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Market Commentary
·
FX markets have
been more exciting lately with AUD/$ and AUD/JPY dropping 4.1% and 6.5%
respectively whilst $/CHF moved down by 4.1%. Interestingly, EUR/$ actually
rallied +4.8% despite being a risk-on currency pair and at odds with how equity markets have been behaving last
+1M. Broadly speaking, still USD weakness though with USD index falling 3.4%
since last month. Took a deeper dive and AUD/JPY still trading upwards having
been congestion channel 58 – 123 since 1988 despite recent downturn due to
Trump induced volatility
·
On 14/03,
Stifel economists quipped “rather than double down with additional rate
reductions… the Committee is presumably better suited to maintain its
‘wait-and-see’ approach”. Whilst the market is expecting three rate cuts, the
Fed will likely maintain optionality, preferring to strike a balanced tone and
not give too much away in terms of policy direction. However, the summary of
projections, which will accompany the rate decision, is likely to force the Fed
into divulging fresh clues on further rate cuts.
·
On 24/02, BofA sees structural strength in the US
economy driven by “sustained pickup in labor productivity growth” and argues
that the productivity cycle will be long lived due to increased business
formation, reduced regulation and capital deepening. BofA also noted that
capital stock in the US is “old, inefficient and in need of refurbishment”.
After decades of dominance by tech spending, capital expenditures have
broadened driven by fiscal support, the need for date centers, aging
infrastructure and reshoring. Whilst AI has been discussed as potential game
changer, BofA is cautious about its immediate impact on the macro. The bank
also sees a link between productivity cycles and stronger equity market returns
with higher rates, nominal growth, pickup in demand and above-average S&P
500 returns. The rise in hurdle rates could also limit the survival of zombie
companies which tend to drag productivity. The bank believes productivity gains
could push US GDP growth to 2 – 2.5% range above The Street.
·
On 09/03, Trump refused to rule out the possibility of
a US recession due to his recent policies saying “there was a period of
transition because what they are doing is very big”. Trump had earlier imposed
25% tariff on Mexico and Canada but later exempted them for 1M. He also
increase tariffs on Chinese good which prompted retaliatory measures and has
set to impose worldwide reciprocal tariffs on 02/04 which could further erode
market sentiment.
·
On 12/03, Trump announced a significant increase in
tariffs on steel and aluminium imports from Canada by raising them from 25% to
50%. Trump has also called for Canada to eliminate what he describes as
“Anti-American Farmer Tariff” of 250% to 390% on various US dairy products. In
his statement, Trump also threatened to declare a National Emergency on
Electricity within the threatened area, which he believes will empower the US
to address what he considers “abusive threat” from Canada. He also warned if
Canada doesn’t not drop other significant tariffs, he will further increase
duties on 02/04 on cars imported from Canada a move he says could “ permanently
shut down the automobile manufacturing business in Canada”
·
On 01/03, Trump signed a memo ordering Commerce
Secretary Howard Lutnick to initiate a national security investigation into US
lumber imports under Section 232 of the Trade Expansion Act 1962. On 24/02,
BofA analysts noted that proposed US tariffs on imported PC and components
could cause significant price hikes, supply chain instability and long-term
shifts in manufacturing. By passing on costs to buyers, PC prices could rise
10% in US or spreading smaller price increase globally. Businesses may delay
upgrades and lower price PCs could see an impact from more price sensitive
customers. Price increases will likely offset margin pressure but could be
demand destructive and despite efforts by OEM manufacturers to shift
production, China remains the dominant hub for PC assembly and components. This
explains why Taiwanese companies Quanta, Wistron and Inventec still operate
largely in China. Even if final assembly move to other countries, many critical
parts will still come from China, impacting overall costs. To avoid tariffs, HP
and Dell have expanded laptop production in Mexico and Thailand whilst Apple
has moved some MacBook production to Vietnam.
·
Noticed US
manufacturing PMI been trending towards the upper end of the range 53 in Feb
2025 from lows 46 in Jul 2023, which support the inflationary argument. Despite all
this Trump tariffs and DOGE fear, US PCE inflation indicator still keeps
dropping. This clearly shows it is the animal spirits driving valuations not
macro data right now.
