October 31, 2017

Daily Observations:

Most equity markets in Asia declined and bonds added to gains as caution crept into markets following a drop in China’s factory gauge, and as investors continue to assess developments on US tax reform after a “phase-in” plan for corporate tax cuts was said to be considered. The BOJ maintained its key policy rate and left its stimulus program unchanged. The US dollar held onto overnight declines.

Russia Probe:

US authorities charged 3 people with crimes on Monday as part of the federal investigation into whether US President Donald Trump’s election campaign colluded with Russia in an effort to win. Among those charged was Paul Manafort, the president’s former campaign chief, who stands accused of money laundering and conspiracy. Manafort was put under house arrest because he is seen as a flight risk after pleading not guilty. Special Counsel Robert Mueller’s team also revealed that George Papadopoulos, a foreign policy adviser on Trump’s campaign, pleaded guilty to lying about his contact with Russian officials on Oct 5 and is now cooperating with the investigation. Papadopoulos corresponded with a professor who promised “dirt” on Democratic candidate Hillary Clinton and sought to arrange a meeting between Trump’s campaign and Russian officials.

The president erroneously claimed that the indictment of Manafort was solely related to events that predated his involvement with the campaign. Trump’s administration has sought to distance itself from Manafort and his associate Rick Gates, though they were reportedly essential to Trump’s victory.

Fed Chair Search:

According to the New York Times, Donald Trump appears “set” on picking Jerome Powell to replace current Fed Chair Janet Yellen, citing 2 people familiar with the plans. An announcement is expected on Thursday, after the Fed wraps up a 2-day policy meeting on Wednesday and before Trump leaves on Friday for a 12-day Asia trip.

Tax Reform:

House tax writers are discussing a gradual phase-in for Trump and Republican leaders’ proposed corporate tax-rate cut – on a schedule that would put the rate at 20% in 2022, according to a member of the chamber’s tax-writing committee and a person familiar with the discussions.

The S&P 500 Index and Dow Jones Industrial Average retreated on the news to start the week. The Goldman Sachs High Tax Rate index of the 50 stocks in the S&P 500 with the highest 10-year median effective tax rates fell the most in more than 6 weeks. The Russell 2000 Index, which is mostly made up of smaller capitalization companies that would benefit the most from lower taxes, tumbled the most since August.

The potential for a phase-in period for corporate tax cuts has implications beyond the stock market. The Dollar Index fell the most in almost 2 weeks, while yields on benchmark 10yr Treasuries slid back below the key 2.40% handle. In both cases, the thinking is that phased-in corporate tax cuts would have less of a positive impact on the economy than if the reductions came all at once, potentially slowing the future pace of interest-rate increases by the Fed.

China PMI:

Manufacturing PMI in October fell to 51.6, from 52.4 in the prior month, lower than then median consensus of 52.0. New orders and prices led the decline as officials increasingly prioritize a campaign to clamp down on polluting industries and rein in debt.

With the economy transitioning away from a growth-at-all-costs model, officials are prioritizing the environment and a push to tame credit growth, key policy directions highlighted during the twice-a-decade Communist Party Congress this month. Still, China is poised for its first full-year growth acceleration, defying predictions of a sharper slowdown triggered by the leverage campaign and property risks.

Bank of Japan Holds:

The Bank of Japan left its massive monetary stimulus program unchanged even as it trimmed its inflation forecasts, signalling further divergence ahead from its global peers. Governor Haruhiko Kuroda and the board voted on Tuesday to maintain the central bank’s yield curve control program and asset purchases, a result predicted by all 43 economists surveyed by Bloomberg. The vote was 8-1.

Weekly Thematic News:

Smart Real Estate Singapore:

By filling the sea along its coasts with imported sand, Singapore has expanded its physical size by about 24% since 1960, according to data from the Singapore Land Authority. However, getting a steady supply of sand to keep extending the shoreline has become more complicated over the years, with countries such as Indonesia and Vietnam having halted sand exports amid environmental concerns and political considerations about shipping lanes and territorial boundaries. In July, Cambodia became the latest country to ban sand shipments to Singapore following pressure from activists alarmed by the negative consequences of massive dredging on coastal mangroves.

