Market Recap: Euro strengthens thanks to a proposed 750-billion-euro stimulus packaged by the European Commission
The S&P500 extended into a three-day win streak with financial stocks leading gains as investors continue to shift to riskier positions. Improving mortgage applications likely helped improve banks' outlook, while better-than-expected manufacturing data from the Richmond Fed helped fuel investor optimism. News that US-China tensions were escalating was also largely ignored by the stock market. The US House voted on Wednesday to authorise sanctions on Chinese officials for human rights abuses against the Uighurs and members of other Muslim minority groups in the Xinjiang region of China. The legislation will now be passed to US President Donald Trump, who has not said whether he would sign it into law. US Secretary of State Michael Pompeo announced the decision that the US could no longer certify Hong Kong's political autonomy from China, opening up the possibility for US sanctions on Hong Kong.
Tech stocks declined sharply at the start of Wednesday's trading session but managed to recover later into the day after Micron raised its revenue forecast for the current quarter. The chipmaker said that it expects sales to reach US$5.2bn to US$5.4bn in its fiscal third quarter thanks to strong chip demand from cloud providers. Micron CEO Sanjay Mehrotra also said that the smartphone market was showing signs of recovery as result of upcoming network technology upgrades and new smartphone launches. The technology sector still underperformed other S&P500 sectors however. Small-cap indices outperformed large-cap ones yet again, continuing to imply that the financial market is pricing in an economic recovery cycle into equities.
||Daily Change (%)
In the foreign exchange market, the euro led gains against the dollar after the European Commission proposed a 750bn euros stimulus plan in light of the Covid-19 pandemic. A third of the plan will be made up of loans while the other two-thirds will be made up of grants, signalling a starting point for an expected debate by European countries that have disagreed on the terms of funding the program. The proposal also suggested a long-term budget of 1.1tn euros for 2021 to 2027. The proposal from the European Commission helped improve investors' outlook for the EU and consequently pushed the euro higher against the dollar as the proposed plan signals progress among EU leaders for a concrete plan to help member countries that have been badly affected by the Covid-19 pandemic to recover. But while the proposed stimulus plan is a step forward, a debate on the details of the plan is likely to be lengthy due to the number differences in economic impact among EU countries.
Separately, the dollar was mixed against other major currencies, although the Dollar Index was trading higher on Wednesday likely as a result of rising tensions between the US and China.
Safe haven assets fell on Wednesday despite rising geopolitical risks between US and China. The optimism in the equity market likely helped dampen demand for lower risk assets. Gold inched down closer towards 1,700. The yen retreated slightly against the dollar but the Dollar Yen continued to hover around 107. US treasuries were mixed, with shorter-term treasuries falling while longer term ones rose. Benchmark 10-year yields fell 1.5bps to 0.68%.
|Safe Haven Assets
||Daily Change (%)
|US Treasury yields
||Daily Change (bps)
Oil futures dipped on Wednesday after a Bloomberg report suggested that Russia was looking to start easing production limits as early as July. While there was no official confirmation from Russia, the report helped dampen sentiment on crude oil supply, putting downward pressure on prices. Reports from the American Petroleum Institute (API) that indicated an increase in US crude oil stockpiles also weakened investors' sentiment for crude oil's recovery. Precision Drilling Corp CEO Kevin Neveu's more pessimistic outlook for the US shale oil industry also probably contributed to the drop in crude oil prices on Wednesday. Neveu expects US shale oil drillers to be in a prolonged downturn, with a rebound only in Q2 2021 at the earliest, or end 2021 at the latest. WTI crude oil futures dived 4.48% while Brent crude oil futures fell close to 4% as a result. Downside risk for crude oil is likely to stem from a possible increase in crude oil inventories in Cushing, Oklahoma, later today at 11pm (GMT +8), since oil prices rising at a rapid rate since the start of May potentially signals over optimism on supply and demand issues in the energy market.
Asian stocks look set to track US gains on Thursday morning, with increasing optimism that the economic damage from the Covid-19 pandemic has mostly peaked. Geopolitical risk from US-China relations is likely to continue to be the largest downside risk at the moment. In contrast, the Hang Seng Index looks likely to extend losses from yesterday with more protests anticipated today as the Chinese Parliament is expected to approve a proposed national security law for Hong Kong today. The Nikkei was trading slightly upwards of 1%, while the ASX200 was more than 2% higher in the first hour of the trading session. The KOSPI gained the least, rising only 0.70% as of 8.41am (GMT +8). Futures tracking US major indices were also trading higher on Thursday morning as of 8.32am (GMT +8), signalling that optimism is continuing to rise among investors.
||Daily Change (%)
||Daily Change (%)
||As of (GMT +8)
Economic releases for the day ahead include (all timings in GMT +8):
- Germany May Inflation Rate (CPI) (P) (8pm)
- US Apr Durable Goods Orders (P) (8.30pm)
- US Q1 GDP (S) (8.30pm)
- US May 22nd Initial Jobless Claism (8.30pm)