·
On 24/02, Bank Indonesia conducted a bold intervention
in the FX market after the rupiah fell to its lowest level against the USD
since 03/20. Edi Susianto who heads monetary management told Reuters that the
depreciation was due to Trump’s trade policies. Right now, $/IDR capped around
16000 levels otherwise would have breached $16800 and beyond.
·
On 21/02, BSP announced a cut in the RRR by 200 bps to
5% effective 28/03 which lowers the reserve requirement for universal and
commercial banks. Additionally, the RRR for digital and thrift banks will be
reduced by 150 bps and 100 bps respectively. This decision follows BSP’s
unexpected move to maintain interest rates during a policy review that week.
Since then, $/PHP has dropped from 57.80 to 57.20 which whilst meaningful not
outside the congestion channel
·
Global
equities have remained weak with MSCI World Index crashing 13.4% since 21/02 all
due to fears of Trump’s tariffs inducing a US recession. Having said that, US
GDP growth still at healthy 2.4% so it is clear that its animal spirits in the
driver seat. More importantly, during Trump 1.0 the US economic did not
actually contract but that was enough to send the S&P 500 down +30% for
that trading cycle. Also, noticed there was a clear breakout of double top
formation at 5780 on 03/03 with 1D DMI crossover. Seems last Fibo 6100 sell was
indeed the market top this cycle and we can safely dismiss the 6700 Fibo target
given recent sell-down. For those of you looking to clear more US equity
positions, typically such massive selldowns accompanied by huge short covering.
Assuming 5118 which is the Fibo 38.2% retracement levels is the end of the
interim selling, we can target 50% pullback to around 5600 as a good exit
level. Typically short covering in the S&P 500 around 38.2 – 78.6%
retracement.
·
European
indices also battered with STOXX 600, CAC 40 and Russia Index dropping 10.4%,
10.8% and 15.3% respectively with TAIEX falling 8% too. Interestingly, China
and rest of ASEAN indices have been resilient so far, which makes sense given
they haven’t really rallied last +2 yrs. Index style-wise the selling is
indiscriminate from small cap, growth, value and dividend stocks all taking the
hits around 16 – 20% downwards. And unsurprisingly, the VIX has rallied 148.8%
reinforcing that fear and uncertainty has taken control of the markets.
·
On 11/03, Citigroup downgraded US equities to neutral
and upgraded Chinese equities to overweight citing a pause in so-called US
exceptionalism with regards to its economic growth lagging the rest of the
world. The downward revision of US equities from overweight position which Citi
held since Oct 2023 was triggered by cautionary signals from two of the bank’s
models. In the credit sector Citi has removed its US high yield overweight, now
underweight in US investment grade credit whilst also closing its underweight
position in EU investment grade credit.
·
On 10/03, GS analysts project that S&P 500
dividends will grow by 6%p.a. despite recent market volatility with a payout
ratio of 30% and dividend of $80 per share. They also cautioned that a 10%
universal tariff by the US could lead to a 3% hit to regional Asian earnings
and 4% decline in valuations in Taiwan, Korea and Japan most exposed. The bank
maintains a positive stance on Chinese equities but flagged expectations of
profit taking after 30% rally since mid-Jan 2025. Japan is reiterated to be overweight
citing strong investment case despite the yen’s fluctuations. In contrast, it
held its marketweight views on India, Korea and Taiwan with investors watching
the impact of tariffs and macroeconomic shifts
·
On 01/04, Ed Yardeni now sees S&P 500 potentially
ending 2025 at 6000 in his revised best-case scenario as he trims earning
expectations amid stagflation risk tied to new US tariffs. The equity
strategist has reduced the probability of his base-case Roaring 2020s scenario
to 55% from 65% whilst raising the chance of a stagflationary outcome, which
could include “a shallow recession later this year, following a buy-in-advance
shopping spree during Apr and May”.
·
On 14/03, Barclays analyst said despite improved
technical that could support short-term rebounds, rallies likely to be sold
until Trump or Fed pivot. Which hard economic data and credit resilience
suggest no imminent recession, the banks says concerns over Trump’s
administration policies and stagflation risk weighing on sentiment. US equities
been hit hard with NASDAQ and tech stocks down double digits from their highs,
BTC/$ and Magnificent 7 down 20% and 10y US Treasury yield down 50 bps.
