Issue#: 488/2018

Spot values at a glance:







Daily Observations:

Asian stocks rounded out a tough week with a further sell-off Friday as technology companies in the region were roiled after Bloomberg’s report that China infiltrated US companies with hardware hacks. 10-year Treasury yields held near seven-year highs before the American payrolls report, due out tonight. The dollar was little changed, heading for a second straight weekly rise.


China Hack Attack:

Bloomberg Businessweek reported Thursday that Chinese spies exploited vulnerabilities in the US technology supply chain to infiltrate computer networks of almost 30 US companies, including Inc., Apple Inc., a major bank and government contractors. Among the targets was a contractor that made software to helped funnel drone footage to the Central Intelligence Agency and communicate with the International Space Station.

Investigators found that tiny microchips, not much bigger than a grain of sand, had been inserted during manufacturing in China onto equipment made by subcontractors of Super Micro Computer Inc., one of the world’s biggest suppliers of server motherboards, the fiber-mounted clusters of chips and capacitors that act as neurons of data centers. Investigators determined that the chips allowed the attackers to create a stealth doorway into any network that included the altered machines, according to people familiar with the matter.

In emailed statements, Amazon, Apple, and Supermicro and the Chinese government disputed summaries of Bloomberg Businessweek’s reporting. “The report that China sought to infiltrate the computer chip supply chain, if true, is deeply disturbing and the latest example of the lengths that Beijing will go to in order to steal America’s official and commercial secrets,” Representative Adam Schiff of California, the top Democrat on the House Intelligence Committee, said in a statement


Powell Issues Hawkish Statement:

In what Fed watchers say was unprecedented 4 public appearances over the past week, Powell repeatedly lauded the economy’s performance, calling it “remarkably positive,” “extraordinary” and “particularly bright.” And he said he expected the good times to continue. “There’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely,” Powell said Wednesday at an event in Washington hosted by The Atlantic magazine and the Aspen Institute. Powell predicted the Fed might go past neutral rates on its tightening path; neutral estimates are crawling higher, according to Bloomberg Economics analysis.

Treasury yields spiked across the board over the past 2 days, with the 10yr yield reaching a 7-year high of 3.23% yesterday.


Sustained Rise in Inflation Yet to be Seen:

According to a Bloomberg analysis piece released earlier today, with the Fed intent on monetary tightening, benchmark Treasury yields are finally taking flight to multi-year highs, yet absent from this equation is any indication of inflation becoming unmoored.

As long-term Treasury yields broke well past recent ranges, traders and economists alike observed that improved growth prospects, rather than an acceleration in inflation, propelled the move. Signs that the US economy remains robust were evident in data Wednesday showing healthy gains in private job creation and America’s service industry. Fed Chairman Jerome Powell, for his part, heaped praise on recent economic performance, sending a strong signal that the central bank would continue raising rates to the point of eventually restricting growth.

Unlike past episodes of debt yields spiraling higher, this time there’s no indication that investors fear inflation will shoot up well beyond the Fed’s 2% target. While inflation linked-debt shows some short-term price pressures are being built after a nearly 15% rally in oil prices since mid-August, inflation expectations for the years ahead remain contained.

A market-based gauge of the annual US inflation rate for the next decade, the 10-year breakeven rate, has risen to about 2.17%, yet remains below a 4-year high reached in May. It suggests investors don’t see inflation exceeding Fed officials’ 2% target on average over the next decade. That goal is expressed in terms of the deflator for personal consumption expenditures, which has historically trailed breakevens by about 40 basis points on average.


Some Analysts Forecast Yield Curve to Steepen:

For investors in the curve-steepener trade, the updraft in Treasury yields of the past 48 hours is more than just a welcome reprieve – it also signals a long-awaited regime shift, Bloomberg news reported.

The selloff in bonds that propelled long-dated US yields to multiyear highs Thursday, and drove the gap over short-end yields to its widest level in months, has abated. But it’s not over yet for those who called a reversal in the roughly 2-year trend of curve flattening. Among them is Mark Kiesel at Pacific Investment Management Co., who says investors may finally be coming to terms with economic reality and the risk of inflation.

The flattening camp is far from packing up, judging by large trades in the middle of the curve Thursday, which helped to stall the steepening move early in the US session. But the debate over the curve’s path is heating up, stoked by this week’s strong economic data and Federal Reserve Chairman Jerome Powell’s enthusiastic descriptions of the state of the economy.

