September 13, 2017

Daily Observations:

Equities in Asia were mixed, with index gains in Tokyo, Seoul and Sydney negating declines in Hong Kong, Shanghai and Singapore. US indices hit fresh record highs overnight. North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the US homeland in its first response to fresh UN sanctions. Gold rebounded from a 1-week low.

Geopolitics:

• China’s and Russia’s support for watered-down sanctions against North Korea didn’t change their fundamental stance toward Kim Jong Un. UN representatives from both nations reiterated that regime change, collapse, reunification, and military development in North Korea were all unacceptable.
• Fresh sanctions passed on Monday at the UN Security Council included reducing imports of refined petroleum products, banning textile exports and strengthening inspections of cargo ships suspected of having illegal materials. US envoy Nikki Haley called them the “strongest measures ever imposed on North Korea” even though they ended up dropping demands for an oil embargo and freeze on Kim’s assets.
• Treasury Secretary Steven Mnuchin warned the US may impose additional sanctions on China – potentially cutting off access to the U.S. financial system, if it doesn’t follow through on a fresh round of UN restrictions against North Korea.
• In its first official response to new United Nations sanctions, North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the US homeland. The UN resolution verified that its push for nuclear weapons “was absolutely right” and strengthened its will to “follow this road at a faster pace without the slightest diversion until this fight to the finish is over,” North Korea’s foreign ministry said in a statement earlier today.

US:

• Janet Yellen is among the contenders being considered by President Donald Trump to run the US central bank after her current term as Federal Reserve chair expires in February, said Treasury Secretary Steven Mnuchin. He added that he’s currently “working closely with the president on the issue”, though he hasn’t made any decisions yet.
• US President Donald Trump is planning an aggressive travel schedule, which would take him to as many as 13 states over the next 7 weeks, to sell the idea of a tax overhaul as the administration tries to avoid repeating the communications failures of its attempt to repeal Obamacare.
• However, in Treasury Secretary Steven Mnuchin and Marc Short, Trump’s legislative affairs director, have both indicated it may not be possible for Trump to deliver on his promise to cut corporate tax rates to 15%, according to Bloomberg News. Both said Trump is still committed to that rate cut, down from the current 35%, but acknowledged the potential for compromise.
• A departure of top White House economic adviser Gary Cohn would be “terrible” for the US and markets, according to billionaire hedge fund manager Ray Dalio, as it would “undermine the future progress of economic reforms and it would also represent a challenge” for the administration in drawing talented people to top posts.
• Dalio also said at the conference that lawmakers will ultimately agree on a watered-down version of Trump’s political agenda, including tax reform, which he said could be completed next year. Instead of the 15% corporate tax rate envisioned by Trump, Dalio said it will be closer to 23%.
• The risk rally was in full swing again on Tuesday as the Dow Jones Industrial Average (+0.28%), the S&P 500 (+0.34%), and the Nasdaq Composite (+0.34%) indexes closed at record highs, helped on by news the Trump administration is pushing for a tax overhaul.
• Apple Inc. slipped, as did some of its biggest suppliers, after investors were underwhelmed at the unveiling of the much-anticipated iPhone X (pronounced “ten”) last night. New features include facial recognition software and wireless charging capabilities.
• The US dollar was largely muted; the Bloomberg Dollar Spot Index reversed its previous session’s gain earlier today, declining 0.2%. The Dollar Index failed to close above the 92 resistance yesterday, and was 0.1% lower at 91.751 earlier.
• Treasuries climbed for a third consecutive session, with the 10yr yield gaining 4bps to 2.17% in New York last night.

Canada:

• Canada’s central bank took the unusual step of directly rebutting criticism from a top economist that its communications were poor ahead of last week’s interest-rate increase. The BOC didn’t give a speech or make other public comments about the strength of an economic recovery in the days before its Sept. 6 increase, a decision that Bank of Montreal Chief Economist Doug Porter called “an epic fail” in a report on Friday.

UK:

• UK inflation is on the rise again, accelerating more than forecast in August after the biggest surge in clothes prices in almost three decades. Headline CPI gained 2.9% year-on-year, improving from the prior rise of 2.6% and better than the forecasted 2.8%. Core CPI over the same period rose 2.7%, accelerating from the 2.4% increase in July and bettering the median estimate of a 2.5% gain.
  