·
After the White House clash between Trump and
Zelenskiy, we saw Republicans lash out against Zelenskiy. South Carolina
Senator Lindsey Graham called for Zelenskiy to change his tune or resign saying
“What I saw in the Oval Office was disrespectful and I don’t know if we can
ever do business with Zelenskiy again”. On 27/02, Republican Senator Jim Risch,
chairman of the Senate Foreign Relations Committee did not say a minerals deal
would garner more Republican support but saw it as instrumental in bringing the
war to an end. “I think there will be a settlement but as in all settlement,
each party needs to come away and be able to tell their constituents they won”.
·
Rare earths are a group of 17 elements including 15
silvery-white metals called lanthanides plus scandium and yttrium. They are
used in a wide range of products including consumer electronics, EV, aircraft
engines, medical equipment, oil refining and military applications such as
missiles and radar systems. China accounts for about 60% of global mine
production and 90% of processed and permanent magnet output. Beijing sets
quotas on output, smelting and separation which are closely monitored
barometers of global supply.
·
On 10/03, US Energy Secretary Chris Wright said
soaring US power demand growth is a train wreck waiting to happen and requires
big investment and regulatory changes to meet. He also added that the Trump
administration intends to reverse what he called US electric vehicle mandates.
·
On 28/02, Canadian and Mexican officials have fanned
out across Washington seeking to show Trump they were making progress in
securing their US borders to curb fentanyl access. US Secretary Scott Bessent
said Mexico had proposed matching US tariffs aimed at Chinese imports but
didn’t specify which level. He then said it would be a nice gesture if the
Canadians also did it so in way US could fortress North American from the flood
of Chinese imports that’s coming out of the most unbalanced economy in modern times.
China’s embassy in Washington said Trump unilateral hikes severely violate WTO
rules and pressure, coercion and threat is not the right way to deal with
China. Instead, mutual respect is a basic prerequisite said embassy spokesperson
Liu Pengyu.
·
On 21/02,
US negotiators pressed Kyiv for Ukraine’s critical minerals by raising the
possibility of cutting the country’s access to Elon Musk’s vital Starlink
satellite internet system. Atlantic Council. Then on13/03, Putin said he
supported Trump’s proposal for a 30-day ceasefire with Ukraine but would forge
on until several crucial conditions are worked out. A few days after, Britain’s
Keir Starmer said European nations and Western allies were boosting
preparations to support Ukraine in the event that a peace deal was struck with
Russia. This initiative being branded the “coalition of the willing” and will
keep increasing pressure on Russia, keep the military aid flowing to Ukraine
and keep tightening restrictions on Russia’s economy to bring Putin to the
table. Both Britain and France said they could send peacekeepers to Ukraine in
event of a ceasefire whilst Russia insist it will not accept Western forces on
Ukrainian soil. Interestingly, when Trump asked this same Starmer on MSM if
Britain could take Russia by herself, he didn’t look very confident.
·
On 28/02, EU leaders all came out in support of
Ukraine Zelenskiy following Trumps’s heated exchange. Again given Trump was
publically challenging UK Keir Starmer whether they could take Russia on their
own, it shows that he knew this would happen in advance. Others have commented
that they need to do so for the optics, how far their action will match later
on is another matter entirely. Right now, the Coalition of the Willing has a
combined GDP exceeding EUR 20B with total US support for Ukraine over the last
3Y standing at 0.3 – 0.6% GDP. As such, matching US contributions of EUR 114B
is very feasible given that Trump pushing them to increase their defence
spending to 5% GDP. In terms of market reaction, it was pretty muted on the
S&P and MSCI World so perhaps investors are not anticipating further
escalation beyond Ukraine just another proxy war like Iraq and Afghanistan.
·
On 15/03, the US expelled South Africa’s ambassador
with Secretary of State Marco Rubio calling the envoy a “race-baiting
politician who hates Donald Trump” Seems Elon Musk and Peter Theil’s
connections to South Africa is influencing US foreign policy despite all their
denials or obfuscations.
