Tuesday, May 5, 2020

Asia Times: Recovery in oil outweigh concerns of a US-China trade war amid the Covid-19 pandemic

Tags
  • China
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • RBA

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Market Recap: Recovery in oil outweigh concerns of a US-China trade war amid the Covid-19 pandemic

Stocks in the US took an early beating on Monday thanks to concerns on escalating tension between the US and China but recovered late in Monday's trading session. Most of the gains came from the energy sector, as oil prices started to recover amid easing concerns of oversupply. As a result, energy stocks led the S&P500 in gains, with the S&P500 energy sector index rising 3.71% on Monday. The optimism on oil mostly outweighed the fear for a renewal of the US-China trade war amid the Covid-19 pandemic. The US Food and Drug Administration’s (FDA) approval of Gilead's antiviral drug, Remdesivir, for emergency use to help treat the Covid-19 virus likely also contributed slightly to gains in equities.

Tech stocks were led mostly by larger-cap technology companies. Nvidia, Salesforce, Apple and Microsoft were among the top leaders in the S&P500 technology sector. Airlines were the laggards of the day after Berkshire Hathaway reportedly unloaded all of its stake in the airline industry in April. The airlines industry sub index of the S&P500 fell 5.93% on Monday, with United, Southwest, American and Delta airlines each losing more than 5% on the day.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +0.11% +26.07 23,749.76
S&P500 +0.42% +12.03 2,842.74
Nasdaq +1.23% +105.77 8,710.72
*Source: Bloomberg

Among major currencies, the dollar unsurprisingly advanced the most as a result of increased risk aversion among investors due to the escalation in US-China tensions over the weekend. Traders today will likely be focused on the Australian dollar as the Reserve Bank of Australia (RBA) is set to decide on monetary policy later today. There may be some upside for the Australian dollar in the short-term following the announcement as the central bank looks likely to keep its policy on hold.

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Traditional safe haven assets ended Monday higher as risk appetite among investors fell amid the heightened prospects for a US-China trade war. Both gold and yen inched higher on Monday. US Treasuries were mixed, as investors weighed the impending record levels of debt issuance from the US Treasury to fund the current Covid-19 stimulus measures, as well as Trump's push for a payroll tax cut in the next Covid-19 stimulus package. But while Trump has pushed for it, it is unclear if it will be able to pass through Congress as neither Democrats nor Republicans has signalled of a possibility of it being in the new stimulus package. Shorter-term US Treasuries rose while longer-term ones fell, lifting benchmark 10-year yields 2.2bps higher to 0.63%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.10% +1.65 1,702.07
Silver -1.32% -0.20 14.72
JPY +0.16% +0.17 106.74
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.8 0.18%
10-Year +2.2 0.63%
30-Year +2.8 1.28%
*Source: Bloomberg

WTI crude oil futures rose past US$20 per barrel on Monday, as fear of oversupply started to ease slightly. The addition of Diamondback Energy and Centennial Resource Development to the list of shale producers limiting output came as a positive signal for oil traders, as storage spaces for crude oil across the world starts to reach its limits. Diamondback said that it would cut back on approximately 10% to 15% of its production in May during its quarterly earnings statement earlier today. Centennial reported that it would be cutting up to 40% of its output this month, while also suspending all drilling and fracking, and cuttings its workforce. Centennial's shares plunged to as low as US$0.55, or -44.99% following the announcement in after-hours trading, but recovered slightly later.

Oil traders welcomed the output cuts among shale producers, driving both Brent and WTI futures higher on Monday, allowing the spread between oil future contracts to narrow. There should be more upside for oil as more countries start to ease lockdowns over time while the downside for oil prices should remain relatively low, since lockdowns can only be sustained for a limited amount of time before the economic costs outweigh the benefits. At the current level of oversupply where storage costs could outweigh the potential upside of oil prices, producers are also unlikely to increase production any time soon. But risks resulting from a possible second wave of Covid-19 infections could potentially cause more delays for economies reopening, dampening the outlook for oil prices. Our outlook for oil as a result is tilted to the upside, but we do not expect oil to return to pre-March levels in the short-term, as demand is expectedly to only return incrementally.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +2.87% +0.76 27.20
WTI Crude +3.08% +0.61 20.39
*Source: Bloomberg

Meanwhile in Asia, stocks should have some room to rise today after Monday's sharp decline. The ASX200 was trading higher on Tuesday morning, and the same should be expected from the STI and HSI. But downside risks may emerge from weak retail sales data in Hong Kong and Singapore as a result of Covid-19 related restrictions. The Tokyo Stock Exchange and South Korean Stock Exchange will be closed for a bank holiday. Futures tracking major indices in the US were trading mostly higher on Tuesday morning as of 8.33am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
ASX200 Index +1.27% +67.45 5,387.30 8:44:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.40% +94.00 23,665.00 8:33:34 AM
S&P500 Futures +0.27% +7.75 2,833.00 8:33:41 AM
Nasdaq Futures +0.30% +26.75 8,822.25 8:33:40 AM
*Source: Bloomberg

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

  • Walt Disney (4.30am +1)
  • Beyond Meat (4.30am +1)
  • Virgin Galactic (5am +1)
  • Pinterest (5am +1)

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

  • RBA Monetary Policy Decision (12.30pm)
  • UK Apr Services/Composite PMI (Markit) (F) (4.30pm)
  • US May Non-Manufacturing PMI (ISM) (10pm)