Issue#: 482/2018

Spot values at a glance:







Daily Observations:

Asian equity indexes gyrated, with the weaker yen and relatively cheap valuations helping Japanese shares outperform. Hong Kong stocks teetered on the brink of a bear market, weighed down by a rout in technology stocks, while equities in Shanghai drifted near the lowest level since January 2016. Overnight, the S&P 500 Index broke a 4-day slide even as the so-called FANG stocks underperformed. US two-year yields hovered near the highest level in a decade in the run-up to an anticipated Federal Reserve interest-rate hike later this month.


Trump-Kim Second Summit:

North Korean leader Kim Jong Un requested a second meeting with President Donald Trump, and US diplomats are already working to set up the summit, White House Press Secretary Sarah Huckabee Sanders said Monday. “The primary purpose of the letter was to request and look to schedule another meeting with the president, which we are open to and are already in the process of coordinating,” Sanders said. She described the document as “a very warm, very positive letter.” The request is the latest direct communication between the two leaders, who held a summit in Singapore in June and agreed that North Korea would abandon its nuclear weapons program. But Kim’s regime has since shown little sign it’s moving toward denuclearization.


US-China Trade War Intensifies:

US President Donald Trump last Friday doubled down on his threats to impose higher tariffs on the nation’s goods, saying he’s ready to tax all imports “at short notice.” While economists see the immediate impact of trade tension as limited, the effect on economic confidence may be larger, warned former People’s Bank of China Governor Zhou Xiaochuan.

Trade data for August released Saturday echoed both the cause and effect of the standoff with the US, the surplus with the US rose to a record, while overall export growth slowed. A lone bright spot may be faster-than-expected import growth, signaling that domestic demand in the world’s second-largest economy is holding up for now.

Hours before Trump’s Friday threats, China announced measures to support some of the exporters targeted by the barrage of higher duties. The Ministry of Finance said it will raise export rebate rates for 397 goods, ranging from lubricants to children’s books, meaning that firms shipping such products abroad will pay less value-added tax. The new rates will be effective from Sept. 15, the ministry said in a statement on its website.

Chinese exporters are feeling the pain as trade tensions between the world’s 2 biggest economies worsen. Data released Saturday showed that China’s trade surplus with the US widened to $31.1 billion during the month, according to Bloomberg calculations. The rise came despite exports climbing at the slowest pace since March. Shipments rose 9.8% in dollar terms, the customs administration said Saturday. Imports climbed 20%.


More EM Pain:

Emerging-market currencies slumped to their lowest level since April 2017 on speculation the US-China trade war will escalate, and Goldman Sachs said its models signal further declines for some developing nations. While this year’s sell-off has pushed emerging-market exchange rates into undervalued territory by at least one measure, they are not yet as cheap as in early 2016, analysts at the investment bank noted, suggesting the possibility of more downside. Back then, the developing world was being battered by a slump in global oil prices.

While this year’s sell-off has pushed emerging-market exchange rates into undervalued territory by some measures, the Colombian peso, Indian rupee and Indonesian rupiah remain modestly overvalued according to a model that takes into account the external and internal imbalances of the nations’ economies. Emerging-market shares also had a rough session Monday, falling more than 1%. The $4.5 trillion sell-off that has taken the MSCI Emerging Markets Index below its 20-year average valuation, normally a signal for investors to return,  has further to run before reaching the point where four major turnarounds in the past 20 years began, technical patterns suggest.


HK Stocks Approaching Bear Market Territory:

The Hang Seng Index’s 1.3% slide Monday put it on the brink of a bear market, extending its loss since a January peak to almost 20%. Already reeling from a selloff in Internet and tech firms as well as concerns over China’s slowing growth, Hong Kong is now caught in an emerging-market exodus first sparked by currency crises in Latin America and Turkey.

Indiscriminate selling across emerging markets has hit Asian stocks particularly hard, thanks in part to the $2 trillion that follows MSCI’s benchmark index. All the bottom 38 performers in the past three months are firms based in Hong Kong, China and Taiwan, which were among the most-owned stocks earlier this year. In March, Taiwan Semiconductor Manufacturing Co. featured in 63% of emerging-market portfolios and Tencent Holdings Ltd. was in 53%, according to eVestment data.

