September 27, 2017

Daily Observations:

Asian equities were mixed, with gains in Hong Kong, Shanghai, Singapore and Seoul offset by declines in Tokyo, Sydney, Kuala Lumpur and Jakarta. The US dollar maintained overnight gains after Fed Chair Janet Yellen adopted a hawkish tone last night. Trump and Republican leaders will announce their tax plan Wednesday, cutting rates for corporations as well as proposing a top individual income tax rate of 35%.

Geopolitics:

• President Donald Trump said the US is “totally prepared” to use “devastating” military force against North Korea, though he would continue to push for a peaceful denuclearization. The US announced more sanctions in a bid to curb Kim Jong Un, taking aim at banks and individuals with ties to the regime’s financial networks.
• According to the Washington Post, North Korean government officials have been quietly trying to arrange talks with Republican-linked analysts in Washington, in an apparent attempt to make sense of President Trump and his confusing messages to Kim Jong Un’s regime.

US:

• Federal Reserve Chair Janet Yellen said gradually raising interest rates is the most appropriate policy approach amid higher uncertainty about inflation, reinforcing the US central bank’s forecast for another hike this year. She called it “imprudent to keep monetary policy on hold until inflation is back to 2%”.
• According to Bloomberg pricing data, traders are pricing in around a 70% chance of a hike at the Fed’s meeting in December, up from 63% on Monday.
• Atlanta Fed President Raphael Bostic told reporters he’s “feeling pretty comfortable” about another interest rate increase at the central bank’s final meeting of the year, while his colleague Fed Governor Lael Brainard struck a more cautious tone in her speech, warning that income inequality may damp US consumer spending.
• Republican Senator Richard Shelby, who said he’d spoken to the president about the Fed, doesn’t think Yellen will be re-appointed. Yellen’s term as chair expires Feb. 3. Vice Chairman Stanley Fischer has said he will leave the Fed next month.
• Trump and Republican leaders will announce their long-awaited tax overhaul plan Wednesday, cutting rates for corporations and pass-through business to 20% from 35%. They’ll also propose a top individual rate of 35%, down from 39.5%, but leave to Congress the decision of whether to create a higher bracket for top earners.
• The S&P 500 Index gave up its gains late in the day to finish virtually flat, while tech stocks pared back some of Monday’s damage to push the Nasdaq Composite 0.15% higher.
• The US dollar extended its recent recovery overnight, with the Dollar Index gaining past 93 during it session following comments from Fed Chair Janet Yellen.
• As such, yields on 10yr Treasuries recovered to close 2bps higher at 2.24%, while 2yr yields rose to 2.16%, its highest level since early March.

Canada:

• Finance Minister Bill Morneau said that the current strength of the Canadian dollar is a reflection of their positive economy. He added that Canada’s economy can continue to grow amid Canadian dollar strength by increasing productiveness to ensure businesses are successful.

UK:

• The European Union welcomed UK Prime Minister Theresa May’s “more realistic tone” on the Brexit negotiations but said her concessions don’t go far enough, suggesting prospects of starting trade talks as soon as next month continue to fade.
• At the heart of the latest dispute are differences over sequencing: Britain says it won’t agree to pay an exit bill unless it gets a trade deal and the EU insists it won’t discuss trade until Britain agrees to pay its obligations. Disagreements also persist in other areas, including the rights of EU citizens living in the UK, and the options for avoiding reinstating a border in Ireland.

China:

• The world’s second-largest economy may be faring well this year but 2018 is shaping up to be less positive, with progress on reducing debt and industrial capacity proving elusive, according to the China Beige Book. Although this year still looks “far better” than the past two years, faltering demand signalled by a reversal of the 5-quarter commodity rally may be in store for 2018, according to the private survey.

Singapore:

• Industrial production in August gained 19.1% from a year ago, slowing from the 21.2% expansion in July; economists were expecting a 16.0% increase. On a seasonally adjusted month-on-month basis, industrial production grew 0.6%, down from 0.9% in the month prior but beating the median estimate of a 0.4% contraction.
• According to BNP Paribas SA, “very significant” income growth will drive the first leg of a recovery in home prices in Singapore, where property ownership as a proportion of household assets is near a record low, and boosting prices by 10% to 15% over the next 12 to 15 months.

