Friday, May 8, 2020

Asia Times: An upcoming call between US and China’s trade negotiators fuels investor optimism

Tags
  • China
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • NonFarm Payrolls
  • Oil
  • Bank of England

05082020a

Market Recap: An upcoming call between US and China’s trade negotiators fuels investor optimism

Stocks in the US advanced on Thursday, largely ignoring weaker-than-expected labour market data in the US and increasing numbers of bankruptcies among US corporations. The Nasdaq rose 1.41% on Thursday, erasing almost all of its losses this year as a result of the Covid-19 pandemic. The Nasdaq is now only 8.53% lower from its all-time high earlier this year in February, while the S&P500 and DJIA still remains more than 10% down from the start of the year. Energy, financials and the materials sector helped drive gains in the S&P500, as pressure on US shale oil producers start to ease with recovering oil prices. US luxury departmental store chain, Neiman Marcus was added to the list of retailers filing for bankruptcy protection as the Covid-19 pandemic amplifies the strain that the ecommerce industry has on retailers.

Lyft’s stock surged more than 21% on Thursday after beating analysts’ estimates for its quarterly earnings. Uber followed close behind, advancing 11.18%. Uber's shares were another 5% up in after-hours trading after the company gave a better-than-expected outlook to the year. The company's ride-hailing customers declined for the first time amid the Covid-19 pandemic, but also said that the business is already starting to recover. It also postponed expectations for its first quarterly profit to next year, as a result of cost cutting that is estimated to eliminate more than US$1bn in expenses. Losses for the quarter also inched closer towards profitability, with losses excluding taxes, interest and other expenses declining 30% from a year ago. Its food delivery business helped offset the fall in demand for its other services as well, with gross bookings for its food delivery service surging by 52%.

PayPal’s shares spiked 14% on Thursday after the company said that it saw a strong pickup in digital payment volumes in April and posted its largest day of transactions on May 1st. The company did miss estimates for the first quarter, with revenue only rising 12% to US$4.62bn in the quarter compared to analysts’ forecasts of US$4.72bn. The strong surge in online payments in the second quarter of the year likely came from quicker adoption of digital payment systems amid lockdowns across the globe. Its peer-to-peer payments platform, Venmo, saw US$31bn in transactions in the first quarter, up from a year earlier, likely boosted by the enablement of its users to receive US Treasury stimulus payments through the platform. The outlook for PayPal should continue to be positive as digital payments will likely continue to enjoy higher rates of adoption. While transactions should start to ease as Covid-19 restrictions ease as well, it will likely still be better off than before the onset of the virus. Rival Square Inc’s stock also gained more than 9% on Thursday, but its outlook may not be as rosy as PayPal as it is more reliant on business transactions than consumer transactions in comparison to PayPal.

Bloomberg reported that Tesla suspended production at its Shanghai plant, asking workers to only return after May 9th, extending the five-day Labour Day break that ended on Tuesday. Chinese tech news site, 36kr, reported that the production halt was due to component shortages, although an official statement from the company has not been made.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +0.89% +211.25 23,875.89
S&P500 +1.15% +32.77 2,881.19
Nasdaq +1.41% +125.27 8,979.66
*Source: Bloomberg

In the forex market, the Australian and New Zealand dollars surged the most on Thursday, amid optimism that there will be more confirmation on US-China tensions as top US and Chinese trade officials will be having a conference call as early as next week to speak on the implementation of the US-China phase one trade agreement that was signed in January. The phone call will be the first since the two superpowers signed the agreement in January and will more than likely highlight the global supply chain disruption as well as China's pledge to increase its purchases of US goods. The pace of purchases has lagged behind the target pace (imports from US to China declined 5.9% in the first quarter of 2020), signalling that the US will likely start to pressure China to adhere to the agreement, although some leeway may be given due to the onset of the Covid-19 pandemic.

The dollar fell as a result of the optimism of US-China relations, as well as on comments from Federal Reserve officials that implied that the central bank may start to consider negative interest rates as a possibility. Atlanta Fed President Raphael Bostic said on Thursday that the central bank will deploy its full arsenal to aid the pandemic-hit economy, while San Francisco Fed President Mary Daly implied that recovery in the economy will likely be gradual instead of a v-shaped one. Fed Fund futures are now pricing in the possibility of negative rates at the end of the year. The dollar should continue to face pressure later today as risk appetite grows and as labour market data for April will likely be at a record low.

The sterling surged initially following the Bank of England's (BoE) decision to keep monetary policy unchanged, but reversed gains after BoE Governor Andrew Bailey signalled that the central bank could expand its asset purchases program at its next meeting in June. But the pound still managed to inch 0.10% higher against the greenback on Thursday.

05082020b

Safe haven assets were mixed. Gold has detached from its safe haven properties, rising 1.80% to close above 1,700 once again. The Japanese yen weakened against the dollar after four consecutive sessions of gains, as risk appetite returned followed the optimism for US-China relations as trade officials from the two countries meet in a call next week. US Treasuries gained across the board. Benchmark 10-year yields fell 6.2bps to 0.64% while two-year yields dipped 4bps to 0.14%, a new record low, as traders price in the possibility for negative rates in the US.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.80% +30.35 1,716.06
Silver +3.32% +0.49 14.73
JPY -0.15% -0.16 106.28
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -4.0 0.14%
10-Year -6.2 0.64%
30-Year -6.5 1.33%
*Source: Bloomberg

Oil futures experienced large price swings on Thursday, spiking up as much as 13% during the day as investors weigh the effects of supply and demand fundamentals. As oil producers around the globe start to cut supply and demand starts to pick up as lockdowns across the world starts to ease, prices should start to pick up. However, the oversupply from record levels of output in April may temporarily put pressure on oil prices. Another downside risk would be a second-wave of the virus, which would force countries to re-enforce lockdown restrictions once more, which would dampen oil prices, although unlikely as much as in March and April as a result of the production limit.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude -0.87% -0.26 29.46
WTI Crude -1.83% -0.44 23.55
*Source: Bloomberg

Stocks in Asia tracked gains in the US on Friday morning. The Nikkei got a boost from the weaker yen, rising 1.52% as of 8.27am (GMT +8). The KOSPI and ASX200 were also trading higher in the first hour of the trading session. Singapore's stock market will reopen today, and looks likely to rise as well. Futures tracking major indices in the US were higher as well, signalling that the financial market's optimism on the global economy reopening may spillover into today as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +1.52% +298.36 19,973.13 8:27:30 AM
KOSPI Index +1.34% +25.81 1,954.42 8:47:30 AM
ASX200 Index +0.92% +49.50 5,413.70 8:47:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.60% +144.00 23,987.00 8:37:34 AM
S&P500 Futures +0.64% +18.50 2,898.75 8:37:34 AM
Nasdaq Futures +0.63% +57.75 9,165.75 8:37:33 AM
*Source: Bloomberg

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

  • Revlon
  • Norwegian Cruise Line
  • Exelon (10pm)

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

  • RBA Monetary Policy Statement (9.30am)
  • US Apr Change in NonFarm Payrolls (8.30pm)
  • US Apr Unemployment Rate (8.30pm)