Thursday, April 30, 2020

Asia Times: Investors flock to risk-on positions as Gilead’s new experimental drug shows positive signs in race for the Covid-19 vaccine

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Market Recap: Investors flock to risk-on positions as Gilead’s new experimental drug shows positive signs in race for the Covid-19 vaccine

Gilead's positive drug testing data drove markets just before April ended after the drug maker said that its preliminary results from a US government trial showed that its experimental antiviral drug, Remdesivir, helped Covid-19 patients recover faster than those that did not. Additional data that came out later in the day said that the experimental drug helped allow the patients recover 31% faster than those on placebo, further cementing the positive impact of the drug in the battle against the novel coronavirus. US National Institute of Health Physician Dr Anthony Fauci indicating his optimism likely also helped legitimise the conclusion of the phase three clinical trial of the drug. Stocks got another boost towards the end of the trading day, at roughly 2am (GMT +8) after the New York Times reported that the US Food and Drug Administration (FDA) planned to approve the emergency use authorisation for the experimental drug as early as Wednesday, citing its source was a senior administration official.

All equities jumped on the news, ignoring the worse-than-expected Q1 GDP figures as well as Fed Chair Jerome Powell's warning that a sharp economic contraction may be worse and longer than expected. Big cap energy stocks rose the most among S&P500 sectors, spiking 7.35% on Wednesday, followed by gains in the communications and technology sector, rising 4.22% and 3.01% respectively. Notably, small cap stocks rose much more than large cap stocks, as the probability of the lockdown being lifted earlier has risen. This is due to smaller-cap stocks being able to benefit more from the lifting of Covid-19 restrictions as smaller businesses will be able to reopen. The Russell 2000 Index was 4.83% higher on Wednesday.

In company news, Microsoft beat estimates for the last quarter, driven mostly by demand for cloud services and IT infrastructure to support the sudden shift in the global corporate environment towards remote working during the lockdown in multiple countries. Profits for the quarter rose to US$1.40 per share, while revenue surged 15% to US$35bn, both beating analysts' estimates for US$1.28 per share in earnings and US$33.7bn in sales. Its revenue from Microsoft Azure surged 59% in the quarter, while overall commercial cloud computing revenue jumped 39% to US$13.3bn. Downsides were present however, as the company said that ad sales from the corporate-centric social network, LinkedIn, declined in the quarter as companies were either going out of business or freezing hiring. Capacity shortage for its cloud infrastructure services were also felt by its clients, as a result in the disruption of China's supply chain. China's closure of factories had a material impact on the technology supply chain as well, with most motherboard manufacturers (with the exception of companies like Gigabyte who has factories in Taiwan that could continue to operate during the Covid-19 crisis) operating in China had to halt production as a result of the lockdown in the country. The supply chain disruption meant that cloud data centres could not be expanded fast enough to account for the sudden rise in demand as more workers shifted to remote environments. Microsoft shares jumped as a result, gaining 4.49% on Wednesday to close at 177.43 and spiking to as high as 186.52 in after-hour trading.

Tesla was another company that beat estimates. The car maker's stock surged 8.70% in after-hours trading after posting its first-ever quarterly profit for the period ending March 31st. The company posted a revenue of almost US$6bn and an adjusted earnings per share of US$1.24. While the car maker beat estimates for the quarter, analysts noted that the company burnt through roughly US$895mn in cash during the period due to inventory build-up amid the suspension of its production factory in California. Tesla CEO Elon Musk also postponed its semi-truck offering again to 2021 and will choose to instead focus on restarting production output for the Model Y crossover in Shanghai and on opening its new factory in Germany. Little was mentioned about its forward guidance for the year, except that it would be difficult to predict demand and when the supply chain disruption will end.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +2.21% +532.31 24,633.86
S&P500 +2.66% +76.12 2,939.51
Nasdaq +3.57% +306.98 8,914.71
*Source: Bloomberg

While economic data and Fed signals were generally less optimistic of the US economy, the positive data on Gilead's drug put downward pressure on the dollar to fall against all other major currencies. Commodity-linked currencies led gains as financial markets price in a potential earlier reopening of the global economy.