Precious Metals:

• Spot gold declined 1.1% to $1,289.53/Oz earlier today after Yellen reiterated gradually raising rate is an appropriate policy stance, boosting odds of another rate hike this year.
• Failure to hold above the recent low of $1,288/Oz could lead to another leg down for the precious metal, with the next support target lying at $1,265/Oz – the 50% retracement level of gold’s rally from mid-July to mid-September.
• The world may have already produced the most gold in a year it ever will, according to Randall Oliphant, the chairman of the World Gold Council. Production is likely to plateau at best, before slowly declining as demand rises, especially given global political risks and robust purchases by consumers in India and China, Oliphant said in an interview Monday. He added prices could climb to as high as $1,400/Oz in the next 12 months, and top record highs in the “medium term”.
• Silver for immediate delivery descended to a fresh 1-month low, 1.6% lower at $16.7812/Oz.

Oil

• Crude oil futures rebounded above $52/bbl earlier today, following its 0.7% decline last night. Oil rose by as much as 0.5% to $52.16/bbl earlier today after the American Petroleum Institute was said to report inventories fell 761,000 last week. Government data due later today is forecast to show they expanded by 3.1 million barrels, according to a Bloomberg survey.
• Those in the oil market fearing a flood of OPEC supply next year will probably be better off preparing for a shortage, according to Citigroup Inc. 5 countries in the group – Libya, Nigeria, Venezuela, Iran and Iraq, may already be pumping at their maximum capacity this year, Ed Morse, the bank’s global head of commodities research, said in an interview. Rather than a surge in output, there’s a risk of a market squeeze emerging as early as 2018, driven by those nations because of weaker investment in exploration and development, he said.

Weekly Thematic News:

China Online:

• Baidu Inc.’s iQiyi is targeting a U.S. initial public offering as soon as in 2018 that could value China’s most popular Netflix-style streaming video service at more than $8 billion, two people familiar with the matter say. IQiyi, the only Chinese service that licenses shows from Netflix Inc., needs to build up its war chest as it battles rival platforms run by Alibaba Group Holding Ltd. and Tencent Holdings Ltd. Baidu, which is also investing heavily in artificial intelligence and autonomous vehicles, needs to buy and create more content to sustain its lead among online video platforms, based on time spent.

Renewables:

• About 68% of global investors intend to increase green investments and one-in-two companies has a strategy to reduce their environmental impact, according to a survey commissioned by HSBC Plc published Sept. 12. Most companies said they lack any clear competitive advantage to be more transparent, particularly regarding cost of funding. Only 66% of the investors surveyed hold green bonds, which isn’t surprising given that total outstanding issuance is relatively small at $232.2 billion in July, according to the report.
• The report estimates that about $90 trillion of investment is needed in new green infrastructure over the next 15 years. In 2016, $22.9 trillion of assets were managed under responsible investment strategies, a 25 percent increase from 2014.
• In separate news, Morgan Stanley and Citigroup Inc. announced they will get all of their energy from renewables in a few years. The banks are aiming for their operations to be carbon-neutral, Morgan Stanley by 2022 and Citi by the end of the decade. Both plan to buy power from clean energy projects.

