October 25, 2017

Gains in Asian equities stalled at recent highs, while recent optimism in the world economy and encouraging earnings reports buoyed the US dollar and bond yields. The Australian dollar sunk to its lowest since July after inflation data damped the outlook for higher interest rates.

Daily Observations:

Xi Cements Power:

The Communist Party approved a sweeping charter revision at the end of its twice-a-decade congress Tuesday that elevates Xi to a status alongside the nation’s most vaunted political figures. The document put Xi’s contributions on par with those of Mao Zedong and Deng Xiaoping and also declared him the party’s “core” leader indefinitely, and giving him the platform to exert his influence long after this second and apparently final term ends in 2022. The changes came a day before the party was expected to announce a new leadership lineup that could signal whether he intends to anoint a successor.

The composition of the Politburo Standing Committee will offer clues on Xi’s succession plan. Liu He, a close adviser to Xi, was re-named to the party’s central committee, viewed as an indication that significant economic reforms aren’t imminent. The absence of Wang Qishan from a reported list of committee members implies that Xi is sticking to the party’s unwritten age-based retirement rule.

Fed Chair Search:

US President Donald Trump conducted an informal poll among Republicans on their preferred candidate to lead the Federal Reserve Tuesday. Senator Tim Scott said Trump mentioned Stanford University economist John Taylor, Federal Reserve Governor Jerome Powell, and Chair Janet Yellen – and that Taylor garnered the most support.

The US dollar rallied on the news, along with the benchmark 10yr Treasury yield which broke beyond a its key 2.40% resistance level.

Caterpillar Inc. & Global Growth:

Long seen as a bellwether for global growth thanks to its exposure to multiple industries, Caterpillar’s earnings announcement on Tuesday reinforced the view that the international economic expansion is the most synchronized since the start of the decade. Sales surged 27% in North America as the US oil and gas industry cranked up, while China’s growing construction market helped sales in the Asia Pacific region balloon 31%. Dealers’ replenishing of inventories boosted sales in Europe, Africa and the Middle East by 22% and “stabilizing economic conditions” in Latin America lifted sales by 24%. A key component of the Dow Jones Industrial Average, Caterpillar helped to index to a fresh record high last night.

Bank of Canada Rate Hike?

The Bank of Canada is set to release its monetary policy decision later today and according a Bloomberg survey, is set to leave rates unchanged at 1.00% after raising rates twice in last quarter. The move drove the Canadian dollar up about 7% against a basket of major economy currencies. Since that last hike on Sept. 6, though, the loonie has faltered as the economic data has largely come in weaker than forecast. More keenly watched will be the central bank’s monetary policy report, in which Governor Stephen Poloz is expected to retain his hawkish leanings.

Australia Inflation Miss:

Third quarter CPI rose 0.6% quarter-on-quarter and 1.8% year-on-year, less than the expected 0.8% and 2.0% gains respectively. Analysts had expected higher electricity prices seen through the quarter to lift inflation back into the RBA’s target range of 2%-3%.

Singapore Banks:

Two rate hikes by the Fed earlier this year lifted borrowing rates in Singapore and in Hong Kong, likely increasing net interest income for DBS Group Holdings Ltd. and its two largest rivals in the July-September period, according to analysts surveyed by Bloomberg News. That, coupled with growth in their wealth businesses, is expected to help Southeast Asia’s largest lenders post an average net income gain of almost 7% from a year earlier.

United Overseas Bank Ltd. will benefit the most from better margins, with net interest income forecast to rise 13% in the quarter, Goldman Sachs Group Inc. analysts forecast in a report this month. Larger rivals DBS and Oversea-Chinese Banking Corp. may see gains of 5% and 11%, respectively, the analysts said.

Singapore Inflation:

Ravi Menon, managing director of the Monetary Authority of Singapore, said Inflation will climb at some point if economic growth continues to strengthen, and under those circumstances, the central bank needs to be forward-looking. He added that the MAS’s track record shows that policy makers are keenly focused on inflation and keeping it under control, adjusting policy stance appropriately as long as inflation remains “benign”.

After easing three times between January 2015 and April last year, the MAS, which uses the exchange rate as its main policy tool rather than interest rates, has stuck to a neutral currency stance in the face of subdued inflation pressure. In the statement accompanying its last policy decision on Oct. 13, the central bank didn’t explicitly reiterate that the stance remains appropriate for an extended period, increasing speculation it would tighten next year by seeking a slight appreciation in the exchange rate.

