October 13, 2017

The US dollar and Treasury yields are poised to end 4 consecutive weeks of gains following cautious sentiment amongst Fed officials regarding another 2017-rate hike, as reflected in the FOMC’s September meeting minutes released Wednesday. Asian equities were mostly firmer despite the S&P 500 Index edging lower. Gold remained capped below the $1,300/Oz resistance, while crude oil maintained above $50/bbl.

 

Daily Observations:

Iran Sanctions:

US President Donald Trump is poised to announce on Friday that the multinational deal that eased sanctions in exchange for curbs on Iran’s nuclear program isn’t sufficiently beneficial to the US. That will heighten the uncertainty for businesses such as Boeing Co., Airbus SE and General Electric Co. that have ventured into Iran and for others that were already hesitating. Trump is expected to make the declaration in a speech where he will also outline a broader Iran policy aimed at curtailing what the administration sees as the Islamic Republic’s malign behaviour in the Middle East, including its sponsorship of terrorism, officials said.

 

Bank Earnings:

Low volatility and softening consumer creditworthiness proved worrisome themes as JPMorgan Chase & Co. and Citigroup Inc. kicked off earnings season for US financials, with both warning that credit card defaults are likely to swell. While the pair managed to exceed analysts’ profit expectations amid margin expansion and cost cutting, shares fell on the day.

 

Brexit Volatility:

Conflicting reports on the state of Brexit negotiations sparked major volatility for the British pound on Thursday. The pound weakened after chief EU negotiator Michel Barnier said the sides had reached a “deadlock,” seemingly confirming fears that talks were going in the wrong direction. Sterling subsequently soared after German newspaper Handelsblatt said Barnier was looking to offer the UK a 2-year transition period to iron out the details of its future relationship with the union, reducing the odds of a “hard Brexit” that ends with no deal.

 

China Exports:

China’s overseas shipments rose 8.1%, in USD terms in September, from a year earlier, missing out on the 10.0% gain expected but accelerating from last month 5.6% rise. Imports over the same period advanced 18.7%, compared to the 14.7% median forecast. Demand for Chinese products has proven robust as growth in major trading partners holds up, though this trade report also gets a boost from a comparison with a low base last year. The official factory gauge rose to a 5-year high in September, and the IMF this week raised its global growth forecast as well as its estimate for China.

 

Singapore:

Singapore’s economy gained traction in the third quarter as a pickup in exports helped to drive up manufacturing. GDP rose at a seasonally adjusted and annualized rate of 6.3% from a quarter ago, accelerating from the prior reading of 2.4% and exceeding the median estimate of 3.7%. On a year-on-year basis, GDP gained 4.6% to surpass the 3.8% predicted.

The services industry, which accounts for about two-thirds of economy, grew an annualized 1.5% in the third quarter from the prior three months. Manufacturing surged 23.1% while construction contracted 9.2%.

The Monetary Authority of Singapore left monetary policy unchanged earlier today, sticking to its neutral stance of zero appreciation in the currency and without re-committing that its neutral stance was appropriate for an extended period, giving itself room to tighten next year if necessary. The central bank tweaked its reference to “extended period” in its statement, using it as a reference point to its statement 1 year ago rather than as a forward-looking statement.

Most analysts are predicting SGD strength to be contained given that core inflation over the medium term is still expected to be below the implicit target of 2%.

 

Australia:

Recent regulatory measures are constraining some borrowers but will strengthen the resilience of household and bank balance sheets, the Reserve Bank of Australia said in its semi-annual Financial Stability Review. The RBA is making no attempt to play down financial risks emerging from a prolonged period of record-low interest rates, yet it appears to be commentating from a position of greater strength than 6 months ago. Regulatory changes have made interest-only loans far less attractive and borrowers are forced to use more realistic loan to valuation metrics.

 

 

Weekly Thematic News:

 

Solar Energy:

By next month, the US International Trade Commission, having unanimously ruled that American solar-panel makers are harmed by competition from Asian and other rivals, will recommend what tariffs or other import penalties the president should impose. This may slow the US solar-energy business which has recently been thriving. Most solar panels sold in the US are made in Asia. In the past several years, falling prices have driven stunning growth in US installations – a 17-fold increase since 2008.

