September 30, 2019

Daily Observations:

Stocks kicked off the week in mixed fashion on Monday, with a slump in Japanese shares contrasting with more muted moves elsewhere. Treasuries were little changed after gains at the end of last week. Shares in Japan, Singapore and China declined as investors took in the latest escalation in trade tensions between the world’s two largest economies – news that the Trump administration has discussed curbing China’s access to US finance.

 

China to Maintain Open Financial Markets:

China said it would continue to open up its financial markets and encourage foreign investment amid reports the Trump administration is considering restrictions on fund flows to China. “We will take further steps to promote high-quality, two-way financial opening and encourage foreign financial institutions and funds to invest in the domestic financial market to boost the competitiveness and dynamism of the domestic financial system,” according to a summary from the eighth meeting of the Financial Stability and Development Committee posted on its website Sunday.

The world’s 2 largest economies are heading into another round of high-level trade talks following China’s week-long national holidays starting Oct. 1. A US crackdown on capital flows would present a new pressure point in the economic dispute, and could cause disruptions well beyond the tariffs on hundreds of billions of dollars’ worth of products the two sides have levied against each other.

The Trump administration is considering measures including delisting Chinese companies from US stock exchanges, limiting Americans’ exposure to the Chinese market through government pension funds, and putting caps on Chinese companies included in stock indexes managed by US firms., according to people familiar with the internal deliberations, Bloomberg news reported on Saturday.

The US Treasury said in a statement over the weekend that the administration “is not contemplating blocking Chinese companies from listing shares on US stock exchanges at this time.” The statement did not address or rule out other possibilities.

US investment in China’s domestic markets is limited – residents had $203 billion of long-term mainland Chinese financial assets as of June, little more than double that held in South Africa, according to the US Treasury. Far bigger is the $1.2 trillion market capitalization of Chinese companies on three key US exchanges as of February, according to a report by the US-China Economic and Security Review Commission.

 

Hong Kong Braces for More Protests:

Hong Kong saw another weekend of violence amid protests marking the fifth anniversary of the pro-democracy Occupy movement, setting the city on edge ahead of Tuesday’s 70th anniversary of Communist Party rule in China.

Demonstrators set a subway station entrance ablaze and threw petrol bombs at police on Sunday as tens of thousands tried to march on Hong Kong’s central government offices. They were met by officers who used rounds of tear gas and a water cannon to disperse them for a second straight day.

The unrest disrupted some services in the city centre, with Hong Kong rail operator MTR Corp. temporarily closing downtown Wan Chai, Admiralty, Causeway Bay and Tin Hau stations. Emergency workers treated injured people in the streets. The violence comes as China prepares for the Oct. 1 anniversary of the founding of the People’s Republic of China, which will be marked on the mainland by “mass pageantry” in which at least 100,000 people will take part. The festivities include a military parade and an evening gala in Beijing’s Tiananmen Square.

Hong Kong is bracing for large-scale protests on Tuesday. The government canceled the city’s annual National Day fireworks on the waterfront, citing safety concerns, and banned a planned rally by major pro-democracy organizer, the Civil Human Rights Front. The group has appealed the ban, with a decision expected by authorities on Monday. Rallies have also been planned in 6 districts that have seen some of the most violent protests of recent months: Wan Chai, Wong Tai Sin, Sham Shui Po, Tsuen Wan, Tuen Mun and Sha Tin. Most of the demonstrations are set to start in the afternoon.

 

Debt-Laden Companies Outperforming Peers:

According to a Bloomberg report released on Sunday, for the first time since 2016, companies with fragile balance sheets are outperforming their sturdier peers and the broad market, a pair of Goldman Sachs indexes showed. That’s a clear sign that the rate cuts are shoring up investor confidence in heavily indebted companies, which is the segment of corporate America that’s perhaps most at risk to any downturn that hits the US economy.

The change in heart comes as the Fed seeks to stoke growth by reducing borrowing costs, reacting to signals that the US economic expansion is slowing. With long-term Treasury yields reaching a record low last month, investors may be betting that all that inexpensive debt financing will help those companies expand and drive future earnings growth.

