult to Xi, who sent Liu. his top economic policy official, to Washington for the negotiations, and cemented a view that Trump’s real goal was to thwart China’s rise.

Trump Threatens Car Tariffs:

The White House is circulating a draft report by the US Commerce Department over whether to impose tariffs on automobile imports to protect national security, 3 people familiar with the matter said. President Donald Trump is scheduled to meet with senior members of his trade team on Tuesday to discuss how to proceed on the potential tariffs, 2 of the people said. Speaking on condition of anonymity to discuss internal deliberations, they didn’t give any insight into Commerce’s conclusions.

The department in May launched an investigation into the national-security impact of car imports under section 232 of the 1962 Trade Expansion Act, the same provision Trump used to justify steel and aluminum tariffs earlier this year. The probe covers imports of automobiles, including SUVs, vans and light trucks, as well as auto parts. Commerce has until February to report its findings to the president, who has final say on any tariffs.

There’s no indication when Trump will make a final decision on autos tariffs but he has repeatedly signaled that he’s getting impatient with his trading partners, including the European Union and Japan. Trump has threatened a 25% tariff on imported cars.

Fed’s Daly Sees Possible December Rate Hike, Two 2019 Moves:

Federal Reserve Bank of San Francisco President Mary Daly said US policy makers ought to be gradually lifting interest rates to bring an economy that’s running above potential in for a soft landing.  “It wouldn’t be surprising to me that we would need to go up again in December and at least a couple of times next year,” Daly told Bloomberg News Monday in her first interview on policy since she became head of the regional Fed branch on Oct. 1. That would be enough to get to her estimate of neutral, or the level of interest rates that neither spurs nor slows the economy.

Daly later clarified in remarks to reporters that she isn’t set on a December move in particular. She said 2 to 3 rate increases will be appropriate over the next “period of time,” but the timing remains to be seen. Daly voted for the first time at the Fed’s policy meeting in November and will vote again at the Dec. 18-19 gathering, at which officials are expected to hike for the fourth time this year.

The Fed is raising rates at a time when the economy is looking strong and wage pressures are creeping up. Unemployment has fallen to 3.7%, its lowest level since the 1960s, and inflation is near the Fed’s 2% goal. The probability of a December rate increase is hovering around 75%, based on trading in federal funds futures, and most Fed officials have said they support further gradual rate increases.

Goldman Worries:

Goldman Sachs Group Inc.’s reputation is facing one of its biggest crises of the decade and now its shares are, too. Since prosecutors implicated a trio of Goldman Sachs bankers in a multibillion-dollar Malaysian fraud early this month, investors have endured an almost daily drip of news on the firm’s ties to the scandal. The barrage culminated Monday as the country’s finance minister demanded a “full refund,” tipping Goldman’s shares into their biggest drop since 2011.

Across Wall Street, analysts expressed surprise over the dive, noting the bank, which hasn’t been charged with wrongdoing, can probably stomach any payment that might be extracted in the case. Instead, some said, the decline appeared to be a combination of concern over the persistently harsh spotlight and uncertainty about what’s to come.

Shares closed at $206.05 last night, a 2-year low, and 25% lower than its March-highs this year.

Saudis Seek to Reduce Oil Production:

Saudi Arabia said OPEC and its allies should reverse about half the increase in oil output they made earlier this year as fears of shortages are supplanted by concerns about oversupply and collapsing prices.

Producers need to cut about 1 million barrels a day from October production levels, Saudi Energy Minister Khalid Al-Falih said in Abu Dhabi on Monday. The kingdom will reduce shipments by about half that amount next month, making its second policy U-turn after a summer surge in prices was followed by a swift collapse into a bear market this month.

The largest producer in the Organization of Petroleum Exporting Countries is once again taking the lead to address huge shifts in the market. In June, it persuaded fellow producers to end 18 months of production cuts and pump more crude in response to falling output in Venezuela and Iran and pressure over prices from US President Donald Trump.

This time, Saudi Arabia is urging allies to focus on the risk of rising oil inventories and forecasts for massive growth in rival supplies next year including US shale. It’s a concern shared by OPEC Secretary-General Mohammad Barkindo, who said Monday that the market balance is under threat from surplus supply and dwindling demand.

Investors Flock to EM ETFs:

Investors in exchange-traded funds ignored an extended rout in emerging-market stocks and doubled their allocations for the asset class last week. Their main destination: China.

The world’s third-largest equity market received more money from ETF investors than any other emerging economy in the week through Nov. 9, according to data compiled by Bloomberg. Overall flows into developing-nation equities crossed $2 billion to the highest level since January, the data showed.

Investors are returning to China three years after a $6.3 trillion rout in 2015, sparked by a slowdown in the second-largest economy and exacerbated by the government’s meddling in the market to rein in selling. Since then, China has gradually rebuilt investor trust with several reforms including the opening of a channel to trade in Shanghai stocks through Hong Kong.

ETF investors’ interest in China has rocketed this year after mainland shares started trading as part of MSCI Inc.’s emerging-market gauge. The index provider has said that the total weighting for Chinese shares could eventually exceed 40% in the benchmark.

Sources: Bloomberg
 

FX Updates:

USD/SGD:

Spot: 1.3821

USDSGD was little changed, maintaining above 1.3800 but paring gains after reaching a 2-week high earlier. A selloff in global equities had recently boosted demand for the US dollar as a haven currency. The key resistance is at 1.3873, a level which has held strongly in October.

AUD/USD

Spot: 0.7206

AUDUSD maintained above the 0.7200 handle, as its longer-term bias remains to the upside after the pair broke above its 2018 downtrend channel earlier this month. A break above 0.7315 would confirm the breakout and likely lead to an ascent to the next resistance of 0.7500.

USD/CAD:

Spot: 1.3220

USDCAD continues to remain on the front foot; having climb above the 1.3200 last Friday, the pair is currently testing the upper bounds of its 2-year old triangle pattern. A convincing break above 1.3250 could lead to a retest of the 2018-high at 1.3386.

USD/CNH:

Spot: 6.9474

USDCNH reversed Monday’s gain, slipping 0.3% to 6.9444 earlier today. There were reports on Bloomberg indicating large Chinese banks had come in to sell the greenback against the yuan as USDCNH approached the 6.9700 earlier today.

USD/JPY:

Spot: 114.02

USDJPY climbed back above 114 following renewed US-China trade optimism. The pair has gained sharply since the end of October, rising more than 2% from its lows 2 weeks ago. The pair’s key resistance remains at 114.55, a level that has held 3 times since July last year.

GBP/USD:

Spot: 1.2886

GBPUSD looks poised to snap a 3-day losing streak, after the pair found some footing around the 1.2850 mark. GBPUSD declined almost 2.5% since late last week, after it was reported that there was little change PM May’s Brexit plan will pass Parliament this week, jeopardizing her leadership. Despite its rebound, the longer-term bias continues to remain to the downside; continued Brexit uncertainty is likely to push the currency pair lower, closer to 1.2500 by year’s end.