October 17, 2017

Daily Observations:

Stocks in Asia paused near recent highs as concerns about North Korea re-emerged, Gold fell with Treasuries as speculation climbed that the next head of the Federal Reserve will be more hawkish.

Next Fed Chair?

Stanford University economist John Taylor, a candidate for Federal Reserve chairman, made a favorable impression on President Donald Trump after an hour-long interview at the White House last week, several people familiar with the matter said. Former Fed board governor Kevin Warsh has meanwhile seen his star fade within the White House, three of the people said. Trump gushed about Taylor after his interview, one of the people said, and the president has always been prone to hiring people with whom he has a good relationship. However, it is worth noting that he told the Wall Street Journal in July that he would “like to see rates stay low,” while Taylor is the namesake of a well-known monetary policy rule that would generally advocate higher interest rates. Trump is reported to have plans to interview current Fed Chair Janet Yellen on Thursday.

The US dollar gained while Treasuries fell on the report of Trump’s favourable interview with Taylor.

Geopolitics:

North Korea warned that a nuclear war “may break out any moment” as the US and South Korea began one of the largest joint naval drills off both the east and west coasts of the peninsula. The nation’s deputy ambassador to the UN said on Monday that his nation had become a “full-fledged nuclear power which possesses the delivery means of various ranges” and warned that “the entire US mainland is within our firing range”.

South Korean military officials are preparing for another possible missile launch from North Korea this week to counter the US-South Korea drills, which include an American aircraft carrier and a nuclear submarine. China’s Communist Party will also start its most important political meeting in 5 years on Wednesday. Russia on Monday urged the US to reduce military drills near North Korea, reiterating a proposal for both sides to step back and calm tensions.

Nafta:

The fourth round of Nafta negotiations is nearing an end amid rising tensions after the US presented proposals that could be politically unfeasible for Canada and Mexico. US negotiators in recent days put forth a string of bold proposals – on auto rules of origin, a sunset clause, government procurement, and gutting dispute panels seen by the other nations as core to the pact. The moves were long-signaled, as was Canadian and Mexican opposition to them.

Brexit:

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are bracing for a “hard Brexit” as they seek to protect their access to the European Union once Britain leaves the bloc in 2019, according to top executives.

UK Prime Minister Theresa May’s government fears Brexit talks will break down unless the EU gives ground at a key summit this week, according to a Bloomberg report, citing a person familiar with her team’s views. Without a clear sign that negotiations will progress to trade and transition arrangements by December at Thursday’s summit of EU leaders, the entire Brexit process will be in danger of collapse, and senior British ministers are losing faith in the EU’s willingness to strike a deal, the report further added.

Chinese Debt:

Yields on China’s 10yr sovereign notes spiked to the highest level since April 2015 on a closing basis, while a stock gauge of smaller companies slumped the most in 3 months, after PBOC Governor Zhou Xiaochuan voiced his concern at the weekend that Chinese firms have taken on too much debt. The comments come amid a run of strong data, with better-than-expected producer price growth Monday underscoring the image of an economy still riding the wave of unsustainable leverage to achieve its growth targets.

RBA Minutes:

The RBA said economic conditions at home and abroad “had been more positive since 2016,” according to minutes of this month’s policy meeting where interest rates were left unchanged. The central bank is maintaining its patient course on policy as the economy is predicted to gradually strengthen and generate increasing numbers of jobs that eventually tighten the labor market, lifting wages and inflation. At the same time, a watchful eye will be kept on debt-laden households struggling with limited income growth and the threat that poses to consumption.

Singapore Exports Slump:

Non-oil domestic exports in September declined by 1.1% year-on-year, compared to a 16.7% surge in August and the median consensus of a 12.7% gain. This was its worst performance since Dec. 2016. Electronic exports, which gained 20.8% from a year ago last month, fell by 7.9% this month, underperforming against the expected 15.0% rise.

Singapore had been enjoying an upturn in exports amid a global trade rebound that helped convince government officials to recently project a 2.5% growth performance for all of 2017. The MAS, in a statement accompanying a decision Friday to maintain a neutral policy stance, said it expects growth to be slightly lower next year as the global recovery enters a “more mature” phase.

