Issue#: 485/2018

Spot values at a glance:







Daily Observations:

Asian stocks rose across the board and long-term US Treasury yields hovered near 4-month highs on Wednesday with investors looking past the latest escalation in the US-China trade feud, seen by some market participants as less severe than expected. The US dollar remained steady while the yuan gained after China’s Premier Li said he won’t let the currency devalue to stimulate exports.


Trump Introduces More China Tariffs:

The Trump administration will slap a 10% tariff on about $200 billion in Chinese goods, taking effect on Sept. 24. That’s more than double the rate in 2019, setting up what could be a prolonged trade war between the world’s 2 biggest economies. The administration is giving US businesses a chance to adjust and look for alternative supply chains by delaying an increase of the tariff to 25% until next year, 2 senior administration officials who declined to be identified told reporters by conference call on Monday.

The latest round of duties comes on top of a 25% tariff already imposed on about $50 billion in Chinese goods, which triggered retaliation from Beijing on the same amount of US imports.


China Retaliates:

China announced it will take retaliatory tariff action against $60 billion of US goods, sharply escalating their trade conflict as the Trump administration considers imposing duties on almost all Chinese imports. China’s retaliatory tariffs, on items ranging from meat to wheat to textiles, will take effect on Sept. 24, China’s Ministry of Finance said in a statement.

Beijing is still ready to negotiate an end to the trade tensions with the US, the ministry said. At almost the same time Beijing released its list of counter-tariff targets, US President Donald Trump on Tuesday threatened more punitive measures against China if it targets politically potent US agricultural products for retaliation. “China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me,” Trump said on Twitter. “What China does not understand is that these people are great patriots.”

Beijing’s plans for tariffs on $60 billion of US goods includes an additional 5% duty on about 1,600 kinds of US products including smaller aircraft, computers and textiles and an extra 10% on more than 3,500 items including chemicals, meat, wheat, wine and LNG. In a previous announcement from August, those products had faced extra tariffs of up to 25%.

President Xi Jinping’s government is preparing for Trump to put duties on all Chinese goods, and expects him to start using the US’s military, technological and financial advantage to pressure Beijing, according to one Chinese official.


China Won’t Devalue Yuan:

China won’t devalue its currency in order to make its exports more competitive amid the trade war with the US, Premier Li Keqiang said, hours after his country retaliated against the latest increase in tariffs by the Trump administration.

Recent fluctuations in the renminbi exchange rate have been seen as an intentional measure, but that isn’t true, Li said in a keynote speech at the World Economic Forum in Tianjin on Wednesday. China won’t devalue the currency to stimulate exports, he said.

Li said that policy makers are currently facing more difficulty in keeping stable economic progress, and will now make greater efforts to prioritize employment. The government is also seeking ways to further cut taxes and fees, he said.


Koreas Agree Denuclearization Path:

North Korea agreed to dismantle a key missile test site under the watch of international inspectors and take other steps toward denuclearization, according to a joint statement signed by Kim Jong Un and South Korean President Moon Jae-in in Pyongyang earlier today.

North Korea is willing to move toward dismantling its main Yongbyon nuclear site if the US takes reciprocal actions, the statement said, without providing further details. The 2 nations repeated an agreement to work toward denuclearization and create peace zones along the border, Moon said at a joint briefing with Kim.

“We agreed to make active efforts to turn the Korean peninsula into the land of peace without nuclear weapons or nuclear threats,” Kim said at the briefing. The North Korean leader would likely visit Seoul later this year, Moon said. He added, “Chairman Kim has clearly shown a way to denuclearization on the Korean peninsula today. We have agreed on a Korean Peninsula without nuclear weapons, without nuclear threats and without a war.”

The complete denuclearization of the peninsula is “not far,” Moon said. “South and North Korea have agreed to collaborate closely with the US and the international community for the final achievement of denuclearization.”


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.


JPMorgan Recommends Switching from US Equities to EM:

According to a recent note to clients, strategists from JPMorgan Chase & Co., led by Marko Kolanovic, is advocating cutting US holdings in equities and adding money to emerging markets. As the benefits from President Donald Trump’s tax cuts dissipate, the world’s largest economy is set to lose its edge in growth, they said. For the last few months in stocks, the world’s loss has often seemed like America’s gain; the S&P 500 is up almost 9% while everything else is down more than 6%, taken as a whole.