In the US, the initial estimate for Q1’s GDP contracted much more-than-expected, diving 4.8% QoQ. A contraction that big was only seen last in 2008, during the Financial crisis. Personal consumption sank 7.6%. US Chief White House Economist Larry Kudlow shared his outlook for the year, forecasting that Q2 GDP will see another significant decline before recovering in the second half of the year.

The Fed kept rates at near-zero and kept the current measures as is. Investors were likely focused on Fed Chair Jerome Powell's speech instead, as the Chairman reiterated the need for more fiscal stimulus to help support the US economy from suffering from a weak recovery after the Covid-19 crisis passes. Powell also noted that the central bank expects that economic activity will suffer a much sharper decline in Q2 than in Q1. As expected, the central banker also downplayed the possibility of a quick and sharp recovery for the US economy, noting that the depth and length of the downturn will depend mostly on how fast the virus comes under control. Both the central bank's actions and Powell's speech signalled that the central bank is ready to do more if needed in terms of credit facilities, while keeping interest rates near zero for an extended amount of time.

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Safe haven assets mostly rose on Wednesday, following the direction of equities although at a much slower pace. Gold, yen and shorter-term US Treasuries gained while longer-term treasuries fell. Positive news on a possibly useful drug against the virus likely helped eased risk aversion in terms of demand for the lower risk bonds. Benchmark 10-year yields gained 1.4bps to 0.63%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.33% +5.62 1,713.41
Silver +0.86% +0.13 15.10
JPY +0.18% +0.19 106.68
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.0 0.20%
10-Year +1.4 0.63%
30-Year +4.6 1.25%
*Source: Bloomberg

Oil surged on the news after another rout earlier this week thanks to optimism for the virus to be controlled with Gilead's experimental drug. Both Brent and WTI crude oil surged on the news, likely as investors speculate for a sharp incline in demand as the world reopens its economy, and as supply starts to come under control with OPEC+ production cuts set to come into full effect on May 1st. Brent rose more than 10% to end Wednesday more than 5% higher from the start of the week, putting the benchmark on track to end a three week losing streak that saw more than a total of 30% of its value wiped out. WTI crude oil futures jumped 22.04% but still closed at just US$15.06 per barrel.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +10.17% +2.08 22.54
WTI Crude +22.04% +2.72 15.06
*Source: Bloomberg

We likely will see Asian stocks surge today as well and track gains in the US. Japan's Nikkei and Australia's ASX200 were already trading more than 1% higher in the first hour of Thursday's trading session. The South Korea Stock Exchange will be closed until Monday, May 4th for the Vesak Day and Labor Day holidays. Futures tracking major US indices traded slightly lower, with the exception of Nasdaq futures likely mostly thanks to normalisation of yesterday's surge.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +2.40% +475.48 20,245.35 8:37:55 AM
ASX200 Index +1.12% +60.38 5,453.80 8:57:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.17% -42.00 24,523.00 8:47:42 AM
S&P500 Futures -0.17% -5.00 2,936.00 8:47:44 AM
Nasdaq Futures +0.21% +18.75 9,055.00 8:47:42 AM
*Source: Bloomberg

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

  • Kellogg (8pm)
  • Kraft Heinz (8.30pm)
  • McDonald's (8.30pm)
  • American Airlines (8.30pm)
  • Western Digital Corp (4.30am +1)
  • Visa (5am +1)
  • Apple (5am +1)
  • Amazon (5am +1)

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

  • Eurozone Q1 GDP (P) (5pm)
  • Eurozone Mar Unemployment Rate (5pm)
  • ECB monetary policy decision (7.45pm)
  • US Apr Personal Income & Spending Report (8.30pm)
  • US Apr 24 Intiial Jobless Claims (8.30pm)
  • ECB President Christine Lagarde Press Conference (8.30pm)