ISM Services PMI jumps to 54.5, topping estimates

Is this a signal for higher interest rates?
Team Halogen
September 11, 2023

Market Movements

Global Macro Highlights

🇨🇳 Evergrande soars 70% leading Chinese property stocks higher after Country Garden avoids default
📈 US Service gauge rises to six-month high, topping all forecasts
🛢️ Rising oil prices reignite inflation fears
🛑 Apple shares fall after reports that China banned iPhone use by government employees
📱Huawei's new chip hints of more to come in the US-China tech war

Oil prices started to spike late Monday night after both Saudi Arabia and Russia announced further production cuts, with Brent Crude futures trading as high as $91 per barrel on the news. In sympathy, US treasury yields traded higher (2y yield to 4.95%) on worries that tighter monetary policy might be the result of higher headline inflation. 

Inflation fears continued to be stoked after ISM Services PMI data on Wednesday. With a beat of 54.5 vs. 52.5 expected, 2y yields traded as high as 5.03%, and SPX500 futures traded nearly 1% lower to 4447 over the period. It didn’t help that Apple shares were hit following news that China was banning the use of iPhones by its government employees, which saw the stock plunge and further add to US equity index weakness - especially when the broad market has been propped up so much by the so-called magnificent seven counters.

The Dollar remained strong throughout the week, especially against commodity currencies and Asian units. USDJPY remains buoyant despite continued whispers of pending currency intervention by the authorities, though to reflect that, options on USD puts JPY calls are starting to become more expensive as traders start looking for protection. Meanwhile, the Chinese Yuan erased all gains from the FX reserve requirement cut, and it now trades even higher than before that news broke.

Malaysian Markets Highlights

📊 BNM maintains OPR at 3%, as expected
⬆️ Bank Negara's international reserves rise to US$112.5bil

As widely expected, Bank Negara maintained the OPR at 3% on Thursday. In their statement, the Monetary Policy Committee was upbeat on domestic growth drivers such as an upswing in tourism and E&E manufacturing activity, while noting that the external environment still remains challenging. 

There was also a bit of tweak to the language at the end, where the committee removed all reference to the level of accommodation that the current monetary policy stance provided (from being ‘slightly accommodative’ in the July statement). Given the slowing of inflation locally, perhaps the current stance has been judged as ‘neutral’ for the current climate. Either that, or the MPC just decided to play their cards close to their chests.

At any rate, local markets didn’t bat an eye. MGS yields were unchanged over the event and into the Friday close, while both the KLCI and MYR traded weaker into Friday in line with global risk assets and the Dollar.

Crypto Market Highlights

🧑‍⚖️ JPMorgan says SEC would likely be forced to approve spot bitcoin ETFs following Grayscale's win
📝 Cathie Wood's ARK Invest Files for First Spot Ether ETF
📚 FASB Adopts Crypto Accounting and Disclosure Rule for Companies
🪙 JPMorgan Is Exploring Blockchain-Based Deposit Token for Payments, Settlements
Source: TradingView

In crypto markets, range trading was the order of the week for major pairs. Bitcoin continued to consolidate in the 25600 to 26100 range mostly. Even news of Cathie Wood’s filing for an Ethereum spot ETF did not have a lasting impact on the market.

That said, in the early hours of our Friday morning, rumours started to spread on Twitter that internally the SEC had greenlighted a spot Bitcoin ETF. Naturally, prices reacted and Bitcoin was up 2.5% early in the day. However, the rumours were not substantiated, and crypto prices eventually reversed into the Friday close.

In a notable development for the industry though, the Financial Accounting Standards Board in the US voted to allow ‘fair value’ accounting for crypto assets held on corporate balance sheets. This would allow companies like Microstrategy, Galaxy Digital, and Tesla to mark the value of their crypto assets to market, and also removes a major headache in their accounting processes. 

What we are monitoring for the week ahead

What does all of this mean? Our thoughts

Bearish September seasonality has so far played out as expected in US equities, though the week ahead might see some relief/profit taking on shorts and put option positions. The trade has been well telegraphed, and is probably a crowded one by now. As a result, more positions would need to be covered, and this would introduce more buying pressure.

Still, next week would be crucial with the release of US CPI data for August. Real time tracking of consumer spending data from banks like JPMorgan and Bank of America have thus far indicated that consumer spending did indeed decline over the last 3 months. So that’s at least one segment that could contribute to slowing inflation. 

We think that oil prices back in the $90-100 regions also make things a bit trickier. While volatile, the concerted effort of OPEC to keep prices elevated could prolong the Fed’s higher for longer stance. It’s certainly something to keep watch on, especially should prices trade closer to the ceiling of that range.

Locally, September has usually been a good month for the Dollar, and a weak one for Ringgit. While BNM remains upbeat on the local economy, the truth of the matter is that our currency is still mainly driven by the external narrative of a weaker Chinese economy and higher US rates. With USDMYR now approaching the year-to-date highs, some local interbank traders have observed price action that is consistent with agent intervention. 

Crypto markets remain sidelined, and it seems the only catalysts that can move prices meaningfully are anything to do with a Bitcoin ETF approval. Friday morning’s mysterious upswing is proof of that, which was probably to do with the aforementioned rumours on Twitter. Prices have since corrected and, as mentioned in the last recap, Bitcoin should still be trading in the lower end of this 25000 to 28000 range. Exchange orderbooks show outsized buy orders supporting the price in the 25000 region, and we suspect that this will hold unless a major news event changes things.

Some froth still remains in crypto markets however, with speculative activity taking off in low-cap altcoins on Binance over the last couple of weeks. From CYBER to NMR, and now to TRB and PERP, several altcoin tokens have taken turns to mysteriously surge in price on outsized volumes. These lofty price levels never hold though, and subsequently collapse after a day or two. 

In blunt terms, one might suspect market manipulation for pairs such as these, and quite rightly so. Investing and trading in cryptocurrencies remains a high risk activity, in no small part due to events like these. Always exercise caution, manage your risks carefully, and ensure you invest with someone you can trust.

One final note about the FASB rule changes: it does make it much easier for US corporates to keep Bitcoin on their balance sheet. We’d hope for such a rule change to trickle down to Malaysia too via a change in IFRS standards. Still, that doesn’t solve the issues surrounding self-custody, which are certainly more crucial to deal with than a mere accounting entry. That’s what we’re here for!

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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Team Halogen
October 27, 2023
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