With land becoming more and more scarce, property prices is expected to be buoyed over the horizon. Investors looking to capitalize on a possible rebound in the real estate sector can buy into the Smart Real Estate Singapore portfolio on iAdvisor, which has returned a healthy 26.5% from a year ago and provides a dividend yield of 4.7%.

Gold:

According to Bloomberg report, gold investors are loading up on the haven asset, sensing the dip in the price of the precious metal from about $1,362/Oz in early September to $1,265/Oz recently is a buying opportunity. Despite the price decline, investors have boosted their holdings of gold through exchange-traded funds to the highest since November 2016, or 2,163.4 tons.

The recent drop in gold has a lot to do with the rebound in the US dollar; since the safe haven asset is priced in the US currency, any gain in the greenback mean’s its more expensive to buy gold. Although gold may be suffering a rough patch, it does have some high-profile backers.

Billionaire Ray Dalio, the founder of Bridgewater Associates, has recommended investors consider placing 5 to 10% of assets in gold as a hedge against political and economic risks. BlackRock advised that in a world where economic or geopolitical perils lurk, investors hould hold bullion in their portfolio to balance equity and credit risks, adding that the prospects for real interest rates staying low are positive for gold.

An alternative to invest in gold would be to buy into the Gold Miners Inverse-Volatility US portfolio on iAdvisor, which comprises of US-listed gold mining companies. In a world where rising debt is a concern, we employ a filtering process to ensure the companies selected satisfy certain credit ratio requirements.

FX Updates:

USD/SGD:

Spot: 1.3603

USDSGD slipped Tuesday back to its 1.3600 handle, although the bias remains to the upside, with the pair breaking above its year-to-date downward trend channel last week.

The key resistance remains at 1.3690. A strong break above it could lead to a push for 1.3900.

AUD/USD:

Spot: 0.7679

AUDUSD’s fall below its old support/resistance level of 0.7750 has led to renewed technical bearishness for the pair. 0.7600 will be key – a move below it signals more pain for Aussie bulls.

For investors with Australian dollar exposure, one way to hedge against the weakening Australian dollar is to invest in the International Growers Australia portfolio on iAdvisor, which comprises of Australian companies with international and growing revenues that stand to benefit from global growth and a weakening domestic currency. The portfolio has gained 5.2% from a month ago, compared to a 4.2% gain in the S&P ASX 200 benchmark index.

USD/CAD:

Spot: 1.2839

USDCAD is expected to meet strong resistance around the 1.2928 mark – the pair’s 50% retracement level from the high in May to its low in September.

Canadian GDP for August will be released later today and is expected to show a the annual pace of expansion slowing to 3.6%, from 3.8% in July, bolstering the case for the Bank of Canada to refrain from further raising rates through year-end.

USD/CNH:

Spot: 6.6263

USDCNH’s recovery over the past 7 weeks seems to have halted over the last 6 days, with the pair failing to close above 6.6500 despite advancing beyond it three times. Further downside bias is expected; the medium-term support target is at 6.5578.

USD/JPY:

Spot: 113.16

USDJPY lingered near 1-week lows on the back of a weaker USD on concern that Trump’s proposed corporate tax cuts may be introduced gradually. The pair should be is expected to be supported though after the BOJ earlier left its massive monetary stimulus program unchanged, providing little reason for yen bulls to initiate new positions.

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: 1.3205

GBPUSD has largely traded within the 1.3000 – 1.3300 range for most of this month. The Bank of England will convene this week and is expected to raise interest rates for the first time in a decade. The implied probability of a BOE rate hike currently lies at 86%, according to pricing data on Bloomberg. Failure to raise rates could result in decline back below the key 1.3000 handle.