Issue#: 484/2018

Spot values at a glance:







Daily Observations:

Stocks in Asia tumbled at the beginning of the week after the latest US move to place a further tranche of tariffs on Chinese goods. The dollar maintained gains. Shares in Hong Kong and China led declines, after news that US President Donald Trump instructed aides to proceed with tariffs on about $200 billion more in Chinese products.


US-China Trade Talks at Risk:

Talks between China and the US aimed at defusing trade tension are at risk amid fresh threats from the White House of tariffs on $200 billion of Chinese imports, the Wall Street Journal reported. Beijing is considering declining the offer of talks led by US Treasury Secretary Steven Mnuchin, the Journal reported, citing officials with knowledge of the discussions, as it isn’t prepared to negotiate with a “gun pointed to its head.” Officials are also considering potential retaliation steps, the report said.

President Donald Trump instructed aides on Thursday to proceed with the additional tariffs on Chinese products despite his Treasury secretary’s attempt to restart talks with Beijing to resolve the trade war, according to 4 people familiar with the matter, Bloomberg news reported. An announcement of the new round of tariffs has been delayed as the administration considers revisions based on concerns raised in public comments, the people said. Trump may be running low on products he can target without significant backlash from major US companies and consumers, 2 of the people said.

It’s nothing new for the US administration to try to escalate tensions so as to exploit more gains at the negotiation table and China “will not just play defense” against the backdrop of “successive US offensives in the trade war,” the Global Times, a tabloid run by the official People’s Daily, said in an editorial late Sunday. Some Chinese officials advising the leadership are proposing to step up the trade fight a notch by restricting China’s sales of materials, equipment and other parts key to US manufacturers’ supply chains, the Wall Street Journal report said. Such restrictions could even apply to Apple Inc.’s iPhones, which are assembled in the mainland, the report said.


Chinese Debt Market Woes Persist:

As reported by Bloomberg news, the global retreat by some of China’s biggest and most-indebted conglomerates shows no signs of stopping, even after more than $17 billion of asset sales. A unit of HNA Group Co. last week missed payments on a 300 million yuan loan, illustrating how the once-acquisitive Chinese company will need to unload more properties and shares to overcome liquidity challenges. And in the US on Friday, Dalian Wanda Group Co. scaled back its bet on movie-theater chain AMC Entertainment Holdings Inc.

The unwinding of China Inc.’s overseas binge, and the associated debt that spooked Chinese authoritie, looks set to continue. HNA is planning to exit its investment in Deutsche Bank AG, is seeking a buyer for its container-leasing Seaco business, plans to surrender eight floors of office space in Hong Kong and is selling stakes in various Chinese units, people familiar with the matters have said. What’s more, HNA is said to be dangling billions of dollars in real estate in the U.S., London and China in front of prospective buyers.


Repatriation of USD Not as High as Trump’s Assertions:

According to Wall Street Journal report, US companies have moved cautiously in repatriating stockpiled overseas profits in response to last year’s tax-law change, despite the Trump administration’s assertions that trillions of dollars would return home quickly and supercharge the domestic economy.

The tax-law rewrite ended the practice of taxing US companies when they repatriated foreign profits. Companies, which often complained that profits were trapped abroad, held them in foreign subsidiaries, piling up global earnings to avoid additional taxes. The new law imposed a one-time tax on those old profits, removed federal taxes on subsequent repatriations and made future foreign profits generally free from US taxes. Trump said in August “close to $5 trillion” will be brought back.

However, the Wall Street Journal reviewed securities filings from 108 publicly traded companies accounting for the vast majority of an estimated $2.7 trillion in profits parked abroad, and asked each company what it was doing with the funds. In their filings and responses, they said they have repatriated about $143 billion so far this year. About two-thirds came from just two companies – Cisco Systems Inc. and Gilead Sciences Inc.

Beyond that, companies have announced plans to repatriate another $37 billion. Some with the largest stockpiles, including Apple Inc., have made general promises to repatriate, without saying when or how much. More than a dozen large companies, including General Electric Co. and Boston Scientific Corp., have said they don’t need past foreign earnings in the US or have no immediate plans to bring cash home. Far more are waiting or simply won’t say.


US Home Sales Stall:

US existing home sales have hit a wall, falling for four straight months, and next week could bring news that they slipped again last month. A decade after the financial crisis, which had its beginnings in the US housing market collapse, sales of preowned US homes remains more than 25% below its pre-crisis peak. The sales pace has dropped nearly 7% from its post-recession high last November.