Weekly Thematic News:

Cybersecurity:

Russian hackers conducted “very active” cyber-attacks against institutions in the Czech Republic last year, according to the European Union member’s counter-espionage agency. APT28 is a Russian hacking group, also known in the intelligence community as “Fancy Bear,” that’s been linked to attacks against the US Democratic Party, the White House and NATO. It targeted Czech diplomatic, military and academic entities last year, the secret service, known as BIS, said in a report released on Tuesday.

International tension over cybersecurity has escalated since the US intelligence community concluded that Russia meddled in last year’s presidential election with the goal of hurting Democratic candidate Hillary Clinton and helping elect President Donald Trump.

Investors can choose to park some money in this increasingly important trend by buying into the Cybersecurity US portfolio on iAdvisor, which has returned 19.4% year-on-year as of Tuesday, outperforming the benchmark ISE Cyber Security Index (+15.8% yoy)

Self-Driving Cars:

Auto-parts supplier shares jumped in Asian trading after Wall Street Journal reported that Tesla Inc. reached an agreement with Shanghai’s government to build a fully owned manufacturing facility in the city’s free trade zone. A Shanghai official in charge of electric vehicles denied the claim.

Tesla’s production plans in the largest auto market are closely followed by industry watchers and investors as China accelerates electric- and autonomous-car development and works on a timeframe to phase out conventional cars. People familiar with the matter last month told Bloomberg that Chinese authorities are considering a proposal to allow overseas carmakers to set up wholly owned EV factories in free-trade zones, a move that would give Tesla a greater range of options.

The Self-Driving Car US portfolio on iAdvisor has been one of the stellar performers over the past year, returning an impressive 44.3% from a year ago.

Renewable Energy:

Caisse de Depot et Placement du Quebec, one of Canada’s largest pension funds, will scale back its high-carbon investments such as coal while boosting its renewable holdings in a bid to help fight climate change. Already among the world’s largest renewable energy investors, the Caisse is pledging to increase low-carbon investments by 50% over 3 years, according to a statement last Wednesday. This will represent more than C$8 billion in new investment, the Caisse said. By 2025, the Montreal-based fund manager will also aim to reduce its carbon footprint by 25% per dollar invested.

In a separate report, tech giants are beginning to get in on the act in the business of clean energy, with Amazon and Google leading the way. Amazon has bought more than 1.22 gigawatts of output to date from U.S. clean-energy projects, second only to Alphabet Inc.’s Google, with 1.85 gigawatts. In a statement made last Thursday, Amazon said that its 253-megawatt wind farm in Texas will deliver more than 1 million megawatt-hours of clean energy to the grid annually. It’s among 18 Amazon wind and solar projects in operation; the company has more than 35 projects in development.

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 recently, commenting that “we seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.”

FX Updates:

USD/SGD:

Spot: 1.3626

USDSGD is threatening to break out of its downtrend channel, which has held firm since the turn of the year. A break above the 3-month high of 1.3691 would probably confirm the reversal of the trend.

AUD/USD:

Spot: 0.7726

AUDUSD declined to a 3-month low Wednesday, after inflation data damped the outlook for the RBA raising rates. A close below the previous low of 0.7733 is likely to indicate further downside bias for the currency pair with the next support target around the 0.7600 handle.

USD/CAD:

Spot: 1.2680

USDCAD advanced beyond its 100-day moving average Tuesday for the first time since June, ahead of the Bank of Canada’s policy decision Wednesday. A dovish monetary policy report would push the currency pair higher to its next resistance of 1.2778. To the downside, 1.2400 is the level to watch.

USD/CNH:

Spot: 6.6413

USDCNH’s was little changed Wednesday following the conclusion of the Communist Party’s 19th Congress. Further consolidation is expected between the 6.6000 and 6.7000 handles over the near term.

USD/JPY:

Spot: 113.88

Then yen weakened against the dollar following PM Abe’s weekend election victory. USDJPY breached the 114 mark earlier on Monday, for the first time since July.

The major resistance level lies at 114.50 – a break above it could result in the currency pair embarking on a longer-term move upwards, with the double-top at 118.60 a realistic possibility within the next year.

GBP/USD:

Spot: 1.3131

GBPUSD approached a 2-week low against a stronger dollar Wednesday, pressured by growing uncertainty over the Bank of England will raise interest rates next week for the first time in a decade. Currency traders will be wary of GDP data due out this Wednesday as well, which is expected to show growth held steady in the third quarter.

The pair is approaching an inflection point, as shown below. Failure to raise rates could result in decline back below the key 1.3000 handle.