Thursday, May 21, 2020

Asia Times: Financial markets rise on possible vaccines while ignoring potential economic risks flagged by the Fed

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • FOMC minutes

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Market Recap: Financial markets rise on possible vaccines while ignoring potential economic risks flagged by the Fed

US equities surged on Wednesday as more news on potential vaccines for the novel coronavirus started to drive investor sentiment. Inovio's stock surged after its experimental DNA vaccine tested on hamsters and guinea pigs showed positive data on neutralizing antibody and immunity results. The company said that it is targeting a phase 2/3 trial by August. Inovio's positive data likely added to investor optimism that a potential vaccine could be available later this year, as drug makers rush to get a vaccine to market as soon as possible. It should be noted that most of the gains in the market over the week has resulted from news of potential vaccines for the novel coronavirus even though it has mostly only been positive data on the initial phase of testing. Any negative publicity or failures on vaccines are hence likely to cause asset prices to dive as well. The S&P500 advanced 1.67% as a result, mostly ignoring escalating US-China tensions and warnings from the Fed.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +1.52% +369.04 24,575.90
S&P500 +1.67% +48.67 2,971.61
Nasdaq +2.08% +190.67 9,375.78
*Source: Bloomberg

The dollar fell as risk aversion in the market eased, sinking closer towards 99.00's level. The New Zealand and Australian dollar led gains among major currencies as investors have become increasingly bullish on a global economic recovery.

The FOMC's meeting minutes may have contributed to a weaker dollar, after the meeting minutes signalled that Fed officials were concerned on the amount of risks and uncertainty that opposes the US economy. A number of officials were also concerned with financial stability, as banks may possibly face greater stress amid an expected sharp contraction in the US economy. As expected, there was no sign of officials discussing negative rates in the near future as well, prompting speculation for negative rates in the US to retreat. The meeting minutes also hinted at a possibility for more detailed forward guidance regarding interest rates, similar to the strategy the Fed used in 2012 where the central bank specified that unemployment and inflation was the key measure to hiking interest rates.

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Safe haven assets inched higher however, highlighting that some investors still remain cautious of the current situation. Speculation that asset prices are overvalued may also be fueling gains in safe haven assets as stocks have risen based on optimism over the week. Gold continues to hover close to 1,750 while the Japanese yen strengthened against the greenback after declining two days in a row. US Treasuries rose across the board, pulling 10-year yields slightly lower by 0.8bps to 0.68%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.18% +3.13 1,748.18
Silver +1.19% +0.21 17.27
JPY +0.17% +0.18 107.53
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2 0.16%
10-Year -0.8 0.68%
30-Year -1.1 1.40%
*Source: Bloomberg

Oil prices continued to rise on Wednesday, likely thanks to positive signs of increased demand from China and the airline industry as well as a continued drop in supply. China's demand for oil has risen sharply since the reopening of its economy and is now close to levels seen before the onset of the Covid-19 pandemic. US airlines signalled that the industry is starting to see some recovery in demand, with Delta airlines saying that it plans to add 200 flights in June and possibly more in July. While the airline industry is likely to continue to be affected by social distancing issues post-lockdown, the increase in demand for flights helped to push oil prices higher as jet fuel demand is expected to recover slightly as well. The concern for now however, is how long the recovery in oil prices can be sustained for as risk that oil producers increases their output rises as oil prices start to rise as well. But the current environment should still tilt the outlook for oil prices to the upside as more workers return to work and factories restart production.

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Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +3.17% +1.10 35.75
WTI Crude +4.79% +1.53 33.49
*Source: Bloomberg

In Asia, stocks look set for a day of gains on Thursday thanks to increased optimism among investors. The Nikkei, KOSPI and ASX200 were all higher in the first hour of the trading session. Futures tracking major indices in the US were trading down as of 8.30am (GMT +8), likely as gains ease in the US stock market.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +0.50% +103.40 20,698.55 8:21:25 AM
KOSPI Index +0.57% +11.41 2,001.05 8:41:20 AM
ASX200 Index +0.17% +9.65 5,582.70 8:41:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.29% -70.00 24,450.00 8:30:53 AM
S&P500 Futures -0.29% -8.75 2,959.50 8:30:58 AM
Nasdaq Futures -0.17% -16.25 9,469.25 8:30:59 AM
*Source: Bloomberg

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

  • NVIDIA
  • JC Penney
  • Best Buy (8pm)
  • Intuit (4.30am +1)

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

  • UK May Manufacturing/Services PMI (Markit) (P) (4.30pm)
  • US May Manufacturing Survey (Philadelphia Fed) (8.30pm)
  • US May 15th Initial Jobless Claims (8.30pm)
  • US May Manufacturing/Services PMI (Markit) (P) (9.45pm)