As Reuters news reported, supply has been a drag on sales. The number of homes for sale is stuck near a record low and inventory growth has been negative on a year-over-year basis every month for more than 3 years. That is driving prices to a record with annual sales price increases of nearly 5%. Many economists believe the steep prices are cutting into affordability, and the limited number of homes for sale is dissuading current owners from putting their homes on the market to trade up.


JPMorgan Predicts 2020 Crisis:

A decade after the collapse of Lehman Brothers sparked a plunge in markets and a raft of emergency measures, strategists at JP Morgan Chase & Co. have created a model aimed at gauging the timing and severity of the next financial crisis. And they reckon investors should pencil it in for 2020.

According to their analysts, the good news is the next one will probably generate a somewhat less painful hit than past episodes. However, the bad news is that diminished financial market liquidity since the 2008 implosion is a “wildcard” that’s tough to game out.

JPMorgan’s Marko Kolanovic has previously concluded that the big shift away from actively managed investing, through the rise of index funds, exchange-traded funds and quantitative-based trading strategies, has escalated the danger of market disruptions. He and his colleagues wrote in a separate note Monday of the potential for a future “Great Liquidity Crisis.”

“The shift from active to passive asset management, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” Joyce Chang and Jan Loeys wrote in the Monday note. Actively managed accounts make up only about one-third of equity assets under management, with active single-name trading responsible for just 10% or so of trading volume, JPMorgan estimates. This change has “eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.


Canadian Household Debt Approaching Record High:

Canadian household debt climbed back towards a record high relative to disposable income in the second quarter, government figures showed. Credit-market debt such as mortgages increased to 169.1% of after-tax income from 168.3% in the prior 3 months, Statistics Canada said Friday in Ottawa. The record high of 170.0% was set in the third quarter of last year.

Credit-market debt grew 1.4% in the second quarter, and disposable income increased 0.9%. The report also showed Canadians are spending a greater proportion of their incomes on debt. The household debt service ratio rose to 14.2% in the second quarter, a level not seen since the fourth quarter of 2008.


FX Updates:


Spot: 1.3744

USDSGD was largely unchanged from Friday’s close earlier today, as the pair attempts to consolidate near-term. Investors are starting to focus on next week’s Singapore inflation data given the implications for MAS monetary policy. The pair has largely been sideways-bound over the past 2 months, ranging between the 1.3600 and 1.3800 handles. A break above the recent high is likely to lead to further gains to 1.3900.



Spot: 0.7156

AUDUSD lingered near Friday’s lows, around the 0.7150 handle. The pair’s rejection of the 0.7200 level potentially signals more downside. Despite the recovery attempts last week, the bears remain in control, now pushing AUDUSD back towards the 0.7100 level, as a sense of caution prevails ahead of the US tariff announcement due later on Monday.

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: 1.2992

USDCAD maintained above 1.3000 last Friday, with the pair being supported by a firming US dollar. The greenback gained momentum after the release of US data (retail sales and consumer confidence) and amid higher US bond yields. Also the loonie was pressured by a decline in crude oil prices and not so positive expectations about NAFTA negotiation.

The pair seems to finding some footing around current levels. Technically, the longer-term bias for USDCAD points to the upside; 1.3386 remains key.



Spot: 6.8725

USDCNH lingered near previous week’s highs earlier this Monday, with FX traders bracing for increased volatility for the pair. There has been speculation that, without US-China trade talks, the odds of the yuan being used as a trade weapon increase. Attention will shift again to the 6.9000 line which, if breached, could trigger a surge of interest to buy USDCNH. A break into a higher range is certainly likely to spur dollar strength across Asia.



Spot: 111.99

USDJPY reached a 7-week high last Friday amid a broad USD rally triggered by strong US data. The pair has largely maintained around 112 Monday, although yen bears look set to make a renewed push to break the 112 handle this week. An upside breakout is likely to lead to a retest of the July high 113.17.



Spot: 1.3079

GBPUSD solidified gains above 1.3000 last week, although it remains uncertain if the pair can rise further, with the UK Tory party expected to vote on Prime Minister Theresa May’s struggling Brexit plan which has already been returned face-down by EU leaders in Brussels.


Sources: Bloomberg, Reuters

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UEN: 201419754M

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