November 28, 2018

Daily Observations:

Asian stocks climbed, as a rally in tech shares gathered pace, with investors mulling comments from Federal Reserve officials and the chances of a breakthrough in the US-China trade dispute. The dollar maintained gains. Earlier, the S&P 500 Index climbed for a second day. The 10-year Treasury yield was steady as Fed Vice Chairman Richard Clarida backed gradual rate hikes ahead of Jerome Powell’s speech on Wednesday.

Fed’s Clarida Backs a Gradual Approach:

Federal Reserve Vice Chairman Richard Clarida said in a New York conference that he supported “gradual policy normalization.’’ That was roughly in line with the Nov. 8 statement by the Federal Open Market Committee that “further gradual increases’’ in interest rates would be consistent with a sustained economic expansion and inflation near the Fed’s 2% goal.

It was a different formulation than Clarida used in his maiden speech as a Fed policy maker a month ago. Speaking in Washington on Oct. 25, the Fed’s No. 2 official not once but twice added the word “some” before the phrase “further gradual adjustment”.  Reading very much between the lines at the time, Fed watchers took that as a sign that Clarida was suggesting that the central bank was nearing the end of a rate-hiking campaign that began in December 2015.

In yesterday’s remarks, Clarida said the Fed is updating its estimates of the “uncertain” neutral policy rate and an unemployment rate consistent with stable prices “as new data arrive.” Even so, rates are “much closer to the vicinity” of neutral than when the Fed started its rate-hiking cycle in December 2015.

His comments appeared less emphatic about the need lift rates than his interview with CNBC on Nov. 16, when he said getting the benchmark lending rate back to around 3%, the Fed’s estimate of the long-run neutral rate, “would make sense.”

Trump, Xi Set to Meet Saturday:

President Donald Trump and China’s Xi Jinping will meet over dinner Saturday evening in Buenos Aires marking a pivotal moment in the escalating trade war between the world’s two largest economies.

Trump is hopeful for a breakthrough with Xi but is ready to impose more tariffs if the upcoming talks don’t yield progress, Larry Kudlow, Trump’s top economic adviser, told reporters Tuesday during a briefing ahead of the Group of 20 meeting in Argentina.

The president believes “there is a good possibility that we can make a deal” and he “is open to it,” Kudlow said later Tuesday. Washington and Beijing remain at odds on key issues such as US accusations of intellectual property theft and forced technology transfer, he said. “As you can imagine this is a big deal, this meeting, the stakes are very high,” Kudlow said. “It’s an opportunity to turn a new page, break through. President Xi can step up and come up with some new ideas for us.”

Trump said on Monday that he will likely push forward with plans to increase tariffs on $200 billion of Chinese goods. In September, the Trump administration announced a 10% tariff on $200 billion of Chinese goods, and said the rate will rise to 25% on Jan. 1. If the 2 sides fail to reach a deal, Trump said he will also impose tariffs of either 10 percent or 25% on the remaining $267 billion in annual US trade with China.

Trump “Not Even a Little Bit Happy” with Powell:

President Donald Trump renewed his attack on Federal Reserve Chairman Jerome Powell, telling the Washington Post he’s “not even a little bit happy” with his choice to head the central bank. “So far, I’m not even a little bit happy with my selection of Jay,” Trump told the Post on Tuesday, using Powell’s nickname. “Not even a little bit.”

Trump, who has repeatedly criticized the Fed for its interest-rate increases, complained at length about Powell in the interview. He said the central bank’s policies are responsible for recent stock market declines and for GM’s announcement this week that it would close five factories in North America and lay off 14,000 workers next year, the Post reported.

Trump has previously blamed the “loco” Fed for causing steep stock-market losses with its campaign of gradual rate increases and demurred on whether he’d fire Powell. The president’s criticism shattered a two-decade White House tradition of avoiding comment on monetary policy out of respect for the Fed independence.

Libor-OIS Has More Room to Run:

The renewed ascent of Libor-OIS may just be getting started, according to a Credit Suisse Group AG analysis based on a “morbidity review” of the key short-term dollar-financing indicator’s 5-month surge starting in late 2017.

The key forces in play this time around are the surcharges imposed on US banks that are defined as global systemically important institutions; the recent increase in Treasury-bill supply; and limited expectations for prime money-market fund inflows through the end of the year, the bank stated in a note to its clients.

The Libor-OIS spread reached widest since July on Monday. The gap reached 60 basis points earlier this year, fueled by a surge in T-bill supply and repatriation concerns related to changes in US tax policy. Funding pressures receded as the government cut issuance to offset income-tax receipts and assets flooded into prime funds, which boosted demand for commercial paper.

The bank added the trend could be reversed if there’s either a large correction or rally in US stocks before year-end. That’s because securities lenders’ cash collateral flows and corporate treasurers’ portfolio decisions are both driven by how stocks perform, and therefore have an impact on Libor-OIS.

‘Time is getting closer to add bonds’, says AXA:

Corporate bonds have fallen so hard they’re officially in a bear market, according to AXA Investment Managers. A string of corporate warnings and the worst returns in a decade may point to the end of the US economic expansion, but AXA is eyeing a potential trough and buying opportunity in the ruins.

In a note to clients, AXA Investment’s CIO for fixed income Chris Iggo wrote that “the market is trading with more attractive valuations than for most of the post-crisis period”. He added that “for anyone that is relatively optimistic that the U.S. will avoid a really nasty slowdown and that inflation will generally remain well behaved, then the time is getting closer to add to bonds.” After their dismal performance in 2018, Iggo predicts US dollar bonds “should race ahead next year.”

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3776

USDSGD rose to its highest in 2 weeks last night, following a recent strengthening in the US dollar, briefly testing the 1.3800 handle before paring back some of its gains. Further consolidation is expected between the 1.3700 and 1.3873 levels. A decline below 1.3700 would likely lead to a swift retreat back to the 1.3600 support, last traded in the months of August and September.

AUD/USD

Spot: 0.7236

AUDUSD was little changed earlier today and looks set to resume its sideways trend until the end of the week. Aussie traders will keep a close eye on the Trump-Xi meeting at the G20 summit later this week. The pair had recently failed to break above the key resistance at 0.7315, although its technical bias continues to remain to the upside. 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: 1.3303

USDCAD reclaimed the 1.3300 handle for the second time in a week, following a rally in the USD and as the Canadian dollar’s outlook continues to be clouded by the price of crude oil, which seems to have found some footing for the time being at the $50/bbl handle. A move above 1.3386 would confirm a break out of the currency pair’s longer-term wedge pattern since 2016.

USD/CNH:

Spot: 6.9501

USDCNH traded near 2-week highs as investors grappled with threats of tariff hikes and hopes of a US-China trade deal. The pair has largely tapered sideways over the past 2 weeks, although volatility looks set to rise over the near term. The key level continues to remain at 7.0000.

USD/JPY:

Spot: 113.79

USDJPY extended its move up in Asia earlier today, as investors adopted a risk-on attitude Wednesday, shunning safe haven assets such as the yen. The pair’s 2018 uptrend continues to hold strong. The key resistance resides at 114.55, a level that has held 3 times since July last year.

GBP/USD:

Spot: 1.2742

GBPUSD inched lower towards its key 1.2662 support earlier today, as expectations remain high the UK PM May will lose a crunch Brexit vote on Dec. 11. If the Prime Minister loses the meaningful vote by a close margin, we could see a limited market reaction, as expectations will shift to the belief that a plan B could be put together.  The market is currently pricing in for this vote to fail. A strong defeat could bear a more adverse reaction to the pound, and could almost certainly lead to a drop closer to the 1.2500 handle.