“The large US fiscal boost this year, as well as the delayed positive impact of weak USD and low rates from last year created a ‘sugar high’ for US assets this year,” the strategists wrote. “We expect convergence of macro fundamentals between US and international markets in the coming quarters; with equity markets tending to price forward fundamentals by 6 to 12 months, the time for the rotation may be now.”

Last week, JPMorgan estimated that the combined per-share earnings for S&P 500 companies could drop by as much as $10 if bilateral tariffs of 25% are imposed. This year’s earnings forecast for the benchmark is $165 per share.

“We gradually trim exposure to US stocks and dollar assets, as they acted as a trade war ‘safe haven’ so far, but investors may ultimately rotate into more attractive foreign assets if trade concerns ease,” Kolanovic wrote. “The trade war and asset outflows already impacted foreign assets, creating an FX advantage and attractive valuations.”


Markets Begin to Price in 3 Hikes for 2019:

According to Bloomberg news, investors in recent weeks have moved closer to the Fed’s projected path of 3 rate hikes next year (they’re now pricing in 2), following increases next week and in December. Although some bond managers still doubt that inflation will be enough of a threat to warrant as much tightening as policy makers expect.

This divide may persist at least until November, when the results of US midterm elections make it easier to gauge the potential economic tailwind from fiscal policy. The resolution of the debate over the course of interest rates could prove to be a slow meeting in the middle of the 2 camps. But it may also deliver a painful blow to bond bulls or even the Fed’s credibility. Either way, the standoff is expected to lead to  heightened turbulence in debt markets after one of the most subdued stretches in decades.

Traders ramped up bets on 2019 Fed hikes after labor-market data released Sept. 7 showed wages jumped in August by the most since the end of the recession. But a handful of investors still aren’t convinced inflation will accelerate, a view that gained traction after unexpectedly tame consumer-price figures last week.

The market has been reluctant to price in the Fed’s projected path since this tightening cycle began in 2015, especially after the central bank fell short on delivering the multiple hikes it projected for 2016, eventually moving only once. The dynamic started to change ahead of the March 2017 tightening, when traders had to scramble to price in a hike in response to Fed signals. Derivative traders see the funds rate only reaching about 2.8% by the end of 2020, whereas in June, the median of Fed officials’ forecast was for 3.4%.



FX Updates:


Spot: 1.3707

USDSGD was largely unchanged from Tuesday’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: 0.7227

AUDUSD is trading around a 2-week high, as the pair makes another attempt to break above the 0.7200 handle, buoyed by continuous advance in local bond yields. However, with the US-China trade dispute escalating, any further gains in the currency pair is likely to be muted.  To the downside, the psychological 0.7000 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: 1.2972

USDCAD declined to a 2-week low on Wednesday, ahead of Canadian Foreign Minister Chrystia Freeland’s arrival in Washington later today to resume Nafta talks with US Trade Representative Robert Lighthizer. Only a few days likely remain until a handshake deal would need to be reached in order to generate text of an agreement by Sept. 30, which is the deadline to allow a new version of Nafta to be signed before Mexico’s incoming president takes office.

Technically, the longer-term bias for USDCAD points to the upside; 1.3386 remains key. A break below 1.2888 would be a bearish signal.



Spot: 6.8531

USDCNH declined sharply on the day, after Premier Li Keqiang said earlier China won’t devalue its currency in order to make exports more competitive amid the trade war with the US. The currency pair has largely fluctuated between 6.8000 and 6.9000 over the past month.

Renewed trade tensions may shift focus again back 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: 112.36

USDJPY climbed to a fresh 2-month high Wednesday, gaining by as much as 0.3% to 112.432, after 10yr Treasury yields rose to their highest since May this year. The pair remained little change after the BOJ kept rates unchanged this morning and reiterated a rosy view. Following its breakout above the 112 resistance, the July high of 113.17 is likely to be tested next.



Spot: 1.3151

GBPUSD lingered near a 6-week high earlier, after UK Prime Minister Theresa May was said to rule out a second Brexit vote in a report. The pair is currently testing its 100-day moving average of 1.3166. After solidifying gains above 1.3000 last week, GBPUSD could see more upside momentum over the near term.


Sources: Bloomberg

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