Issue#: 380/2017

Spot values at a glance:

USDSGD

USDCNH

AUDUSD

USDJPY

USDCAD

GBPUSD

Daily Observations:

Global bonds declined as optimism over the health of the US economy and President Donald Trump’s tax-cut plan pushed Treasury yields higher with the US dollar. Most Asian stocks outside of Japan pared earlier gains as investors began to assess the implications of the much-anticipated tax proposal.

Tax Reform:

  • Republicans unveiled their nine-page blueprint for tax reform on Wednesday, which reduces the number of individual brackets, eliminates the estate and alternative minimum taxes, and removes some popular tax deductions.US President Donald Trump billed the plan as a “revolutionary” win for American workers. He pledged that the corporate tax rate would be lowered to at least 20% in a bid to incentivize domestic activity and employment.
  • Contrary to Trump’s assertions, however, the proposal offers more than $1 trillion in tax breaks for the wealthiest Americans, with the proposed framework calling for capping the tax rate on such pass-through businesses at 25%. Businesses organized that way don’t pay income tax themselves, instead passing earnings to their owners, who pay at their individual rates. Owners with high business incomes, who currently face a top rate of 39.6%, are in for major tax relief, policy analysts said according to a Bloomberg report.
  • Moreover, some senators may be wary of how much the tax cuts could boost the budget deficit. GOP Senator Bob Corker has said while he supports lower taxes, he won’t back legislation that increases deficits such as last night’s proposed tax framework. Senate Republicans need every vote they can get to pass tax cuts with 50 votes in a chamber they control by a 52-48 margin.
  • According to another report from Bloomberg, although Republicans say the plan is to reduce the corporate tax rate to 20 percent from the current 35%, the Institute on Taxation and Economic Policy found that more than 250 of the largest US companies already paid an effective rate of just 21.2% from 2008 to 2015. This may indicate the promised corporate tax cut won’t be much of a cut.
  • Goldman Sachs estimated that S&P 500 companies will earn a collective $139 a share in 2018, and predicts that every one percentage-point reduction in tax rates would raise profits by $1, thus indicating the best stock bulls can expect is slightly less than a 1% boost to earnings from the proposed tax cuts.

US:

  • Treasuries slid as traders reacted to the tax reform; longer-termed 30yr yields rose by the most this year to gain 9bps, while the benchmark 10yr Treasury yield rose 7bps to 2.31% in New York.
  • The US dollar pushed higher against all currencies, driven by the expectation that the fiscal boost to companies will help growth and spur inflation. The Dollar Index broke above its 50-day moving average for the first time since April, and looks set to test the 94 handle soon.
  • Small-caps stocks were boosted, with investors expecting higher-taxed smaller companies to benefit the most form the proposed tax cuts since they get more of their sales domestically. The Russell 2000 Index climbed to a record high for the third straight session in a row Wednesday, outperforming the S&P 500 Index by the most since November.
  • The S&P 500 pushed back above its 2,500 handle, ending the session just short of a new record high. Bank and tech stocks outperformed; the Nasdaq Composite rallied 1.2%.
  • The synchronized increase in stocks, Treasury yields, and the US dollar has prompted analysts on Bloomberg to claim the so-called ‘Trump trade’ might be back on.
  • In a pushback against Yellen’s recent hawkishness, the Fed’s St. Louis President James Bullard said he opposes further rate increases because inflation continues to lag economic growth. He added “US inflation has surprised to the downside in recent months and the surprise is unlikely to reverse in 2017”.

Canada:

  • Bank of Canada Governor Stephen Poloz said he will proceed “cautiously” as he gauges the impact of two interest rate increases on the economy. In a rather-dovish speech, Poloz said in a speech it’s still not clear whether the economy has run up against the sort of capacity constraints that would warrant higher borrowing costs from here, particularly with inflation and wage growth sluggish. That means the Bank of Canada won’t move ahead on interest rate hikes mechanically and will be watching data closely for clues, he said.

UK:

  • BOE official Andy Haldene said he’s among the MPC minority who sees the UK “nearing a point” where a reduction in stimulus might be warranted. He added “this would be a sign of the economy healing, and therefore adjusting to that healing process”.

Precious Metals:

  • Spot gold sank to its lowest in a month, by 0.7% to $1,281.56/Oz earlier following the tax cuts announcement last night. With the failure to hold above the key $1,300/Oz handle, coupled with a break below its 50-day moving average last night, the momentum has shifted to the downside for the precious metal.
  • The next support below lies around $1,240/Oz – a Fibonacci retracement level of gold’s rally from mid-July to mid-September.
  • Silver for immediate delivery descended to a fresh 5-week low, 0.8% lower at $16.7253/Oz.

Oil

  • Crude oil futures maintained around the $52/bbl handle earlier today, following a surprise drop in US stockpiles last night, the first decline since Hurricane Harvey hit the Texas coastline last month and shut refineries.
  • Crude inventories slid by 1.8 million barrels last week, while the pace of oil output gains slowed, according to an Energy Information Administration report.
  • However, Libyan output is climbing again after disruptions, nearing the 1-million barrel a day mark.

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.

 

FX Updates:

USDSGD:

  • Spot 1.3597
  • USDSGD edged 0.1% higher to 1.3607 to test its 1-month high. Continued USD strength may propel the pair higher to the 1.3700 handle.
  • 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 0.7823
  • AUDUSD neared a 2-month low after falling by as much as 0.5% to 0.7821.
  • The support at 0.7800 remains intact, although a break below it may lead to a reversion back to the 200-day moving average of around 0.7650.
  • The currency pair is expected to remain pressured with iron ore futures at a 3-month low.

USDCAD:

  • Spot 1.2497
  • USDCAD ascended above the 1.2400 handle to gain 0.9% to 1.2497, spurred on by Poloz’s dovish comments and USD strength overnight.
  • The next resistance level lies at 1.2778 – a 9-week high.

USDCNH:

  • Spot 6.6479
  • The PBOC weakened its reference rate earlier today by 0.14%, to 6.6285 per US dollar.
  • USDCNH gained 0.2%, reaching its 50-day moving average for the first time since June.

USDJPY:

  • Spot 112.90
  • USDJPY is currently unchanged on the day, following a 1.0% gain the previous session to its highest level since July.
  • With a break above the 200-day moving average confirmed, the next key resistance to be tested lies at the 6-month high of 114.48.

GBPUSD:

  • Spot 1.3385
  • GBPUSD shed 0.4% to 1.3373 following the continuing strengthening of the US dollar.
  • BOE Governor Carney is set to speak later today and sterling traders will keep an ear out for any comments regarding future interest rate hikes.
© Jachin Capital Pte Ltd

UEN: 201419754M


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