Wednesday, May 27, 2020

Asia Times: US equities surged on Tuesday thanks to upbeat economic outlooks but was unable to hold on to gains

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

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Market Recap: US equities surged on Tuesday thanks to upbeat economic outlooks but was unable to hold on to gains

Stocks in the US soared with traders coming back from the Memorial Day holiday largely discounting most of the possible downside risks that are present in the current environment. Optimism likely was fueled by comments from JPMorgan CEO Jamie Dimon and St Louis Fed President James Bullard. Both Dimon and Bullard were optimistic of an economic rebound later this year. Dimon now see a higher likelihood of a quick economic recovery from Q3 2020 thanks to strong fiscal stimulus. He did however warn that a prolonged economic downturn is not off the table. Bullard said that he expects a contraction in unemployment rate to lose than 10% in December.

But a report implying US-China tensions may escalate reversed some gains in the equity market. The S&P500 surged past 3,000 on opening but fell back below the key level towards the end of the trading day after Bloomberg reported that the Trump administration was considering a range of sanctions on Chinese officials, businesses and financial institutions. The report cited people familiar as its source, but official comments regarding the matter were not available. The financial sector rose the most among S&P500 sectors, likely thanks to Dimon's comments. Sectors that has outperformed during the past weeks, such as the healthcare and technology sectors underperformed on Tuesday. Small-cap indices (Russell 2000: +2.77%, S&P600: + 4.02%) also beat large-cap indices in the US, signalling that the financial market has likely started to price in an economic recovery cycle into equities.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +2.17% +529.95 24,995.11
S&P500 +1.23% +36.32 2,991.77
Nasdaq +0.17% +15.63 9,340.22
*Source: Bloomberg

The greenback fell against all other major currencies as demand for its safe haven properties faded while investors shifted into riskier positions. Consumer confidence in the US for May came in slightly lower-than-expected, but the report did indicate that consumers may be more upbeat on an economic recovery in the US as the expectations sub-index improved from April. New Home Sales surged in April as well, only falling 5,000 from March, instead of economists' expectations for a 147,000 drop. The better-than-expected new home sales likely helped fuel risk-on behaviour in financial markets as well, as consumer spending in the US seemingly remains strong. Commodity-linked currencies surged instead, with the Australian dollar leading gains among major currencies.

The greenback may however be able to recover some of its losses over the week as demand for safe haven assets may return as US-China relations may face greater pressure with Hong Kong lawmakers set to meet for the second reading of the national anthem Bill on Wednesday.

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Safe haven assets dipped on Tuesday as well as investors become increasingly optimistic of a fast and sharp global economic recovery. Gold dived, bringing it closer back to 1,700. The yen strengthened against the greenback, but this was mostly due to the weak dollar as the Japanese currency fell 0.61% against the euro. US Treasuries fell across the board, bringing benchmark 10-year yields 3.7bps lower to 0.70%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.23% -21.37 1,710.58
Silver -0.88% -0.15 17.04
JPY +0.16% +0.17 107.54
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.4 0.17%
10-Year +3.7 0.70%
30-Year +7.4 1.44%
*Source: Bloomberg

Oil futures rose on Tuesday, as more countries across the globe and states in the US ease lockdown restrictions. But oil futures may see some downside later today, thanks to a Bloomberg report that Russia is looking to ease oil output cuts from July. OPEC+ members are set to meet June 9th to June 10th and will discuss the level of oil production limits. The likelihood of deeper cuts to output is probably quite low in the current situation as more countries start to reopen its economies. A rebound in China's oil demand is also likely to deter oil producers from making deeper cuts to help with oversupply as well. Tapering of production limits is hence more likely to be discussed at the June meeting instead, although this will also be at risk of a second wave of Covid-19 cases which would imply that lockdowns and social distancing rules could potentially be extended.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +1.80% +0.64 36.17
WTI Crude +3.31% +1.10 34.35
*Source: Bloomberg

Stocks in Asia started Wednesday mixed, as optimism starts to ease and focus on US-China tensions resumes. The Nikkei and ASX200 were trading lower than Tuesday's close while the KOSPI was slightly higher in the first hour of Wednesday's trading session. Futures tracking major indices in the US were trading slightly lower as well. The outlook for the day looks tilted to the downside as US-China relations may face more pressure ahead of an anticipated protest in Hong Kong later today.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index -0.20% -41.73 21,229.44 8:33:55 AM
KOSPI Index +0.35% +7.02 2,036.80 8:53:50 AM
ASX200 Index -0.38% -22.05 5,758.00 8:53:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.20% -50.00 24,962.00 8:44:00 AM
S&P500 Futures -0.20% -6.00 2,989.00 8:44:00 AM
Nasdaq Futures -0.20% -19.25 9,394.00 8:43:58 AM
*Source: Bloomberg

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

  • Eurozone May Financial Stability Review (4pm)