The rotation around the last index options expiry in June was so aggressive that the largest exchange-traded fund tracking the index lost $5.4 billion that month, the biggest outflows since 2014. The Hang Seng Index is on track for its worst quarter in 3 years, when China’s chaotic yuan devaluation roiled markets around the world.

As volatility soars, calls to stay in cash are growing louder. Investors are preferring to ride out the selloff in safety even though valuations across Asia are the cheapest they’ve been in years. The Hong Kong gauge trades at just 10 times projected earnings, the lowest since 2016.


Brexit Deal ‘Realistic’ in 8 Weeks:

European Union chief Brexit negotiator Michel Barnier once again struck an optimistic tone as he said a deal on the UK’s orderly withdrawal from the bloc is possible within 8 weeks, sparking a rally in the pound.

Barnier told a conference on Monday in Bled, Slovenia, that it was “realistic” and “possible” to get an agreement by the start of November to allow time for the deal to be approved by the British and European parliaments. Still, he warned that several issues, including the contentious matter of the Irish border, need to be resolved.

Barnier’s remarks are the latest in a series of more positive sounds from the EU side on the state of the negotiations. The bloc is exploring ways to make the section of the Brexit treaty on the Irish border more palatable to Britain; Germany has privately agreed to accept a less detailed agreement on future UK-EU ties; and Barnier last week told UK lawmakers there are “lots of useful things” in the government’s post-Brexit blueprint.

Brexit is being done in 2 parts: first the divorce deal, which needs to be settled in the next few months to ensure an orderly exit. Alongside that, the 2 sides will agree to an outline of what their future relationship should look like. Once the UK has left, that agreement will be fleshed out into a detailed trade deal.

Sounding a note of caution, Barnier said there are still 3 major items necessary for the divorce deal that the 2 sides haven’t yet agreed on: the Irish “backstop” – an insurance policy to avoid a hard border on the island of Ireland, the protection of food names linked to specific geographies, and how the deal is enforced.



FX Updates:


Spot: 1.3787

USDSGD continues to fluctuate near its key resistance level of 1.3820. The momentum remains to the upside with the pair bouncing strongly off the 1.3600 support 2 weeks ago. A above the recent high is likely to lead to further gains to 1.3900.



Spot: 0.7111

AUDUSD’s technical continue to remain weak. The downward trend channel since the start of the year stays intact, while the recent break below the 0.7150 support signals more Aussie weakness. The psychological 0.700 handle is likely to be a short covering target for Aussie bears. The 9-year low at 0.6828 is the long-term support level.



Spot: 1.3152

USDCAD retreated overnight after failing to break above 1.3200 despite trying over the past couple of sessions. A short-term pullback to 1.3000 is expected. Continued uncertainty regarding NAFTA is likely to cap declines at 1.3000. Technically, the bias for USDCAD points to the upside; 1.3386 remains key.



Spot: 6.8781

USDCNH looks poised to gain for a third consecutive session, after rising to a fresh 2-week high earlier today, as investors remained cautious amid threats of US tariffs on a wider range of Chinese products. A break back above 6.9000 will probably lead to a retest of the currency pair’s 18-month high of 6.9586.



Spot: 111.39

USDJPY extended its gains above 111 as the yen fell against all its Group-of-10 peers as gains in Japanese stocks and improving risk appetite damped demand for haven assets. The pair has been largely stable since the start of August, keeping largely within the band of 110-112.



Spot: 1.3037

GBPUSD gained to its highest in more than a month, soaring past the 1.3000 handle, after the European Union’s chief negotiator Michel Barnier said it’s “realistic” to get a Brexit deal within 8 weeks. Investors will now be watching for any hints from either side showing a willingness to compromise on the remaining issues. The prospect of no deal before the UK leaves the bloc in March helped drive the currency to the lowest in more than a year last month.



Sources: Bloomberg

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UEN: 201419754M

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