Monday, May 18, 2020

Asia Times: Oil prices and equities continue to advance as industrial production data in the US helps fuel investor optimism

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

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Market Recap: Oil prices and equities continue to advance as industrial production data in the US helps fuel investor optimism

US equities rose on Friday likely thanks to better-than-expected economic data in the US and the recovery of oil prices. Industrial production fell 11.2% (est. -12.0%) MoM in April, while empire manufacturing improved from -78.2 in April to -48.5 (est. -60) in May. Consumer sentiment surprised the market as well with the University of Michigan's survey index rising to 73.7 (est. 68.0) from 71.8, highlighting that with states reopening in the US, consumers expect the current situation in May to quickly recover.

But gains in equities were likely curbed by rising tension between the US and China and weak retail sales in the US. The US government moved on Friday to block global chip supplies to Huawei Technologies, with the Global Times reporting after that China is planning to add US companies to an "unreliable entity list". Retail sales in the US dropped 16.4% (est. -12.0%) in April, while retail sales less auto and gas sales was 16.2% (est. -7.6%) down from March.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +0.25% +60.08 23,685.42
S&P500 +0.39% +11.20 2,863.70
Nasdaq +0.79% +70.84 9,014.56
*Source: Bloomberg

Friday's gains were not enough to recover losses over the week, as US major indices suffer one of its worse losses since the week ended April 3rd. Losses over the week were likely a result of escalating tension between the US and China, as well as increased investor caution on a possible second wave of the virus. Other major indices across the globe fell as well with the exception of the ASX200 as mining stocks drove gains in the week amid more countries lifting Covid-19 restrictions.

Indexes Weekly Change (%) Net Change Closing Price
Dow Jones -2.65% -645.90 23,685.42
S&P500 -2.26% -66.10 2,863.70
Nasdaq -1.17% -106.76 9,014.56
FTSE100 -2.29% -136.21 5,799.77
Euro Stoxx -4.73% -137.41 2,770.70
CSI300 -1.28% -50.80 3,912.82
Nikkei -0.70% -141.62 20,037.47
KOSPI -0.95% -18.54 1,927.28
ASX200 +0.25% +13.73 5,404.81
Hang Seng -1.79% -432.70 23,797.47
Straits Times -2.64% -68.33 2,523.55
*Source: Bloomberg

In the foreign exchange market, major currencies fell against the dollar on Friday as US-China tension escalates. The Japanese yen and swiss franc gained the most against the dollar, signalling the likely increase in risk aversion in the market. The Reserve Bank of New Zealand's call for banks in the country to prepare for negative rates earlies last week continued to weigh on the New Zealand dollar, losing 1.13% against the dollar on Friday to end the week 3.28% weaker against the greenback.

Sterling dipped on Monday morning, falling to 1.2092 against the dollar thanks to a Bank of England (BoE) official’s comments on negative interest rates. BoE's Chief Economist Andy Haldane signalled in an interview with the Telegraph newspaper that the central bank was examining the possibility of negative interest rates amid the Covid-19 crisis. Haldane also signalled that the central bank was looking at the possibility of expanding the scope of its asset purchase program to include more risky assets. The more dovish statement from the central bank economist resulted in sterling weakening as traders start to price in an increased probability for negative rates from the BoE.

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Safe haven assets were mostly higher on Friday. Gold gained 0.77% as trade war fears weigh on investor sentiment. The Japanese yen strengthened 0.18% against the dollar. US Treasuries were mixed as traders continue to speculate that the Fed may introduce negative rates towards the end of the year despite signals from Fed Chair Jerome Powell saying earlier last week during a web conference that negative rates were not being considered by the central bank at the moment. Shorter-term treasuries were slightly higher on Friday while longer-term ones fell. Benchmark 10-year yields were 2.1bps higher at 0.64% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.77% +13.37 1,743.67
Silver +4.65% +0.74 15.79
JPY +0.18% +0.19 107.06
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2 0.15%
10-Year +2.1 0.64%
30-Year +3.6 1.33%
*Source: Bloomberg

Oil surged on Friday for the second trading session in a row as any oversupply worries were quelled by OPEC+'s urgency in its production limits. Oil prices looks to have more upside today, with both Brent and WTI crude oil futures trading more than 3% higher as of Monday 8.07am (GMT +8). Demand and supply worries should continue to ease for energy markets as OPEC+ and US shale oil producers are likely to continue to limit production amid softer demand. Energy demand should start to return as more countries ease Covid-19 restrictions. Downside risks including a potential second wave of Covid-19 infections and escalation in the US-China trade war is likely still limited. Gains may eventually start to ease however, since demand is unlikely to reach pre-Covid-19 levels in the short-term.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +4.40% +1.37 32.50
WTI Crude +6.79% +1.87 29.43
*Source: Bloomberg

Stocks in Asia were trading slightly higher on Monday morning, as investors remain cautious on US gains amid increased US-China tensions and renewed worries for a second wave of Covid-19 infections. The Nikkei may get a boost from the Japanese yen trading lower against the dollar on Monday morning. Futures tracking major indices in the US were trading higher on Monday morning as well, signalling that optimism in the financial market may have returned.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +0.08% +15.18 20,055.81 8:10:45 AM
KOSPI Index +0.06% +1.09 1,928.45 8:30:40 AM
ASX200 Index +1.27% +68.79 5,473.60 8:30:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.77% +181.00 23,698.00 8:16:15 AM
S&P500 Futures +0.74% +21.00 2,867.50 8:16:22 AM
Nasdaq Futures +0.73% +66.25 9,161.75 8:16:21 AM
*Source: Bloomberg

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

  • SoftBank Group (2pm)
  • Ryanair (5pm)
  • Baidu (9.15am +1)

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

  • RBA Monetary Policy Meeting Minutes (6.45am +1)