·
On 11/03, Greenland’s pro-business opposition party
Demokraatit party which favours a slow independence from Denmark a
parliamentary election that was dominated by Trump’s pledge to take control of
island. Demokraatit secured 29.9% of the votes up from 9.1% in 2021 ahead of
the opposition Naleraq party which favour rapid independence at 24.5%. The vast
island with a population of 57k has bene caught up in a geopolitical race for
dominance in the Artic where melting ice caps are making its resources more accessible
and opening new shipping routes. Both Russia and China have intensified
military activity in the region.
·
On 28/02, Macron left Washington with “very little
hope” stating that there were misunderstandings, design problems in the
commercial approach proposed by the US administration. Central to their
reasoning is that France’s taxes on consumption in particular VAT are a tariff
which are factually false. Speaking alongside Macron, Portugal Luis Montenegro
reiterated his call for dialogue with Washington but said Europe will have to
respond to an increase in tariffs in a similar way.
·
On 24/02, Trump was sued by the Democrats over recent
executive order it says violates federal election law by giving him too much
power over the independent Federal Election Commission. The Election Commission
was created in 1974 in the wake of the Watergate Scandal to oversee elections
and enforce campaign finance laws. According to the complaint letting Trump
micromanage the commission would undermine its purpose by allowing a single
partisan political figure to rig campaign rules and resolve disputes against
his opponents. The plaintiffs include the Democratic National Committee,
Democratic Senatorial Campaign Committee and Democratic Congressional Campaign
Committee. The lawsuit seeks a declaration that a federal law shielding the
election commission from “presidential coercion and control” is constitutional
and block Trump’s Feb 18th order. It also comes as Democrats,
outnumbered in Congress seeks an effective means to counteract far-reaching
changes to Trump’s first 6 weeks of his 2nd term including many
steps to lessen government oversight and eliminate internal dissent. Several
dozen lawsuits have challenged over actions taken by Trump such as control over
the National Labor Relations Board and SEC.
·
·
On 14/03,
BofA analysts are anticipating +10% downside in European equities should global
economic activity slow as anticipated. On 14/03, UBS analysts said that
Germany’s fiscal landscape is on a verge of tectonic shift with
Chancellor-in-waiting Friedich proposing major increase in infrastructure and
defense spending. This will likely improve domestic and regional outlook and free
up to EUR 500B for infrastructure investment and exempt defense spending over
1% GDP from Germany’s debt brake
·
Other major
movers have the TAIEX 100, KLCI and Russia Index, which have all dropped 6.4%,
4.9% and 7.8% respectively. TAIEX broadly following SPX and MSCI World as all
of them are trading at ATH. However, KLCI and Russia Index are clearly out of
favor with global investors, and they haven’t breached their ATH since 2018
Trade War and 2022 Ukraine War. For the latter, perhaps normalization of
relations between US and Russia might reverse this trend
·
On 25/02, GS noted that hedge funds’ willing to boost
bets on Asian stocks rose to its highest level since 2016. Long positions
exceeded short positions by 1.5-to-1 which China and HK accounting for nearly ½
the regional inflows from 14/02 to 20/02. Japan contributed 23% of the inflows
followed by Taiwan and Australia. “Asia is now the most overweight region
versus MSCI AC World weights at expense of hedge funds rotating out of North
America” according to the bank.
·
On 28/02, China’s major commodities exchange announced
that they would be expanding the scope of tradable derivatives’ products for
qualified foreign investors from 04/03. Qualified Foreign Institutional
Investors (QFIIs) and RMB Qualified Foreign Institutional Investors can
participate in a trading of a bulk of commodities futures and options
contracts. The Shanghai Futures Exchange includes stainless steel, fuel oil,
pulp and container freight futures contracts of silver and steel rebar option
contracts. The Guangzhou Futures Exchange allows the participation of trading
industrial silicon, lithium carbonate and polysilicon futures and options
contracts. The Dalian Commodity Exchange is open for polypropylene, polyvinyl
chloride and styrene futures and options contracts.
