October 10, 2017

Stocks were mixed on Tuesday as Japan and South Korea reopened, while Treasury yields were steady as trading recommenced after holidays. The dollar declined and Turkey’s lira maintained losses after a shock drop on Monday that stood out in global markets.

Daily Observations:

2.40%:

Bond markets in the US were closed overnight due to Columbus Day, but bond traders will be keenly watching the key level of 2.40% when trading resumes today.

According to Bill Gross, that’s the yield on the benchmark 10yr Treasury note that could mark the start of a bear market in bonds. The yield flirted with that level last Friday, but failed to bust through as speculation North Korea was planning another missile test spurred haven buying. Gross said, “If we move above 2.4%, there is a chance that this long-term bull market in bonds is broken and bond investors should be on the defensive instead of the offensive.”

The next trigger for higher yields may come from reports on inflation, which Federal Reserve Chair Janet Yellen has called a “mystery” for remaining tame amid job-market strength. By at least one measure due this week, price growth may again rise above the central bank’s 2% target. The September consumer price index is expected to climb 2.3% from a year earlier, up from 1.9% the prior month.

Trouble in Tukey:

The Turkish lira, stocks and bonds all fell yesterday amid a deepening standoff between President Recep Tayyip Erdogan’s government and the US. The 2 nations had earlier suspended visa services for each other’s citizens, following the arrest of a Turkish national who works at the US consulate in Istanbul for alleged involvement in the July 2016 coup attempt against Erdogan.

Catalonian Crisis:

The Catalan government’s determination to break from Spain faces its moment of truth, as the regional parliament meets to consider a declaration of independence that risks an ironclad backlash from Madrid, the threat of economic meltdown and international isolation.

Catalonian President Carles Puigdemont is due to address lawmakers later today and much focus will be on the form of words he uses. Unless he backs away from a unilateral independence declaration, Prime Minister Rajoy has made clear that Catalonia risks intervention by security forces and the reassertion of central government control.

China:

While investors hoped the week-long national holiday last week would lead to bumper earnings, they’re now growing more skeptical, as new home sales in Beijing dropped to 116 units during the week, the lowest since 2009, and new home sales in Shanghai plunged 78% to 178 units. Sentiment was also hurt by weaker growth in retail sales and restaurant receipts. The MSCI China Index, which closed at a decade-high on Friday, fell as investors moved into stocks that had lagged behind this year, such as consumer staples.

Separately, PBOC Governor Zhou Xiaochuan has made a fresh call to open up the nation’s financial sector, and warned that reform will become more difficult if the window of opportunity is missed. He said that a “troika” of 3 drivers were needed to further open up the economy, citing greater foreign trade and investment, a more market-based foreign-exchange rate mechanism with a “reasonable and balanced” yuan rate, and the relaxation of capital controls to allow use of the yuan to be gradually freed.

Gold:

On Oct. 6, when Russian legislators said North Korea was preparing to test a missile that could reach the US West Coast, transactions were posted for the purchase of calls that give the holders the right to buy more than 1.5 million ounces of gold for delivery in December 2018 for $3,000/Oz, according to a Bloomberg news report.

Gold has recently recovered off a 2-month low of $1,260.67/Oz, but is expected to be capped below the psychological $1,300/Oz level as investors await Wednesday’s release of minutes from the Fed’s latest meeting for clues on its monetary tightening path.

Brexit:

UK Prime Minister Theresa May won public support from Brexit hardliners in her cabinet after she outlined contingency plans for leaving the European Union without a deal, upping the stakes in exit talks with the bloc. May released 2 policy papers Monday and said she’s made enough overtures to Brussels. The “ball is in their court,” she said.

Weekly Thematic News:

Renewables:

Tax incentives for the wind industry should be eliminated, Environmental Protection Agency administrator Scott Pruitt said Monday, responding to a question about the effectiveness of renewable energy. He added that renewable energy sources should compete in the market “as opposed to being propped up by tax incentives and other types of credits that occur, both in the federal level and state level”.

Congress voted to extend tax credits for both the wind and solar industries in 2015 as part of a broad deal that also ended ban on crude oil exports. Under the deal, the wind industry’s 2.3-cent-per-kilowatt hour tax credit would begin phasing down this year before expiring in 2020. The solar industry’s 30% tax credit winds down and expires in 2022.

Singapore Real Estate:

En-bloc sales, or redevelopment deals in which a group of owners band together to sell apartment blocks at a hefty premium, are at a 10-year high, according to estimates by OCBC Investment Research. On the back of a spate of deals last week, en-bloc sales have totalled more than S$5 billion this year, its highest level since 2007.

As of Monday, the Smart Real Estate Singapore portfolio on iAdvisor is currently up 20.6% year-on-year, outperforming other REIT indices such as the SGX S-REIT 20 (+12.3%) and the FTSE Straits Times REIT (+12.7%).

Self-Driving Cars:

According to a survey by AIG Inc., US residents are “polarized” on whether to embrace driverless cars. Out of the 1,000 people polled, 42% were generally OK with it, while 41% said they had reservation. 39% said they thought such vehicles would operate more safely than the average driver, while three-fourths of the surveyed said there’s a threat that hackers would take control of autonomous vehicles. Still, the majority said they don’t expect driverless cars will be on the road within the next two decades.

The Self-Driving Car US portfolio on iAdvisor has been one of the stellar performers over the past year, returning an impressive 39.2% from a year ago.

FX Updates:

USD/SGD:

• Spot 1.3595
• USDSGD has gained for 4 consecutive weeks, although the pair is likely to find strong resistance around the 1.3700 level.
• A move above 1.3700 would confirm the technical breakout of its year-to-date long downtrend; the next resistance lies around the 1.3900 handle.
• The pair is likely to maintain above its 1.3550 support.

AUD/USD:

• Spot 0.7779
• Following last week’s break below the 0.7800 support, the bias is now to the downside for the AUDUSD, with the next support below coming in around the 200-day moving average of 0.7650.

USD/CAD:

• Spot 1.2526
• USDCAD ended last week on higher note, with the pair reaching the 1.2600 handle briefly, its highest level since early-September.
• Helped by weaker crude oil prices and thus a weaker Canadian dollar, the currency pair continue to hold comfortably above the 1.2500 handle. The next resistance at 1.2778 is a possible target over the next few weeks.

USD/CNH:

• Spot 6.5899
• USDCNH retreated back below its 50-day moving average Tuesday after a stronger-than-expected daily reference rate and PBOC Governor Zhou’s call for the relaxation of capital controls, shortly before the start of the Communist Party congress.
• Strong resistance is expected to cap USDCNH around the region between 6.7000 (a strong psychological level) and 6.7165 (the 50% Fibonacci retracement level since January) this week. To the downside, the pair could find support at 6.5000.

USD/JPY:

• Spot 112.68
• The recent ascent of USDJPY looks to have hit a snag around the 113 handle. Further consolidation is expected for now.
• The next key resistance to be tested lies at the 6-month high of 114.48.

GBP/USD:

• Spot 1.3158
• GBPUSD regained following its recent pullback following PM May’s optimistic comments on the EU post-Brexit partnership yesterday, but still remains short of the 1.3200 handle.
• The psychological 1.3000 handle is likely to remain a key support. Following a 3.9% decline over the past 3 weeks, GBPUSD looks poised for a bounce; the 1.3200 handle looks like a realistic target over the near-term.