Friday, May 22, 2020

Asia Times: Asia markets look set to face pressure as US-China tensions escalate

Tags
  • China
  • Dollar
  • Gold
  • Stocks
  • Oil

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Market Recap: Asia markets look set to face some downward pressure on Friday as US-China tensions escalate

Stocks on Wall Street faltered on Thursday, reversing some of the gains earlier in the week as investors start to price in rising US-China tensions. The South China Morning Post reported Thursday that Chinese lawmakers were preparing to pass measures that would curb secession, sedition, foreign interference and terrorism in Hong Kong, citing unidentified people. While China did not confirm details in the report, US President Donald Trump's response sparked sentiment that US-China tensions is escalating, after telling reporters outside the White House that the US "will address that issue very strongly". Trump's response also implied that possible actions from the US will only be after more official details are revealed from China. Trump saying that he will be withdrawing from the Open Skies treaty, an arms control pact that was meant to increase transparency between the US and Russia likely also weighed on investor sentiment on Thursday.

The industrial sector led gains among S&P500 sectors while tech lagged. Interestingly, small-cap indices outperformed major indices on Thursday and Wednesday. Week-to-date, the Russell 2000 and S&P600 indices has returns more than double that of the Dow Jones, rising 7.21% and 8.29% respectively. Small caps typically start to outperform large cap stocks in the recovery stage post-crisis. While this may be a signal that investors' outlook of the economy has greatly improved since the start of the Covid-19 pandemic, it may be premature to fully expect the stock market to enter into a robust recovery cycle, since the high levels of unemployment, high rates of bankruptcies and sharp contractions across multiple industries signal that a contraction could be longer-than-expected.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones -0.41% -101.78 24,474.12
S&P500 -0.78% -23.10 2,948.51
Nasdaq -0.97% -90.90 9,284.88
*Source: Bloomberg

The dollar rose against all other major currencies, curbing losses after falling four times out of the last five trading sessions as optimism for potential vaccines shifted to risk aversion as US-China tension continue to escalate. The Hong Kong dollar fell sharply against the greenback as a result of being one of the issues surrounding the escalating tension between the US and China. USD/HKD jumped to as high as 7.7551 on the news.

The Japanese yen traded fairly muted on Thursday as the Bank of Japan (BoJ) is set for an emergency meeting today. It is widely expected that today's meeting will not surprise markets with new policy decisions but to finalise details for a small company funding program that the central bank proposed in its last monetary policy meeting. As a result, the decision is unlikely to be a key driver for the Japanese yen for the day ahead.

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Safe haven assets dropped on Thursday, possibly due to investors shifting to cash positions. Gold declined 1.21% on Thursday, erasing gains over the week. The yen inched only slightly lower against the greenback, although this was likely more due to the stronger dollar as the currency strengthened against the euro. US Treasuries were mixed, with shorter-term treasuries retreating while longer-termed one’s advanced. Benchmark 10-year yields were 0.8bps lower at 0.67% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.21% -21.18 1,727.00
Silver -2.56% -0.45 16.88
JPY -0.07% -0.08 107.61
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2 0.17%
10-Year -0.8 0.67%
30-Year -1.2 1.39%
*Source: Bloomberg

WTI crude oil futures advanced to the sixth session in a row. But gains in oil prices eased on Thursday, signalling that the sharp incline in oil prices could be nearing its end as sustainability starts to become a question among financial markets. With factories still mostly closed around the globe, oil prices are unlikely to return to pre-Covid-19 levels before the second half of the year. Bloomberg reported that it estimates demand in India, the third largest market in the word, to currently be at approximately at 2.8mn barrels per day, compared to 4.6mn barrels per day in May 2019 based on projections by oil executives in the country. India's situation comes in contrast to China's oil demand which has mostly recovered back to pre-Covid-19 levels, signalling that global oil demand is unlikely to fully recover in the near future as lockdown restrictions continue to curb energy demand. Oil futures are still largely down from the start of the year however, with Brent and WTI crude oil futures down 43% and 42%.

Trading in oil markets may start to flatten however, as the largest ETF tracking oil markets reported that its broker has blocked the fund from making more purchases of oil futures as a result of regulatory requirements in the US, UK and Canada. The news comes a day after a WisdomTree ETP tracking movement of the first-month Brent Oil futures contract via swaps was forced to shut down on June 22nd when oil giant Royal Dutch Shell decided to end its swap agreement with the fund.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +0.87% +0.31 36.06
WTI Crude +1.28% +0.43 33.92
*Source: Bloomberg

Stocks in Asia will likely face some pressure from US-China tensions during trading today. Hong Kong stocks may be the among the most affected Asian markets today, with the BlackRock iShares Hong Kong ETF falling 3.76% in the US stock market on Thursday. The Nikkei and ASX200 were slightly higher in the first hour of trading on Friday morning, while the KOSPI was trading slightly lower. Expect some volatility on Friday morning in Asia as well as economic data from China being released this morning will likely also affect stock prices as well. Futures tracking US major indices rose on Friday morning.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +0.16% +32.65 20,584.96 8:30:55 AM
KOSPI Index -0.39% -7.75 1,990.34 8:50:50 AM
ASX200 Index +0.18% +9.77 5,560.20 8:50:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.43% +104.00 24,480.00 8:41:00 AM
S&P500 Futures +0.40% +11.75 2,948.75 8:41:03 AM
Nasdaq Futures +0.44% +40.75 9,396.00 8:40:59 AM
*Source: Bloomberg

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

  • Alibaba (7.30pm)

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

  • UK Apr Retail Sales (2pm)
  • Canada Mar Retail Sales (8.30pm)