That’s not to say there’s hasn’t been a ton of hand wringing about soaring corporate debt levels and the fallout to come when things go south. Even the Fed’s rate cut, while helpful in the short term, runs the risk of merely delaying the reckoning that will surely arrive for overzealous borrowers.

Goldman Sachs pointed out that net leverage, which measures how much companies owe for every dollar of earnings after subtracting cash on hand, for the median company in the S&P 500 spiked to a record in the second quarter. JPMorgan also flagged growing debt levels this month as a risk, saying leverage metrics are worsening.

But rather than fret, equity investors are taking a chance on riskier firms. A Goldman Sachs basket of companies with weak balance sheets has bested a gauge of strong balance sheet firms for four straight months. Up 20% year-to-date, the group of firms with more fragile finances is on track to beat the S&P 500 for the first time since 2016.

Companies have been on a refinancing tear in September, issuing bonds with lower interest rates and buying back more expensive securities. The US investment grade market, with about $155 billion priced this month, has already surpassed last September’s total, and more companies are looking to refinance with borrowing costs still low.

 

China’s Factory Outlook Improves:

A report on the health of China’s manufacturing sector improved in September on an uptick in new orders, although it was still below the line indicating contraction. The manufacturing PMI rose to 49.8, according to data released by the National Bureau of Statistics on Monday. That’s better than the 49.6 forecast in a Bloomberg survey of economists.

The non-manufacturing gauge was 53.7, above the 50 level that divides expansion from contraction. A separate PMI focused more on smaller, export-orientated firms due later Monday is forecast to show a slowing expansion.

The improved result comes after economic activity slowed in August, with industrial output growing at the slowest pace for a single month since 2002. A set of early data collated by Bloomberg showed that trend continuing in September.

 

RBA Expected to Cut Rates Again:

Markets and most Australian economists expect RBA chief Philip Lowe to cut interest rates for the third time in 5 months on Tuesday. But the man himself is giving a mixed message, according to a Bloomberg news report earlier today.

Traders see a more than 70% chance of the RBA taking the cash rate to 0.75% when its board meets in Melbourne, while 20 of 27 economists surveyed expect a cut. Their view is based on a cocktail of global risks – worsening economic growth mixed with shocks ranging from Hong Kong chaos to the US-China dispute, not to mention Brexit and an impeachment probe of the US president. And then there’s rising unemployment and falling confidence at home.

In a set-piece speech last week, Lowe acknowledged further cuts could well be required. He said the RBA couldn’t remain impervious to easing by its US and European peers, otherwise the Aussie dollar would spike and hurt growth. Yet he also repeated 3 times in the address that the economy is at a “gentle turning point” and likely to strengthen from here, while refusing to be drawn on Tuesday’s decision, having lowered in June and July.

The RBA’s back-to-back cuts matched the moves of the Federal Reserve and there is no certainty that the latter will go lower. Indeed, one of the US’s usually more dovish policy makers, Chicago Fed chief Charles Evans, last week said he doesn’t see the need to cut again because the two recent reductions should be enough.

Lowe’s confidence in an uptick, if only a moderate one, is premised on the combination of his already delivered 50 basis points of easing, government tax rebates, infrastructure spending and higher mining investment along with a weaker currency. The Aussie has slid more than 16% against the dollar since early last year, a boon to exporters.

Australia, unusually, has also mostly benefited from the US-China conflict as commodity prices spiked, fueled in part by Beijing’s stimulus to offset weaker exports. Yet, it is unlikely to continue to escape fallout from a weaker economy in its biggest trading partner. Already, growth in Chinese tourists and students to Australia have slowed sharply amid concerns about prospects for the mainland economy.

 

Gold Heads for Fourth Consecutive Quarterly Gain:

Gold is up for a fourth straight quarter, set for the best run in 8 years, as slowing growth, trade tensions and central banks in easing mode buoy demand for havens. Palladium’s done well too, trading at a record and poised for the best stretch of quarterly gains since 2000.

Bullion’s up almost 6% since July as investors added more than 200 tons to exchange-traded funds, with inflows seen every month. Still, there are signs bulls are finding it harder to made headway from here: prices are lower in September even as positive signals abound. Spot gold eased on Monday.