The swiftness of this rates reset casts stronger doubt on the flattening trend that’s gripped investors and policy makers alike because of the signal it may send about the economic outlook. Analysts at Morgan Stanley and BMO, who were among strategists forecasting that move, have been vindicated by the curve’s collapse. The winners of the steepening trade are yet to be determined.

Wells Fargo is sticking with its steepening call, and sees the gap between the 2- and 10-year yields ending the year at 35 basis points, compared with just over 30 now. In a research note Thursday, the bank’s strategists cited “hefty supply,” as the Treasury is forced to increase issuance across maturities to plug deficits, along with reduced demand as central banks globally unwind stimulus.


US Interest Payments Exceed Belgium’s Economic Output:

US government interest payments surpassed total economic output from Belgium in the fiscal year ending Sept. 30, underscoring the growing burden of America’s debt load amid wider budget deficits and climbing borrowing costs.

The government shelled out $523 billion on interest in fiscal year 2018, the highest on record and 14% more than the prior 12-month period, according to data published by the Treasury Department Thursday. The figures represent gross rather than net interest payments. The government in some cases pays interest to itself, as for example the Federal Reserve owns Treasury securities.

Still, the rising debt burden has raised alarm bells in Washington, where the Congressional Budget Office in April warned lawmakers that the government is on track to spend more on interest than national defense by fiscal 2023. The debt load is climbing as tax cuts, spending hikes and increased retirement levels put pressure on the government’s budget. Meanwhile, average interest rates climbed to 2.4% in fiscal 2018 from 2.1% in the prior 12-month period, according to Treasury.


China Stock Slide Overdone: Goldman Sachs:

Chinese companies with significant business with the US have seen their stocks underperform the local market by 45% since Donald Trump’s election victory, and that probably overstates the hit from trade tensions, according to Goldman Sachs Group Inc.

The team’s analysis suggested that Chinese equities with significant US exposure have done 15% worse than the broader market since US-China trade frictions worsened in May. The Shanghai Composite Index entered a bear market in June even before Trump widened punitive tariffs to cover an additional $200 billion of Chinese imports.

While there have been some signs of a slowing in Chinese growth in recent months, most economists still see the country sustaining an expansion rate exceeding 6% into next year. Goldman economists see “fairly modest” macroeconomic effects from the tariffs.

Regional Asian markets have also been hit by the trade battles, perhaps too much so, according to Goldman. In the past 6 months, Taiwan’s main stocks gauge has slumped about 7% in US dollar terms over the past 6 months, South Korea’s Kospi index is down about 13% and the Indonesian equity benchmark has lost about 19%.



FX Updates:


Spot: 1.3814

USDSGD held above 1.3800 earlier today, and looks set to gain for a sixth straight session as investors position themselves for un upcoming policy decision by the Monetary Authority of Singapore next week. A break above the key 1.3819 resistance is likely to lead to a run up to the next level at 1.4000. Conversely, the 200-day moving average around 1.3400 acts as the next support to the downside.



Spot: 0.7066

AUDUSD declined to a fresh 2-year low earlier today, breaking below its low last month in the process. The currency pair’s downward trend since the start of the year continues to hold. The psychological 0.7000 handle continues to remain a short covering target for Aussie bears. The 9-year low at 0.6828 is the long-term support level.



Spot: 1.2929

USDCAD rose for a third straight day, as an overnight crude oil sell-off weighed on the Canadian dollar. The bias, though, remains to the downside for the currency pair. A revisit of the 200-day moving average, currently at 1.2873, is likely over the coming week.



Spot: 6.9050

USDCNH gained above 6.9000 Friday, as it approaches a 2-month high amid broad dollar strength this week and as the Chinese markets remained closed for a national holiday. Analysts are predicting the PBOC to set a stronger reference rate than the market expects on Monday to send a signal yuan weakness isn’t preferred.



Spot: 113.91

USDJPY briefly tested its key resistance at 114.50 Thursday, before paring back below 114 today, ahead of tonight’s nonfarm payroll numbers. 114.50 will be crucial – a break above the 16-month high is likely to lead to a run up to the pair’s next resistance at 118.66.



Spot: 1.3010

GBPUSD’s decline since reaching a 3-month high of 1.3298 on 21 Sep. seems to have paused around the pair’s 50-day moving average at 1.2963, with GBPUSD holding above it over the past 2 days. The pair continues to be weighed by Brexit uncertainty. UK PM May is set to travel to Brussels later this month to meet other EU leaders.


Sources: Bloomberg

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UEN: 201419754M

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