Weekly Thematic News:

Diversified Assets Bearish:

According to a Bloomberg report, a growing number of hedge funds are getting worried about the current unusual state of calm in markets, expecting that it may not last for long. Firms are rolling out new funds designed to protect investors from rising market turbulence, in spite of so-called long volatility strategies being one this year’s worst performers. In recent times, financial and economic bigwigs from Nobel laureate Richard Thaler to BlackRock Inc. Chief Executive Officer Larry Fink has warned that the unusual state of calm in markets may not last.

Indicators of expected swings in stocks, bonds and currencies have fallen toward multi-year lows, while valuations for just about every major risky asset class are climbing. That’s despite heightened uncertainty over US economic policy and the prospect of war with nuclear-armed North Korea. Thaler highlighted the dissonance in a Bloomberg TV interview last week, commenting that “we seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.”

Rather than positioning for a jump in volatility with hedge funds’ strategies, investors can opt for lower-fee ETFs linked to a downturn in equity indices such as the ProShares Short S&P 500, ProShares Short MSCI EAGE (Europe, Australasia & the Far East) and ProShares Short MSCI Emerging Markets. These inverse ETFs, which generally profit when its index constituents fall, are 3 of the 4 main components of the Diversified Assets Bearish portfolio on iAdvisor.

Singapore Real Estate:

Singapore home sales fell in September as developers marketed fewer projects in a month considered inauspicious by Chinese homebuyers. Developers sold 657 units last month, down from a revised 1,246 in August, according to Urban Redevelopment Authority data released Monday. That’s the lowest sales since January. A total of 73 new units were offered, down from 794 in August, the data showed.

Despite a slow month, Singapore’s property market is showing signs of a turnaround. Home prices rose for the first time in 4 years, snapping a record run of declines and confirming recent signs that the property market is rebounding.

As of Monday, the Smart Real Estate Singapore portfolio on iAdvisor is currently up 23.9% year-on-year, outperforming other REIT indices such as the SGX S-REIT 20 (+14.6%) and the FTSE Straits Times REIT (+14.9%).

FX Updates:

USD/SGD:

Spot: 1.3550

USDSGD declined every day last week before ending below the 1.3500 handle Friday. Some support is expected to buoy the Singapore dollar around 1.3500, although the momentum remains to the downside.

The key resistance at 1.3700 is unlikely to be breached this week.

AUD/USD:

Spot: 0.7848

AUDUSD extended its resurgence back above the 0.7800 on Friday, reaching an October high on the back of USD weakness. Whether the pair can hold above 0.7800 this week is likely to depend on Chinese GDP data due Thursday. Also on the agenda this week is Australia’s jobs report.

USD/CAD:

Spot: 1.2533

USDCAD traded largely sideways last week, fluctuating around its 1.2500 handle. The pair’s recent recovery seems to have faltered after failing to break above 1.2600.

The important number to watch is 1.2400 – a break below it and the pair could fall quickly back towards the 2-year low of 1.2062. The risk event this week is Friday’s Canadian CPI release.

USD/CNH:

Spot: 6.5997

With the 19th National Congress Meeting commencing this Wednesday, movements on the yuan are expected to be limited the range of 6.5500 – 6.6000.

USD/JPY:

Spot: 112.08

The recent ascent of USDJPY looks to have hit a snag around the 113 handle. The pair retreated back below 112.00 Monday, although traders will be keeping a closer watch on the 111.50 support.

GBP/USD:

Spot: 1.3255

The pound fell against the dollar Tuesday on news that negotiations between the UK and the EU could be headed for a breakdown, declining back below its 1.3300 handle.

Markets are now eyeing December as the next important deadline to make progress in the divorce talks, with just over a year to go at that point until Britain leaves the bloc. While most currency strategists surveyed by Bloomberg News see some kind of agreement or transition as a base case scenario, the chance of not getting a deal is a significant risk. The closer we get towards the deadline without any progress, the higher the downside risk for the currency.