Bullion has rallied this year as central banks cut rates amid the US-China trade war, which is hurting global growth. Geopolitical tensions and the possibility President Donald Trump will face impeachment has added to the uncertainty. This week, investors focus on a slew of US data, including the monthly government jobs report, as well as speeches from Federal Reserve officials such as Chicago Fed President Charles Evans and New York’s John Williams for further clues on the US economy and monetary policy path.

 

Trump Seeks Treason Inquiry:

President Donald Trump called for the Democrat leading the House impeachment inquiry to be questioned for treason and demanded to meet the anonymous whistle-blower who lodged a complaint about the US leader’s request that Ukraine investigates his political opponents.

The series of Twitter posts Sunday night is his latest attack on the whistle-blower who raised concern over his controversial July phone call with Ukrainian President Volodymyr Zelenskiy now at the heart of an impeachment inquiry, and they’re likely to prompt new questions about whether Trump is violating protections in place for government employees seeking to expose unethical behavior.

Trump went on to say he wants the identities of individuals who provided information cited in the whistle-blower report.

The whistle-blower is under federal protection out of fear for his or her safety, CBS News said, citing a letter it obtained. The person’s lawyers sent a letter to Joseph Maguire, the acting Director of National Intelligence, thanking him for activating “appropriate resources” to ensure their client’s safety, and saying that “certain individuals” are offering a $50,000 bounty for the whistle-blower’s identity, CBS said.

The president further called for a treason inquiry into House Intelligence Committee Chairman Adam Schiff, saying the California Democrat had lied “in perhaps the most blatant and sinister manner” ever seen in the House of Representatives. That came after Trump called for Schiff to “immediately resign” after the California Democrat began a committee hearing with what he called a summary and what critics called an embellishment of Trump’s conversation with Zelenskiy.

 

Sources: Bloomberg

 

FX Updates:

USD/SGD:

Spot: 1.3813

USDSGD erased Friday’s gains earlier today as the pair retreated back towards its 50-day moving average, close to the 1.3800 handle. USDSGD has recently gained on the back of a stronger greenback as well as rising speculation that the MAS will ease its currency policy next month. Despite today’s pullback, the pair is expected to approach 1.3900 over the coming weeks.

 

AUD/USD

Spot: 0.6757

AUDUSD remains firmly on the downtrend as it continued to fall further earlier today, adding onto its recent decline from 0.6900 from 2 weeks ago. Traders remain focused on Tuesday’s RBA rate decision, with a possible cut weighing on the Australian dollar today despite stronger-than-expected manufacturing data coming from China.

 

USD/CAD:

Spot: 1.3239

USDCAD remained largely in consolidation phase last week, although the pair declined below its 50-day moving average of 1.3244 earlier this morning. The longer trend points to the upside, with the key support lying at 1.3000. With crude oil prices stabilizing over the past few days, the downside for USDCAD should, for the time being, be limited. The resistance to the upside remains at 1.3386, a 3-month high.

 

USD/CNH:

Spot: 7.1227

USDCNH retreated from a 3-week high earlier today, falling by as much as 0.3% to 7.1186 following better-than-expected PMI data. Not much action is expected as China embarks on a week-long national holiday starting Tuesdays, and as investors await news from US-China trade talks.

 

USD/JPY:

Spot: 107.93

USDJPY ended last week with modest gains, just shy of 108, as the pair pared some of those gains earlier today to start of the new week. Potential risk events continue to buoy demand for the safe haven yen; recent risk-off events including the potential impeachment of Trump and reports suggesting the US is considering putting limits on US investors’ portfolio flows into China and delisting Chinese companies from US stock exchanges. The shorter-termed support lies at 107, coinciding with the 50-day moving average. The major support below is at 104.50.

 

GBP/USD:

Spot: 1.2288

GBPUSD remains supported at its 50-day moving average of 1.2260, but only just. A failure to maintain above could pave the way for another down move, back closer towards 1.2000, a key support level. The political pessimism in the UK recently got an additional boost as Prime Minister Boris Johnson signalled readiness to avoid law forcing him to delay Brexit. However, the UK Telegraph indicated that the opposition Labour party backed remain alliance is under the process of forming a political plot that will push the Tory leader to obey the rule. Adding burden on the political watchers is The Guardian’s news report stating that the case involving possible conflict of interest when PM Johnson was mayor of London is given to police for further inquiry.