October 4, 2017

A rally in the US dollar petered out as investors await Donald Trump’s decision on the leadership of the Fed Reserve and gauge prospects for US tax cuts. Gold gained and looks set to snap a 5-session losing streak. Crude oil declined back to $50/bbl. Most Asian indices were higher, taking the lead from US indices which ended Tuesday at fresh record highs again.

Daily Observations:

Defense Spending:

• US Congressional defense committees reallocated more than $400 million in funds into missile defense programs in a bid to allay the threat posed by Kim Jong Un’s nuclear and military ambitions. The Pentagon has requested nearly $10 billion for the fiscal year that started in October. Boeing Co., Raytheon, and Orbital ATK Inc. are seen as the top beneficiaries of this shift in spending priorities.

Fed:

• US Treasury yields declined overnight as news emerged that Trump has been presented with a shortlist of Fed-chair candidates with a range of views on policy. Among them, ex-board member Kevin Warsh has criticized the central bank for trying to do too much with monetary policy, while Governor Jerome Powell has voted in sync with Chair Janet Yellen, whose term is up in February. The other reported candidates include Yellen herself and National Economic Council Director Gary Cohn.

US Tax Reform:

• Bob Corker, a key Republican senator, has raised concerns about the fiscal-deficit implications of the Trump administration’s tax plans. The framework released last Wednesday calls for deep rate cuts and would abolish existing tax breaks to help pay for them, but without such “pay-fors”, Congress might have to settle for only temporary tax cuts. Corker has insisted he won’t vote for a tax bill that adds to the budget deficit.

Fresh Highs…Again:

• The Dow Jones Industrial Average, Nasdaq Composite Index, Russell 2000 Index, and S&P 500 Index all closed at fresh records on Tuesday. Cyclical sectors such as tech, industrials, and financials, paced the advance.
• According to a Bloomberg report, one important part of the market is sending a very disturbing signal. The technology-stock-heavy Nasdaq 100, stuffed with names such as Apple, Amazon.com and Facebook, crossed the 6,000 level for the sixth time in a month on Monday, but again failed to hold on, indicating a possible exhaustion in price movement.
  
• ETF investors pulled almost $900 million from tech-focused funds over the past 5 days, more than any other sector tracked by Bloomberg. This is important because it suggests that tech stocks may be ceding leadership of the overall market to bank and energy stocks, according to the report.
• The Nasdaq 100 had been having a stellar 2017, powering through 5,000 on Jan. 6 on its way to a 23.1% gain this year through August. Since then though, it has been flat.

RBA Holds Rates:

• Australia’s central bank kept interest rates unchanged Tuesday, as expected, reinforcing Governor Philip Lowe’s reluctance to follow developed-world counterparts and tighten policy. Policy makers remain concerned about the level of household debt, now at a fresh record high of 194%, and weak wage growth and their combined potential to spook consumers into cutting back spending.
• Lowe has made clear he’s in no hurry to follow counterparts moving rates higher, because Australia didn’t have to cut as low or undertake quantitative easing. In the meantime, a stronger currency has proved unhelpful for exporters while signs of higher investment are encouraging.

Weekly Thematic News:

3-D Printing:

• Raoul Leering, head of international trade analysis at ING, writes that growth in 3-D printing could wipe out almost one-quarter of cross-border trade by 2060. He predicts about half of manufactured good could be printed by 2060 if the current growth of investment in the technology persists, cutting world trade by 25% as it would require less labor and reduce the need to import intermediate and final goods from low-wage countries. That could cause trade deficits to narrow for major importers, though countries with a trade surplus could suffer.
• That was the slow-growth scenario. If investments ramps up, doubling every five years, he guesses that as much as two-fifths of global trade could disappear.
  
• The 3D Printing US portfolio on iAdvisor has returned an impressive 6.7% over the past month, and is one of the various “Internet of Things”-themed portfolios available on the platform.

Cybersecurity:

• Yahoo, the internet company acquired by Verizon Communications Inc. this year, now believes a 2013 security breach exposed all 3 billion of its users at the time. The assessment, based on new intelligence obtained after the $4.5 billion acquisition, compares with Yahoo’s initial estimate that 1 billion accounts were compromised. The information stolen didn’t include passwords in clear text, payment data or bank accounts.
• With hacks and security breaches becoming more frequent on the corporate and national fronts, the cybersecurity space looks poised to continue its exponential growth. As one of the steady-eddies in our library of portfolios, Cybersecurity US has been a consistent deliverer of returns in recent times, generating 2.7% and 10.6% over the past month and year respectively.

Singapore Real Estate:

• Singapore’s home prices rose for the first time in four years, snapping a record run of declines and confirming recent signs that the property market is rebounding. Private residential prices rose 0.5% last quarter, according to data from the Urban Redevelopment Authority released Monday.
• Analysts at BNP Paribas SA and Morgan Stanley are among those forecasting that prices will rebound after officials in March boosted sentiment by loosening some curbs. In a UBS Group AG report last week on global property bubble risks, Singapore housing was described as “fair-valued”, with declines in prices likely to end this year and be followed by moderate increases.
• As of Tuesday, the Smart Real Estate Singapore portfolio on iAdvisor is currently up 18.4% year-on-year, outperforming other REIT indices such as the SGX S-REIT 20 (+10.5%) and the FTSE Straits Times REIT (+11.3%).

