October 5, 2017

Daily Observations:

US Economy:

• Economic data stemming from the US continues to outperform. The non-manufacturing ISM gauge expanded in September to 59.8, from 55.3 in August, gaining by the most in 12 years; economists had predicted a modest gain to 55.5.
• The ADP employment change last month slipped to 135,000, in line with expectations, from a 228,000 gain in August. The lower numbers reflected a hit to the labour market from hurricanes Harvey and Irma.
• Investors will keep a watchful eye over the September’s nonfarm payrolls report due on Friday night.

Catalonian Crisis:

• Catalan President Puigemont said Catalonia will apply the result of its illegal independence referendum and is seeking a mediation process. King Felipe VI and Prime Minister Mariano Rajoy have both condemned last Sunday’s vote. The euro remained little changed despite his remarks, with traders preferring to remain on the sidelines ahead of Friday’s US jobs report and Thursday’s release of minutes from the ECB’s latest meeting.
• What makes things extra complicated is that the European Union cannot mediate because it would give legitimacy to every region in Europe that wants to secede from the national state, according to Brown Brothers Harriman strategists.

Australian Housing:

• Home ownership among young Australians has fallen to the lowest level on record, as an explosive property boom squeezes out all but the wealthiest. Home prices have surged more than 140% in the past 15 years, propelling Sydney past London and New York to rank as the world’s second-most expensive housing market, second only to Hong Kong.
• In response, home ownership among the young has plunged: only 45% of 25-to-34 year-olds own their own home, down 16 percentage points from the 1980s, with almost half the decline coming in the past decade. At the same time, hefty mortgages have pushed household debt to a record, acting as a drag on the economy’s 26 years of unbroken growth. As more people retire still owing a mortgage, or renting, they are more likely to qualify for government welfare, undermining the A$2.3 trillion pension savings system.
  

Australian Retail Sales:

• Retail sales in August unexpectedly declined 0.6% month-on-month, accelerating from its 0.2% drop in July, and fuelling further concerns over its economic outlook. This morning’s drop was the worst retail sales drop since March 2013.

MAS to Tighten?

• According to Pimco, there’s a chance the Monetary Authority of Singapore may surprise financial markets by tightening its policy stance this month in a move that could make it among the first central banks in Asia to do so.
• Economic indicators are pointing to an improved growth outlook in the city state, while core inflation could approach 2% this year, the top of the MAS’s forecast range, Roland Mieth, an emerging-market fund manager at Pimco in Singapore, said in an interview. He added the probability of policy tightening this month is about 30%.

$50/bbl:

• WTI futures closed below $50/bbl Wednesday for the first time since 13 Sep, as a flood of US crude exports added to concerns that a global glut will be sustained.
• US exports were reported to have jumped to a record 1.98 million barrels a day, with production rising for a fourth consecutive week, according to the Energy Information Administration.
• Meanwhile, a tropical depression that could grow into a hurricane is forecast to strike the US Gulf Coast late Sunday, potentially forcing offshore oil and natural gas rigs to shut.

Bank of Canada:

• Pimco and BlackRock, two of the world’s biggest fund managers, are predicting Bank of Canada Governor Stephen Poloz to refrain from hiking interest rates further until at least 2018, anticipating a more gradual approach to monetary policy. In contrast, traders are betting policy makers to tighten for a third time in December, according to pricing data on Bloomberg. Swaps traders are pricing in about a two in three chance of at least one more quarter-point rate increase by the BOC’s December meeting.
• Pimco and BlackRock say uncertainty surrounding Nafta negotiations, an anticipated slowdown in growth once fiscal stimulus wanes, and muted inflation make it unlikely the central bank will raise rates again by year-end.

Weekly Thematic News:

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.
• Solar power grew faster than any other source of fuel for the first time in 2016, the International Energy Agency said in a report Wednesday suggesting the technology will dominate renewables in the years ahead. Solar powered by photovoltaics, or PVs, grew by 50 percent, with almost half of new plants built in China.
• The IEA said 165 gigawatts of renewables were completed last year, which was two-thirds of the net expansion in electricity supply. This marks the sixth consecutive year that clean energy has set records for installations.
• The IEA expects about 1,000 gigawatts of renewables will be installed in the next 5 years, a milestone that coal only accomplished after 80 years. That quantity of electricity surpasses what’s consumed in China, India and Germany combined.
• The surge of photovoltaics in China is largely due to government support for renewables, which are being demanded by a population concerned about air pollution and environmental degradation that has led to deadly smogs. The country is seeking to reduce its reliance on coal and has become the world’s largest market for renewables, particularly solar.
  
• 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.

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.

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.

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.

FX Updates:

USD/SGD:

• Spot 1.3638
• USDSGD continues to be supported above 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 0.7832
• AUDUSD retreated back towards its 0.7800 support Thursday, following poorer-than-expected retail sales numbers.
• A break below 0.7800 could lead to a reversion back to the 200-day moving average of around 0.7650.

USD/CAD:

• Spot 1.2480
• USDCAD remained capped by the 1.2500 mark Thursday, ahead of Friday’s jobs reports coming from both the US and Canada. 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 6.6493
• 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 112.75
• 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 Thursday, as the pound continues to be hampered by Brexit concerns.
• Nonetheless, the long-term bias remains to the upside following the pair’s significant breakout on Sep. 15. The 1.3200 level is likely to remain supported.