Wednesday, April 29, 2020

Asia Times: Investors start to shift to cyclical sectors as Covid-19 restrictions start to ease across the globe

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • US earnings' season

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Market Recap: Investors start to shift to cyclical sectors as Covid-19 restrictions start to ease across the globe

Stocks around the world ended Tuesday higher, with only the US, Japan and Australian major indices ending the day lower. Stocks on Wall Street were mixed, pulled lower by defensive stocks while demand for cyclical sectors kept major indices from falling lower. More European cities signalled that they were planning to ease Covid-19 related restrictions in the coming weeks. France said that it plans to start allowing shops to reopen from May 11th, while Spain's goal is to remove restrictions over the next two months.

Among sectors, energy and materials led gains in the S&P500, advancing 2.19% and 1.96% respectively while the healthcare and communication services sector declined 2.13% and 1.89% respectively. The sector analysis implies that investors are now shifting towards industries that are most affected by the Covid-19 pandemic as more countries start to ease their respective lockdowns.

Most companies yesterday gave pessimistic outlooks to the year ahead. Mining and construction equipment Caterpillar warned that the second quarter will be the worst for the global economy this year after failing to meet Q1 analyst estimates. Southwest airlines withdrew all revenue forecasts as the company said that revenue trends can't be forecast past May. The airlines also delayed its 737 Max deliveries.

On a slightly more positive note, 3M's stock jumped on Tuesday at opening but pared back gains later to end the day 2.58% higher after the company beating estimates in both revenue and earnings per share. But the company signalled that it was preparing the worse for 2020, suspending its share buyback program and making aggressive cost cutting plans to preserve cash minimise impact on its employees. The company also pulled its 2020 forward guidance.

As expected, Google parent company, Alphabet, reported better-than-expected earnings for Q1, pushing its shares 7.55% higher in after-hours trading as its diversification plans over the last few years paid off. Sales rose 14% YoY to US$33.71bn, with YouTube and Google's cloud offerings driving the company's top line. While its main advertising business suffered as companies cut spending on advertisement to preserve cash, YouTube’s advertising growth remained robust in the quarter with the exception of the end of March. However, it is likely that Q2 revenue will be more impacted than Q1 as the current earnings season signals that more companies will be cutting marketing budgets to preserve cash, which may eat into Google's ad revenue (Google's search engine revenue is still its largest segment, contributing to 60.6% of total revenue in FY2019).

Chipmaker AMD disappointed financial markets however, slightly missing analysts’ revenue and earnings estimates. Revenue grew 40% YoY to US$1.79bn while earnings per share rose to US$0.14 from US$0.01 a year ago. The chipmaker expressed the weakness in the consumer market affected its top line, contrasting investor sentiment that the lockdown could potentially increase demand for the gaming industry. Similar to Intel, the company also forecasted that weak consumer demand is expected to continue into the second half of the year while commercial and server demand is likely to stay strong. AMD's earnings highlight the underlying issue that consumer spending across the globe and not only the US is weakening more than expected as a result of the Covid-19 pandemic. It also implies that investors may have been overly optimistic on defensive stocks at this point of time. AMD stocks fell 3.08% in after-hours trading as a result.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones -0.13% -32.23 24,101.55
S&P500 -0.52% -15.09 2,863.39
Nasdaq -1.40% -122.43 8,607.73
*Source: Bloomberg

The dollar fell against most major currencies as investors' risk sentiment continued to ease. The Dollar Index fell below 100 on Tuesday, ahead of the Fed's monetary policy decision set for 2am (GMT +8) in the early hours of Thursday. The US conference board's consumer confidence index for April likely fuelled investor optimism as well despite diving by 31.9 points to 87.0. Its sub-indices for consumer confidence on expectations and current situation implied that its survey participants were expecting the effects of the Covid-19 pandemic to only be temporary. The sub index for expectations rose from 88.2 to 93.8 while the current situation index sharply declined from 167.7 to 76.4.

The euro fell slightly against the dollar despite multiple EU countries starting to plan for the reopening of their respective economies. The euro may trade mostly flat ahead of the ECB's monetary policy meeting tomorrow, as investors wait for possibly additional stimulus measures from the European central bank as EU leaders fail to agree on a concrete long-term economic recovery plan for the bloc.

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Safe haven assets were mostly mixed on Tuesday. Gold fell slightly as a result of risk-off sentiment. The Japanese yen strengthened against the dollar likely boosted by both additional stimulus measures in Japan and a weaker greenback. US Treasuries rose across the board, pushing benchmark 10-year yields 4.8bps lower to 0.61%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.36% -6.20 1,707.79
Silver -0.29% -0.04 14.91
JPY +0.35% +0.38 106.87
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.1 0.21%
10-Year -4.8 0.61%
30-Year -5.2 1.20%
*Source: Bloomberg

US oil futures experienced high levels of volatility on Tuesday despite falling only 3.44%. The June contract for WTI crude oil fell to as low as US$10.07 per barrel as volatility continued to spike after the US Oil Fund (USO) ETF started a massive selloff of its June contracts to buy later-term contracts to comply with regulation. Brent advanced 2.35% however, as OPEC+ members started to signal that they would start cutting oil production ahead of the May 1st deadline since late last week.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +2.35% +0.47 20.46
WTI Crude -3.44% -0.44 12.34
*Source: Bloomberg

Stocks in Asia showed signs of gains as the KOSPI and ASX200 inched higher in the first hour of Wednesday's trading day. Japan's Tokyo Stock Exchange will be closed for a bank holiday today and only reopen tomorrow. Futures tracking major us indices were trading higher on Wednesday morning as well, although it may only be driven by cyclical and technological infrastructure stocks.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
KOSPI Index +0.68% +13.23 1,947.32 9:07:30 AM
ASX200 Index +0.45% +24.00 5,337.10 9:07:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.30% +73.00 24,118.00 8:57:35 AM
S&P500 Futures +0.39% +11.25 2,878.50 8:57:39 AM
Nasdaq Futures +0.79% +68.75 8,788.50 8:57:39 AM
*Source: Bloomberg

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

  • Microsoft Corp (5.30pm)
  • General Electric Co (8pm)
  • Hasbro Inc (8pm)
  • Mastercard Inc (9pm)
  • Boeing Co (10.30pm)
  • Qualcomm Inc (4.45am +1)

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

  • Germany Apr Inflation Rate (CPI) (P) (8pm)
  • US Q1 GDP (8.30pm)
  • US Q1 Inflation Rate (PCE) (8.30pm)
  • US Fed Monetary Policy Decision (2am +1)
  • US Fed Chair Powell's Press Conference (2.30am +1)