Self-Driving Cars:

• Ford Motor Co. and Lyft Inc. have agreed to team up on developing and deploying autonomous vehicles, sealing the latest alliance intended to popularize self-driving cars. The US automaker and ride-hailing service will share data to develop the systems and technology needed to design affordable driverless automobiles, and eventually get them onto Lyft’s network, they said in twin blogposts Wednesday.
• According to a Bloomberg report, 40% of vehicles are expected to be fully autonomous by 2050, citing a Bernstein research note. Investors eager to jump into the burgeoning future trend can look into parking their money in companies that supply the parts, rather than trying to pick a future champion among the many car builders.
• For example, companies developing advanced driver assistance systems (or ADAS) can prove to be an early profitable choice. According to the report, ADAS captures all the driver assistance technology and electrical systems that manufacturers are building on the path toward fully self-driving cars and include sensor manufacturers such as Sunny Optical Technology Group Co. and Sony Corp., or chipmakers such as Nvidia Corp. or Toshiba Corp.
• More than a quarter of cars are expected to come with higher levels of automatic driver assistance programs, like pedestrian detection and lane departure warnings, within two years, and the industry is forecast to generate annual global revenue of $27 billion by 2020, according to Bernstein.
• The Self-Driving Car US portfolio on iAdvisor has been one of the stellar performers over the past year, returning an impressive 36.1% from a year ago.

Solar Energy:

• For Caribbean islands plunged into darkness after hurricanes Irma and Maria, more resilient, small-scale electric systems powered by the sun are looking increasingly attractive. To make the case for so-called microgrids, solar installations were reported to have remained largely intact while local utilities reported damage to more than 1,200 electrical poles following the aftermath.
• It won’t come cheap however, with an estimated cost of $250 million to build about 90 megawatts of solar and storage across a chain of Caribbean islands – enough to power an estimated 15,000 US homes. As such, large scale state support and external funding will be pertinent for such initiatives to take place.
• Up until recently, our Solar Power US portfolio has performed remarkably. Despite a 3.3% decline over the past month, the portfolio has returned a healthy 27.7% over the past year.

Renewables:

• 2 initiatives pending in Washington, one to prop up large traditional power plants and a second to impose tariffs on solar panels, could let Trump upend wholesale electricity markets and tip the advantage away from renewables, according to a Bloomberg report released on Monday. Both moves invoke laws that haven’t been used in a decade and come as Congress begins debating a White House tax plan that may undermine a key source of financing for clean energy. Together, they raise questions about whether falling costs will be enough to keep wind and solar thriving under a president intent on supporting fossil fuels.
• Trump’s tax plan overhaul may adversely affect wind and solar companies. These companies enjoy financial backing from large banks, insurers and other backers that take advantage of federal credits through tax-equity financing, a mechanism that lets businesses buy from renewable-energy developers’ tax credits that they can apply to their own tax bills. If corporate rates fall, investors will have less need for write-offs, potentially damping demand for this type of investment.

FX Updates:

USD/SGD:

• Spot 1.3603
• USDSGD pared recent gains to retreat back to its 1.3600 handle. 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.

AUD/USD:

• Spot 0.7858
• The Australian dollar strengthened Wednesday against the USD, with the key 0.7800 proving to be a tough level to crack for Aussie dollar bears.
• With the current rebound expected to be temporary, a retest of the 0.7800 is likely while a break below it could lead to a reversion back to the 200-day moving average of around 0.7650.
• Iron ore futures remain at a 3-month low, and is expected to further depress the Australian dollar.

USD/CAD:

• Spot 1.2473
• USDCAD remained capped by the 1.2500 mark Tuesday, amid a pullback in USD strength and crude oil prices. The pair continues be supported by its 50-day moving average after closing above it for the first time since May.
• The next resistance level above lies at 1.2778 – a 10-week high.

USD/CNH:

• Spot 6.6497
• USDCNH retreated Wednesday after failing to retest its 6.7000 level.
• The yuan last Friday registered its worst weekly drop since Jan 2016, and indicated that the PBOC‘s recent strategy of setting stronger-than-expected fixings is having little success in containing losses.
• USDCNH is likely to find strong resistance around the region between 6.7000 (a strong psychological level) and 6.7165 (the 50% Fibonacci retracement level since January) this week.

USD/JPY:

• Spot 112.65
• USDJPY’s bias remains to the upside, having gained above its 200-day moving average for the first time since July.
• The next key resistance to be tested lies at the 6-month high of 114.48.

GBP/USD:

• Spot 1.3259
• GBPUSD maintained near a 2-week low Wednesday, following more weak economic data released on Tuesday, where the IHS Markit’s gauge of British building activity fell to 48.1 for September, below the median economist forecast for a reading of 51.1. For the first time since August 2016, the index was below the key 50 level.
• Also weighing on the pound are signs that the government is increasingly concerned that it could crash out of the European Union if a trade deal can’t be struck soon.