• The run up in inflation can be attributed to the pound’s 11% depreciation against the dollar since the Brexit referendum, thus boosting import costs and feeding through to prices for everyday household items.

Japan:

• PPI in August was unchanged from a month ago and rose 2.9% from a year before, lower than the consensus forecasts of 0.1% and 3.0% respectively.

Australia:

• The Westpac Consumer Confidence Index for September rose 2.5% from a month ago, reversing a drop in August.

Singapore:

• Retail sales in July gained 1.8% year-on-year, compared to the prior month’s rise of 2.0% and beating the consensus estimate of 1.7%.

Precious Metals:

• Spot gold rebounded from a near-2-week low, gaining by as much as 1.0% to $1,337.18/Oz earlier today as North Korea threatened to accelerate nuclear plans in response to UN sanctions.
• Long-term momentum continues to be biased to the upside, with gold having broken the important psychological resistance of $1,300/Oz 2 weeks ago. $1,300/Oz now acts as a strong support level.
• The next key resistance level to be tested lies at $1,375.34/Oz – a 3.5-year high. The precious metal may be supported above $1,325/Oz for now, as long as geopolitical tensions within the Korean peninsula remain heightened.
• Silver for immediate delivery advanced 1.0% to $17.9282/Oz, rebounding from a 1-week low.

Oil

• Crude oil futures held near $48/bbl earlier today as OPEC was said to discuss prolonging output cuts further into next year and as US energy markets continued their slow recovery after disruptions from 2 hurricanes.
• OPEC and its allies are discussing extending by more than 3 months the oil production cuts that expire in March 2018, potentially prolonging them well into the second half of next year in an effort to boost prices, according to people familiar with the matter.

Cryptocurrencies:

• JPMorgan Chase & Co. CEO Jamie Dimon blasted the cryptocurrency at an investor conference in New York on Tuesday, saying it’s a “fraud” and “worse than tulip bulbs.” He added that he’d fire any trader at the bank who dabbled in bitcoin, because it’s “stupid.” The digital currency slumped to session lows thereafter, extending a series of recent retreats following China’s crackdown on cryptocurrencies earlier this week.
• Bank of America Merrill Lynch’s survey of fund managers showed that “long bitcoin” was judged to be the most crowded trade in financial markets.

USDSGD:

• Spot 1.3451
• USDSGD pared a 2-day gain, retreating 0.2% to 1.3442 today on the back of a weaker US dollar.
• Resistance remains at 1.3500 while the key support below lies at 1.3350.

AUDUSD:

• Spot 0.8029
• AUDUSD was little changed on the day from the previous close of 0.8027, as the pair continues to be supported above the psychological level of 0.8000.
• A retest of the 2015-high at 0.8164 is possible.

USDCAD:

• Spot 1.2171
• USDCAD extended its previous session’s gain from the 1.2100 handle, gaining another 0.5% to 1.2190 last night.
• Having strengthened more than 11% in 4 months against the dollar, the Canadian dollar looks poised for a pullback over the medium term. The first point of resistance is likely to come in at the 1.2400 handle.
• The key support at 1.1920 is likely to hold.

USDCNH:

• Spot 6.5288
• The PBOC weakened its reference rate by 0.16% to 6.5382 per US dollar earlier today – weaker than expected.
• USDCNH erased Tuesday’s gain, after falling by as much as 0.3% to 6.5231 earlier.

USDJPY:

• Spot 110.08
• USDJPY reversed an overnight gain of as much as 0.4% to revert back towards the 110 handle earlier this morning, following North Korea’s latest threat to accelerate its plans to acquire a nuclear weapon.
• The 1-month resistance level around 111 remains the handle to be tested next; on a longer term basis, 115 represents a more significant level.

GBPUSD:

• Spot 1.3302
• GBPUSD extended its previous session’s 0.5% ascent, gaining another 0.3% to 1.3315, a fresh 1-year high, following yesterday’s stronger-than-expected inflation numbers.
• The next key support lies around the region of 1.3450 – 1.3500.