Tuesday, April 28, 2020

Asia Times: US WTI oil prices suffer 24% drop thanks to a massive selloff from a top US ETF

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Bank of Japan

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Market Recap: US WTI oil prices suffer 24% drop thanks to a massive selloff from a top US ETF

US Stocks gained on Monday as multiple cities in the US started to ease lockdown restrictions, lifting investor optimism that the economic damage from the Covid-19 pandemic may be able to be limited. While hardest hit states (New York and New Jersey) signalled that any easing of restrictions are still weeks away, states like Georgia, South Carolina and Oklahoma has started to add non-essential businesses like restaurants and theatres to their respective exemption lists while still maintaining the social distancing order. Each of the major US indices closed more than 1% higher on Monday, pushing the S&P500 to gain more than 16% since the start of April.

Financials led the S&P500 sectors on Monday, rising 3.61% followed by the real estate sector, which advanced 3% thanks to optimism for a rebound in the US economy. Among companies, today's focus likely will be on Caterpillar's earnings report as investors will be using the company's performance as a signal of demand for infrastructure across the world.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +1.51% +358.51 24,133.78
S&P500 +1.47% +41.74 2,878.48
Nasdaq +1.11% +95.64 8,730.16
*Source: Bloomberg

Among major currencies, the Australian dollar surged 1.48% on Monday against the dollar as Queensland and Western Australia joined in lifting its Covid-19 restrictions to boost the Australian economy. Queensland will be easing its lockdown from May 1st while Western Australia will allow indoor and outdoor gatherings of up to 10 people on Monday. With reliance on the Chinese economy which has almost fully reopened since late March, the Australian and to some extent the New Zealand economy may be best positioned to rebound post-Covid-19. But this will likely still be dependent on the country's own ability to curb Covid-19 infections to allow incrementally allow workers to return to work.

Elsewhere in Japan, the Bank of Japan (BoJ) pledged to remove its limit on government bond purchases and increase its corporate bond and commercial paper purchases to 20tn yen. The additional stimulus measures by the BoJ comes in tandem with Japanese Prime Minister Shinzo Abe's submission of an extra budget of more than 1tn yen on Monday, signalling that both the Japanese government and central bank are acting in a coordinated effort to lift the Japanese economy amid the Covid-19 crisis. The response from the BoJ was likely to add more support to lending facilities to prevent higher rates of bankruptcies that would prolong a likely economic recession in the country, instead of price stability. The financial markets' response to the news was mixed however, with the Japanese yen weakening against the greenback initially pushing USD/JPY to as high as 107.55 before strengthening and pulling the Dollar Yen to as low as 107.30 in the hour following the BoJ's announcement.

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Safe haven assets were mixed again, signalling mixed sentiment in the market. Investors are likely hedging their positions against probable disappointments in earnings that are set to release this week. But strength in the stock market is also likely affecting demand for safe haven assets as well. Gold retreated 0.90% while the Japanese yen ended the day slightly higher against the greenback. Shorter-term US Treasuries gained slightly while longer-term ones fell. Benchmark 10-year yields gained 6bps to 0.66%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.90% -15.61 1,713.99
Silver -0.29% -0.04 15.03
JPY +0.24% +0.26 107.25
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2 0.22%
10-Year +6.0 0.66%
30-Year +8.6 1.26%
*Source: Bloomberg

Oil suffered yet another rout on Monday in the US as ETFs continued to distort demand in the oil futures markets. WTI crude futures contracts for June fell 24.56% as the US Oil Fund (USO) massive selloff for the June contracts forced the 1-month and 2-month spread to widen, similar to last Monday. The selloff resulted from imposed regulations, prompting the fund to spread out its oil future contracts across longer maturities to prevent negative oil futures prices in the future. June prices ended at US$12.78 per barrel while July contracts were priced at US$18.08 per barrel on Monday.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude -6.76% -1.45 19.99
WTI Crude -24.56% -4.16 12.78
*Source: Bloomberg

In Asia, the Nikkei traded slightly lower on Tuesday morning, likely a result of a stronger Japanese yen and as investors weigh the latest decision from the BoJ and Japanese government. In contrast, the KOSPI and the ASX200 traded close to 1% higher in the first hour of Tuesday's trading session, tracking gains in the US. Futures tracking major US indices were relatively flat. Look out for some volatility today with the amount of companies reporting earnings.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index -0.18% -35.88 19,747.34 8:29:00 AM
KOSPI Index +0.92% +17.63 1,940.40 8:49:00 AM
ASX200 Index +0.84% +44.96 5,366.40 8:48:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.09% +21.00 24,020.00 8:38:48 AM
S&P500 Futures +0.03% +0.75 2,869.75 8:39:00 AM
Nasdaq Futures +0.09% +8.00 8,832.25 8:38:54 AM
*Source: Bloomberg

Companies reporting earnings in the day ahead include (all timings in GMT +8):

  • PepsiCo Inc (6pm)
  • Caterpillar Inc (6.30pm)
  • UPS (7pm)
  • 3M Co (8pm)
  • Corning Inc (8.30pm)
  • Southwest Airlines Co (11.30pm)
  • Alphabet Inc (4.30am +1)
  • Ford Motor Co (5am +1)
  • Starbucks Corp (5am +1)
  • AMD Inc (5.30am +1)

Economic releases for the day ahead include (all timings in GMT +8):

  • US Apr Consumer Confidence (Conf. Board) (10pm)