Spot values at a glance:
Asian stocks slipped, led by China, and the yuan fell as investors assessed the latest move by the People’s Bank of China to loosen monetary policy. Chinese shares bore the brunt of selling as traders returned from a week-long holiday that encompassed the rout in Treasuries. Equities from Sydney to Shanghai sank, while Japan was shut for a holiday, and Columbus Day in the US means no Treasuries trade on Monday. US stocks on Friday capped the worst week in a month.
PBOC Cuts Reserve Ration Requirement:
China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policy makers seek to shore up the faltering domestic economy amid a worsening trade war.
The PBOC lowered the required reserve ratio for some lenders by 1 percentage point, effective from Oct. 15, according to a statement on its website Sunday. The cut will release a total of 1.2 trillion yuan, of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing, the central bank said.
The central bank has shifted to looser monetary policies this year as the combined effects of Beijing’s financial clean up and the trade conflict with the US threatened the economic expansion. As there’s now every sign that the Trump administration intends to continue pressing Beijing on trade and other fronts, China is faced with a more urgent need to support the domestic economy, even if that may increase downward pressure on the currency.
Meanwhile, China’s foreign-currency holdings fell in September, as heightened trade tensions with the US fueled concerns of capital outflow and further yuan depreciation. Reserves declined by $22.69 billion to $3.087 trillion in September, the PBOC said Sunday. That compares with $3.110 trillion the previous month and the median estimate of $3.105 trillion in a Bloomberg survey of economists.
Payrolls Cool, Jobless Rate Falls to 48-Year Low:
According to data released last Friday, US hiring cooled in September by more than forecast, while the jobless rate fell to 3.7%, the lowest since 1969. Employers added 134,000 jobs last month after a large upward revision to the August figure. Hurricane Florence affected parts of the East Coast during the September reference periods, the government said. Average hourly earnings climbed 2.8% from a year earlier, matching projections.
The figures suggest the job market remains tight, with hiring outpacing labor-force growth and perhaps pushing the economy beyond full employment, though it’s yet to spark a significant acceleration in wages. The coming months will indicate whether pay gains and prices will finally surge in response to a historically low unemployment rate, a development Fed Chair Powell says he doesn’t expect.
“The rise in wages is broadly consistent with observed rates of price inflation and labor productivity growth and therefore does not point to an overheating labor market,” Powell said in a speech last week in Boston. “Further, higher wage growth alone need not be inflationary.”
Powell said he expects to stick with the central bank’s current path of gradual interest-rate hikes while monitoring a set of risks presented by the current environment of very low unemployment and low inflation.
“This historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times,” he said. “Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation.”
Homeland Backs Firms Claims Denying China Hack:
The Department of Homeland Security (DHS) said it has no reason to question denials by US technology companies of a report that Chinese spies had used a microchip to hack into American computer networks. The companies, including Amazon.com Inc. and Apple Inc., have denied that their systems were compromised.
The infiltration of the computer systems, which stemmed from servers assembled by San Jose-based Super Micro Computer Inc., was investigated as part of an FBI counter-intelligence probe, according to national security officials familiar with the matter. DHS may not be involved in such inquiries, several people familiar with them said.
Bloomberg Businessweek reported on Thursday that Chinese spies exploited vulnerabilities in the US technology supply chain to infiltrate the computer networks of almost 30 US companies, including Amazon, Apple, a major bank, and government contractors. Among the targets was a contractor that made software to help funnel drone footage to the Central Intelligence Agency and communicate with the International Space Station.
China Equities Slump After 1-week Break:
Chinese stocks tumbled as the nation’s markets resumed trading, putting them on course for their worst performance after the week-long October holiday since 2008. The yuan dropped with bond futures. The CSI 300 and Shanghai Composite indices slid 2.9% and 2.4% respectively at 10:15 am Singapore time earlier today, led declines in consumer discretionary and financial companies, after Hong Kong stocks tumbled last week. China’s currency fell as much as 0.5% against the dollar to its lowest since mid-August.
Chinese investors face a barrage of negative news, including weak manufacturing data, a close call between a US and a Chinese destroyer, a North American trade deal that’s set to sideline China, accusations of election meddling and a Bloomberg News report that the country spied on US companies. The PBOC may have temporarily blunted the pain by cutting the amount of cash lenders must hold as reserves earlier today.