Solar Energy:

• Solar installers are looking to partner with companies, as they wrestle with a market that is shrinking after 16 years of rapid growth. Their long-time sales model of knocking on doors, cold calling at home and setting up mall kiosks has proven to be costly. Some have realised it might be more effective to use the umbrella of bigger established companies to find customers, according to a Bloomberg report.
• Sunrun Inc., for example, will try to sell panels through Comcast Corp., the biggest cable-TV company in the U.S. Last month, the two agreed to a deal in which Comcast will use its vast marketing arm to tap some of its 27 million customers for solar. Vivint Solar Inc. is now bundling its panels with an energy management system offered by Vivint Smart Home, a sister company.
• Solar companies hope the alliances will solve a problem of high customer-acquisition costs that often run 20% of expenses, sometimes exceeding the panels themselves. They also address another issue: Some potential customers are reluctant to sign on to decades-long contracts with relatively small, little-known companies. That could change by associating with brand names.
• Through early 2016, installers had an almost singular focus on growth, using no-money-down leases to pump up sales. The industry grew a staggering 48% in 2015, but slowed last year to 20%, and seems to be coming to halt this year with new residential installations expected to drop by 2.4% over 2016, according to Bloomberg New Energy Finance. Shifts in government policies have played a big role in diminishing some of the financial incentives for homeowners to install a solar system. The decline has been most evident in California, the biggest US solar market.

Electric Vehicles:

• The internal combustion engine’s days may be numbered in California, where officials are mulling whether a ban on sales of polluting autos is needed to achieve long-term targets for cleaner air. Governor Jerry Brown has expressed an interest in barring the sale of vehicles powered by internal-combustion engines, though the earliest such a ban gets imposed is at least a decade away.
• Dyson Ltd., best-known as a manufacturer of vacuum cleaners, hand driers and air filters, will build an electric car by 2020, founder James Dyson said Tuesday. The company is investing one billion pounds to develop the car, plus the same sum to create solid-state batteries to power it, Dyson said. These investments will dwarf money the company is spending on research and development for its vacuums and air filters.

Cybersecurity:

• The vulnerability of governments and businesses to cyberattacks was exposed again last week when a top US financial regulator said hackers had breached its electronic database of market-moving corporate announcements in 2016, and may have profited from the information they stole through the use of illicit trades.
• Singapore has overtaken nations including the US, Russia and China as the country launching the most cyber-attacks globally, according to Israeli data security firm Check Point Software Technologies Ltd. A key Southeast Asian technology hub, much of the internet traffic flowing through Singapore originates in other countries. That means a cyber-attack recorded as coming from Singapore may have been launched outside the country.

USDSGD:

• Spot 1.3554
• USDSGD gained 0.3% to a 3-week high on the back of the USD’s recovery.
• The main trend since the start of the year remains to the downside, although a break above the key resistance around the 1.3600 could indicate a reversal is on the cards.

AUDUSD:

• Spot 0.7859
• AUDUSD sank to its lowest in more than a month last night, falling 0.5% to a low of 0.7859 at one point, as weak metal prices continue to weigh on the Australian dollar.
• The currency pair is expected to remain pressured with iron ore futures maintaining near 3-month lows. A retreat back to 0.7800 is likely.

USDCAD:

• Spot 1.2355
• USDCAD retreated after testing the 1.2400 handle overnight, as expected, to fall 0.5% to 1.2331 following Morneau’s hawkish comments.
• The key resistance remains along the 1.2400 handle. A breakout above it could lead to the next resistance level of 1.2778 – a 9-week high.

USDCNH:

• Spot 6.6301
• The PBOC strengthened its reference rate earlier today to 6.6192 per US dollar, higher than expected in a Bloomberg survey.
• USDCNH was little changed on the day this morning, paring a 0.3% overnight gain.
• A stronger-than-expected fixing earlier today could signal that the PBOC feels the recent decline in the yuan is enough, according to an ANZ strategist.

USDJPY:

• Spot 112.42
• USDJPY rebounded 0.7% back above the 112 handle and its 200-day moving average, following hawkish comments from Yellen last night.
• The recent high of 112.72 is expected to be breached soon, with the next key resistance lying at the 6-month high of 114.48.

GBPUSD:

• Spot 1.3434
• GBUSD was little changed on the day, after falling 0.3% in its prior session after EU President Donald Tusk said on Tuesday he didn’t see enough concessions from Britain to progress to discussions of future trade. y.
• On the monetary policy front, the BOE is still widely expected to raise rates in the coming months, and increasing rate hike expectation should push to currency pair toward the 1.4000 handle.