·
On 11/03, Zhengzhou Exchange raised the trading margin
requirement for some rapeseed meal futures contract from 9% to 7% after
Beijing’s 100% tariff on Canadian imports triggered a two-day rally that pushed
prices to a 5M high. This 100% tariff has been applied to $1B worth of Canadian
rapeseed oil, oil cakes and pea imports and another 25% duty on $1.6B worth of
Canadian aquatic products and pork. According to Chinese customs data, China
imported 2.02M tones of rapeseed meal from Canada in 2024, accounting for 73%
of its total imports. Other major supplier include the UAE, Russia and Ukraine.
·
On 15/03,
Volkswagon entered talks with digital cockpit system developer Ecarx to put the
Chinese company’s technologies in cars it sells in developed markets such as
Europe. The firm which is backed by Geely to manufacture smart cars in Brazil
and Indiawith Ecarx’s Antora 1000 which offers services such as voice
recognition and navigation maps. The plan underscores efforts by Western
automakers to leverage Chinese prowess in smart-driving technologies to hold
onto their global market share after sales declined sharply in China in recent
years. Mercedes-Benz also doing the same with Chinese firm Hesai’s lidar
sensors. Interestingly, Volkswagen has enjoyed limited success with its
in-house software unit Cariad and plans to lay off almost 30% of staff by
end-2025
·
Chinese companies are ramping up orders for Nvidia H20
AI chip due to booming demand for DeepSeek’s low-cost AI models. Tencent and
Alibaba and Bytedance have “significantly increased orders of the H20 as well
as smaller companies in health and education sectors. Previously, only
deep-pocketed financial and telecom firms bought serves with AI computing
systems. Trump is looking at imposing restrictions on the sale of H20 chip to
China. “When DeepSeek launched, many misjudged that computer power demand might
stagnate or decrease. In reality, more advanced AI models drive deeper
integration into daily life, exponentially increasing inference-level compute
need” said White Oak Capital Nori Chiou.
·
On 01/03, SCB raised its China 2025 GDP growth
forecast to 4.8% from 4.5% given stronger than expected real activity
performance for the first 2M and the March PMI survey.
·
Bond
markets remains the same trend with US Treasury yields heading lower with 2s
and 10s dropping 13.3% and 9.7% respectively. Updated the chart and found the
10Y UST yields forming potential head and shoulder with neckline around 3.6%.
Perhaps Trump induced US recession fear might lead to Fed continuing to cut
rates further which is what he wants anyway. JGB and SGB both tracking US
Treasuries dropping 14.5 – 24% range with the only exception is CGB where their
2s and 10s have moved higher by 1.4% and 3.5%. Credit curve not been impacted
much so far as LQD, HYG and EMB only down 2.5 – 3.5%.
·
REITs have
been a mixed bag with MAPL, CAPD and PWLR both rising 8.3%, 8.3% and 11.8%
whilst PREI and UOGR dropping 3.9 – 6.2% range. Gold has rallied 3.5% due to
safe haven flows whilst XAG, natural gas and WTI crude all falling 9.2%, 9.4%
and 11.7% respectively. And in crypto world, BTC/$ actually been pretty
resilient as its only dropped 14$ whist ETH/$ and SOL/$ both fell 35.8% and 31.2%
respectively.
·
On 01/04, UBS maintains a gold price target of $3200
per troy ounce and continues to favour fold in their gold and Asian investment
strategies. The bank also recognizes that prices could reach their higher
scenario of $3500 if tariff-related or geopolitical risks escalate to the
extent of adversely affecting the US and global economies.
·
On 10/03, deVere CEO Nigel Green anticipate that US
will not be the last nation to take the step to build up their Strategic
Bitcoin Reserve. Other nations motivated to hedge against dollar dominance will
likely do the same. Interestingly, BTC/$ actually experienced a dip upon
Trump’s executive order to establish the Strategic Bitcoin Reserve which shows
investors still sceptical of the move.
·
On 26/02, the FBI said North Korea was responsible for
the theft of approximately $1.5B in virtual assets from ByBit. The agency refer
to this attack as “TraderTraitor” and saying that the proceeds have been
converted into BTC/$ across thousands of addressed on multiple blockchains and
will eventually be fully converted into fiat currency.
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