China Halted US Crude Oil Purchases in August:
Even though Beijing hasn’t sanctioned American oil imports yet, Chinese buyers aren’t taking any chances. The country halted purchases of US crude in August for the first time since September 2016, according to US Census Bureau data released Friday. In July, Chinese buyers received nearly 12 million barrels of crude from the US.
Beijing, once an enthusiastic buyer of US crude after Washington lifted its restrictions on exports in December 2015, has even jockeyed with Canada for the position of top importer at times. Yet, China’s interest in American oil has diminished amid the escalating trade spat between the two nations.
In June, Beijing threatened to slap a 25% tariff on crude imports in response to US President Donald Trump’s $50 billion levy on Chinese imports. China’s largest refiner Sinopec then suspended its incoming shipments of US crude, yet eventually resumed some purchases after crude was removed from that list.
The future of American crude shipments into China remains uncertain and there is still no guarantee that threats of a US crude tariff won’t resurface as the trade conflict persists. American oil producers, particularly those who operate in the key Permian Basin of West Texas and New Mexico, risk feeling the pain from the ongoing tensions as they increasingly look to foreign shores to market their supplies, as local demand becomes saturated.
Asian Dollar Bond Sales Outlook Dim:
According to a Bloomberg news article, Asia’s dollar bond sales are set to end 2018 with a whimper after a sizzling start and next year’s prospects may prove dimmer, bankers and investors say. Volatile emerging markets, trade wars and now surging US Treasury yields have created a perfect storm that’s battering sentiment across Asia. A Bloomberg survey expects primary issuance to slump as much as 46% in the fourth quarter and Credit Suisse Group AG expects more turbulence going into 2019 that will test borrowers’ mettle.
It’s a stark reversal from 2017 when euphoric sentiment and investor’s crave for higher yields saw Asian borrowers led by Chinese companies rush to sell a record $323 billion of dollar bonds. The issuance mania spilled over to an early part of 2018 that unleashed the strongest-ever start to a year. Dollar-denominated bond sales in Asia excluding Japan will probably hit $50 billion to $65 billion this quarter, compared with the year-earlier period of $93.4 billion, according to 11 out of 22 bankers and analysts surveyed by Bloomberg. Some are expecting market sentiment to continue weakening in 2019, especially for high-yield credits, the survey showed.
USDSGD is threatening to break out of its 2-month long range between 1.3600 and 1.3819; the pair closed on Friday at 1.3825 – its highest since Aug 2017 and the back of recent USD strength. A break above the key 1.3819 resistance is likely to lead to a run up to the next level at 1.3913. Conversely, the 200-day moving average around 1.3415 acts as the next support to the downside.
According to a Bloomberg news report, SGD is at risk of backsliding if the MAS doesn’t step up with further policy tightening in the coming days.
AUDUSD declined to a fresh 2-year low earlier today, as it edges towards the 0.7000 psychological support. The currency pair’s downward trend since the start of the year continues to hold, and looks on track to reach its 9-year low at 0.6828 by year-end. On a nearer-term basis, the pair is approaching oversold levels, hence a temporary pullback to 0.7160 is possible before the longer-term down trend resumes.
USDCAD looks set to rise for a fifth consecutive sessions today after the pair gained to a 1-week high of 1.2966 this morning. The downtrend channel, established since July, continues to hold, although the longer term technical bias points to the upside. The pair broke above its multi-year triangle pattern earlier this June – a breakout above of its current 3-month long downtrend channel would suggest a likely retest of the 1.3382 resistance.
USDCNH gained above 6.9000 Monday, as it approaches a 2-month high after the PBOC cut banks’ required reserve ration to shore up the Chinese economy. Onshore yuan declined by as much as 0.6% to 6.9081. Given the monetary policy divergence between China and US, the RRR cut will add depreciation pressure on the yuan; a break above 6.9000 is expected over the near term.
USDJPY briefly tested its key resistance at 114.50 last Thursday, before paring back below 114 to close out the week. The pair is likely to retest the key resistance at 114.50 again – a break above the 16-month high is likely to lead to a run up to the pair’s next resistance at 118.66.
GBPUSD was little changed earlier today after Friday’s 1.1% rise. The pair registered a strong close last week after sterling was buoyed by reports that a Brexit deal was close amid an offer from the EU for a free-trade deal. The details of the proposal will be presented by EU Chief Negotiator Michael Barnier this Wednesday. Further Brexit deal optimism could push the pair higher above 1.3200 for the coming week.