The Solar Power portfolio on iAdvisor has generated a total return of 29.2% over the last year, despite declining 3.9% over the past month.

 

Self-Driving Cars:

California took another step Wednesday toward permitting testing of self-driving vehicles without a human driver, continuing a shift away from previous policies that companies criticized as being overly restrictive. The state’s Department of Motor Vehicles on Wednesday released revisions to regulations proposed in March to allow such autonomous car testing on public roads, which could take effect by next June. The proposed rules would also allow companies to introduce self-driving vehicles that can be used by the general public.

According to a survey by AIG Inc. earlier this week, 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.

 

Gold Miners:

According to the research findings of Bloomberg’s Cameron Crise, there is statistical evidence of gold being an effective hedge in periods of risk. Using the VIX Index as a proxy for market risk aversion and after running a series of regression analyses, he concluded that the t-statistic (a gauge of the importance of explanatory variables) shows up as highly significant when comparing spot gold and the VIX. The most significant driver of gold prices, though, was inflation, followed by real US 10yr yields.

He goes on to conclude that a portfolio of 55% stocks-35% bonds-10% gold outperforms a traditional 60% stocks-40% bonds portfolio by about 55 basis points a year over the past 3 decades. A brief summary of his analysis can be found here.

An alternative way to gain exposure to gold, instead of buying physical bullion or an ETF, would be to invest in a portfolio of gold-mining companies. The Gold Miners Inverse Vol portfolio on iAdvisor has returned a modest 2.6% year-on-year, but given the increasing risks in today’s financial landscape and gold’s special role as a hedge, some exposure to this portfolio is highly recommended.

 

China Online:

According to a report by Google and Temasek Holdings, Southeast Asian’s e-commerce market is projected to reach $88 billion by 2025. While Amazon is firmly established in Japan, the web retailer has mostly ceded China to Alibaba and JD.com Inc. In Singapore, locally-established Lazada, whose parent is Alibaba Group Holdings, dwarfs Amazon by offering more than 30 million products compared with tens of thousands listed on Amazon’s Prime Now. Lazada has recently already teamed up with real-estate operator CapitaLand Ltd., letting people shop online and pick up merchandise at a nearby mall.

Gain exposure to Alibaba and other e-commerce Chinese ADRs by investing in the China Online portfolio on iAdvisor. China Online is one of the top 3 performers over the past year, gaining a remarkable 43%.

 

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%).

 

FX Updates:

USD/SGD:

• Spot 1.3544
• USDSGD remains little changed Friday despite a more volatile morning following the release of MAS’s monetary policy decision.
• USDSGD looks poised to break its run of 4 consecutive weekly gains, after meeting strong resistance around the 1.3700 level earlier this week.
• 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 currently trading around its 1.3550 support.

AUD/USD:

• Spot 0.7838
• AUDUSD held above the 0.7800 heading into the close of the week, despite weaker-than-expected China trade numbers. Iron ore futures recovered slightly from 3-month lows.
• The bias remains to the downside for the pair, with the next support below coming in around the 200-day moving average of 0.7675.

USD/CAD:

• Spot 1.2469
• USDCAD look set to snap 4 consecutive weeks of gain after declining back below its 1.2500 handle on Wednesday.
• A pullback to 1.2400 a possibility.

USD/CNH:

• Spot 6.5705
• USDCNH retreated back below its 50-day moving average earlier this week after a PBOC Governor Zhou’s call for the relaxation of capital controls, shortly before the start of the Communist Party congress.
• Speculation has been building in the past 2 months that policy makers will extended the current 2% trading range.
• 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 112.4
• The recent ascent of USDJPY looks to have hit a snag around the 113 handle. Further consolidation between 112 and 113 is expected.
• The next key resistance to be tested lies at the 6-month high of 114.48.

GBP/USD:

• Spot 1.3275
• The pound gained to its highest in a week against the greenback after it was reported that chief EU negotiator Michel Barnier may offer the UK a 2-year transition period to stay in the union.
• The momentum remains firmly to the upside, and a revisit of the 1.3500 handle is likely to occur over the coming 1-2 weeks.