Thursday, May 14, 2020

Asia Times: S&P500 falls to three-week low thanks to Powell’s downbeat comments on the US economy

  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • Reserve Bank of New Zealand


Market Recap: S&P500 falls to three-week low thanks to Powell’s downbeat comments on the US economy

Wall Street closed another day in the red after Fed Chair Jerome Powell's warning during his speech on Wednesday. Powell called on Congress to increase fiscal stimulus, suggesting that additional fiscal support is needed to avoid a deeper and extended economic downturn. The Fed Chair's speech was also relatively downbeat on the economy's outlook, pointing to strong uncertainty on the Covid-19 outbreak as well as high levels of downside risks for the economy. But Powell also echoed other Fed officials earlier this week on the adoption of negative interest rates in the US, citing mixed evidence on the effectiveness of it. The comments from Powell dampened investor sentiment for the second day in a row, prompting the Dow and S&P500 to fall to a three-week low. The S&P500 and Nasdaq were less affected compared to the Dow and small-cap indices as investors flock towards safer positions such as large-cap consumer staples and big-tech stocks.

Tencent's earnings report for the quarter ending March 31st largely beat analysts’ estimates. Revenue and net income surged to record levels amid higher demand for its mobile games and social ads during the quarter that China was mostly on lockdown. But the company highlighted that demand for mobile games should normalise in the current quarter, as China starts to return back to normal. Media advertising is also expected to be under pressure for the second quarter in the year. As a result, the short-term prospects for the company may be dampened as workers in China returns to work, effectively putting downward pressure revenue from its mobile games segment. Advertising should also face headwinds in the next quarter, as a result of an economic contraction which will likely push companies to reduce spending on marketing. But the company's fintech segment, despite falling in the Q1, should show some strength in Q2 as merchants have started to reopen since the start of the Q2 although will still face competition from Alipay in the longer-term.

Cisco's stock rose more than 2% in after-hours trading after the company gave a better-than-expected forward guidance. The company expects revenue for the quarter ending at the end of July to fall 8.5% to 11.5% from a year earlier, slightly beating analysts’ estimates. Earnings per share was projected at US$0.72 to US$0.74, beating expectations as well. While the financial projections were welcomed by traders, Cisco CEO Chuck Robbins did highlight that spending from highly impacted sectors such as travel and tourism has already reduced spending, while the opposite has happened for companies who need the infrastructure to facilitate work from home environments. This signals that the company likely expects demand for infrastructure to remain close to current levels with a slow recovery moving forward.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones -2.17% -516.81 23,247.97
S&P500 -1.75% -50.12 2,820.00
Nasdaq -1.55% -139.38 8,863.17
*Source: Bloomberg

The kiwi plunged on Wednesday following the Reserve Bank of New Zealand's (RBNZ) monetary policy decision. NZD/USD ended the day 1.43% lower after facing downward pressure from both the RBNZ's comments and Powell's signal that negative rates in the US is unlikely. The New Zealand dollar dropped as much as 1.41% after the RBNZ almost doubled its quantitative easing program to NZ$60bn (from NZ$33bn) on Wednesday and signalled for the possibility of negative rates in the future. The RBNZ has written to banks requesting that their systems be ready for a possible negative Official Cash Rate (OCR) by the end of the year, signalling of the possibility of negative interest rates in the economy. The decision comes as the New Zealand government is set to release its Budget for 2020 at 9am (GMT +8) today in which the government is more than likely to increase its bond issuances to support. NZD/USD initially recovered following the RBNZ's decision up till Powell's speech later on Wednesday, but dropped below the day's low and broke 0.6000's level after the US Fed Chairman dismissed the effectiveness of negative interest rates.

The dollar gained against all other major currencies with the exception of the Japanese yen, as risk aversion increased and as the likelihood of negative interest rates in the US were further downplayed. The Dollar Index rose back above 100's level.


Safe haven assets rose across the board on Wednesday, highlighting that perspective in the market has shifted towards more risk aversion. Gold gained another 0.80% while the yen strengthened 0.10% against the greenback. This brings the yen 0.35% higher since the end of last week, on track for its first weekly gain in the last six weeks. US Treasuries were mostly higher on Wednesday, after Powell's warning of economic risks. Benchmark 10-year yields were 1.3bps lower at 0.65%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.80% +13.58 1,716.28
Silver +0.86% +0.13 15.32
JPY +0.10% +0.11 107.03
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year 0.0 0.16%
10-Year -1.3 0.65%
30-Year -2.5 1.35%
*Source: Bloomberg

Oil futures fell on Wednesday as a result of speculation that a second wave of new Covid-19 cases will dampen demand for energy products. WTI crude oil futures fell more than 1% but closed above US$25 per barrel after finding some strength from falling US crude oil stockpiles. Crude oil inventories at the Cushing crude hub in Oklahoma fell 4.6% for the week ended May 8th, the first decline since February. A joint statement from Saudi Arabia and Russia on Wednesday being more upbeat on oil's recovery is likely to also have lent some support to oil prices as well. Crude oil futures were trading roughly 0.50% higher as of 8.23am (GMT +8) on Thursday and looks likely to rise if there is no negative news on the Covid-19 pandemic today.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude -2.64% -0.79 29.19
WTI Crude -1.90% -0.49 25.29
*Source: Bloomberg

Asia looks set to fall for the second day in a row as pessimism dominates the headlines on Thursday morning. The Nikkei, KOSPI and ASX200 were all trading lower in the first hour of the trading day. CBOE's VIX index has also surged back to 35.28, i.e. a gain of 26.09% WTD, signalling that fear has returned in the short-term. But futures tracking major indices in the US were relatively muted, trading close to flat as of 8.29am (GMT +8), possibly indicating that the selloff may ease during trading hours in the US later on Thursday, assuming that there isn't any negative news leading up to the US market open.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index -0.74% -149.78 20,117.27 8:16:40 AM
KOSPI Index -1.01% -19.69 1,920.73 8:36:40 AM
ASX200 Index -1.15% -62.55 5,359.30 8:36:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.00% +1.00 23,167.00 8:29:34 AM
S&P500 Futures -0.09% -2.50 2,810.50 8:29:35 AM
Nasdaq Futures -0.06% -5.50 8,986.75 8:29:34 AM
*Source: Bloomberg

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

  • Ubisoft Entertainment

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

  • New Zealand Budget 2020 Release (9am)
  • Australia Apr Unemployment Rate (9.30am)
  • Germany Apr Inflation Rate (Harmonised CPI/CPI) (2pm)
  • US May 8 Initial Jobless Claims (8.30pm)