Tuesday, June 2, 2020

Asia Times: Equities starts June with gains despite rising risks thanks to more signs of an economic recovery

Tags
  • China
  • Dollar
  • Gold
  • Stocks
  • Oil
  • ISM PMI
  • RBA

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Market Recap: Equities starts June with gains despite rising risks thanks to more signs of an economic recovery

US equities started the week in the green despite rising US-China tensions and as protests continue in the US. Better-than-expected economic data likely helped support stock prices after ISM's manufacturing PMI report signalled that May saw improvement across almost all of its sub-indices. The supplier deliveries index fell 8 points to 68.0, indicating that supply chain disruptions are likely easing as the rest of world starts to reopen their economies. Employment and new orders rose as well, implying that April was probably when the US economy bottomed out. It should however be noted that while there were improvements in the index, uncertainty among the respondents of the survey remained relatively high despite some signs of recovering demand. The improvements in business conditions however was enough to help fuel investor optimism for an economic recovery, pushing energy and financial sector stocks to lead gains in the S&P500. More defensive sectors amid the Covid-19 pandemic such as the health care and technology sectors lagged the most as a result.

Stock prices in the US mostly ignored media outlets reporting on Monday that China had ordered state-owned firms to temporarily suspend purchases of US soybeans and pork last week after the US signalled that its special treatment for Hong Kong as a trading partner may be ending. Reuters then reported after the US market closed that purchases by Chinese firms were resumed on Monday, citing US traders as sources. While the reason for the decision to resume purchases were unknown, it does signal that geopolitical risks are rising as US-China tensions has room to escalate in the short-term.

In company news, Gilead Sciences’ stock fell after its experimental drug, Remdesivir, only displayed marginal benefits in treating moderately ill, hospitalized Covid-19 patients in its phase three trial. The trial showed that patients in the five-day Remdesivir treatment group were 65% more likely to have clinical improvement at Day 11 in comparison to standard care patients, while improvements in patients in the 10-day treatment group failed to reach statistical significance. No new safety concerns were flagged in its latest trial as well. The company’s stock prices fell 3.43% on Monday.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +0.36% +91.91 25,475.02
S&P500 +0.38% +11.42 3,055.73
Nasdaq +0.66% +62.18 9,552.05
*Source: Bloomberg

The Australian dollar gained the most on Monday, surging against the dollar as risk-aversion in the financial markets faded. Better-than-expected manufacturing PMI data from China likely also helped boost the Australian dollar against the greenback as well. Caixin's manufacturing PMI report highlighted that the Chinese manufacturing sector continues to recover, with the index rising back into expansionary levels at 50.3 for May. The Aussie may have more room to rise today after the Reserve Bank of Australia's (RBA) monetary policy meeting as any additional easing from the central bank looks to be unlikely with the Australian economy continuing to reopen its economy. Slightly more optimism from the RBA may also be possible, as domestic demand expected to show some recovery as the Australian economy reopening likely to help with the central bank's outlook.

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Safe haven assets mostly fell on Monday as well, highlighting the decline in demand for lower-risk assets despite rising risks. Gold inched higher, reproaching 1,750's level likely as a result of some signs of escalation in US-China tensions. The yen was the worst performing currency against the dollar aside from the Swiss franc and inched lower against the euro by 0.03%. US Treasuries were mixed but was mostly skewed towards the downside. Shorter-term two-year treasuries rose while longer-termed ones fell, pushing benchmark 10-year yields 0.7bps higher to 0.66%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.54% +9.28 1,739.55
Silver +2.45% +0.44 17.94
JPY +0.22% +0.24 107.59
*Source: Bloomberg

Crude oil was mixed on Monday likely as traders wait on more concrete news for an OPEC+ meeting. Bloomberg reports citing delegates as sources said that OPEC+ members will be holding a discussion on a short extension of the current output limits at its next meeting. While earlier reports suggested that the meeting originally planned for June 9th may be brought forward June 4th, delegates still had not settled on the new date. OPEC+ members agreed at its last meeting to cut production output by 9.7 million barrels per day in May and June before easing to about 7.7 million in July, followed by an additional tapering of the production limits at the start of next year. Sentiment among OPEC+ members are likely to be mixed on a possible extension of current production limits however, since the current price per barrel of crude is still low, but not at rock bottom prices seen earlier in May. This skews the outlook for oil prices which has had a strong rally in the month of May slightly lower than before. But with current oil prices at around US$35 per barrel, most oil producing countries may opt to extend the production limits for an additional month since prices are still below the breakeven level for a balanced fiscal budget, which should still mean that downside risks for crude oil prices are still limited, although less than before.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +1.27% +0.48 38.32
WTI Crude -0.14% -0.05 35.44
*Source: Bloomberg

Stocks in Asia were mostly higher on Tuesday morning, tracking gains in the US. The Nikkei and KOSPI were trading slightly higher in the first hour of Tuesday's trading session, signalling that optimism in the US for an economy recovery may spillover into Asian markets during Tuesday’s trading session. The ASX200 was trading slightly lower but close to flat, possibly as a result of the surge in the Australian dollar on Monday and ahead of the RBA's monetary policy decision. Futures tracking major indices in the US were trading lower on Tuesday as of 8.40am (GMT +8) as well, signalling that performance in the US market may normalise on Tuesday after Monday's optimism.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +0.92% +202.97 22,256.51 8:30:15 AM
KOSPI Index +0.55% +11.35 2,075.37 8:50:10 AM
ASX200 Index -0.10% -6.05 5,832.00 8:50:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.40% -103.00 25,369.00 8:40:13 AM
S&P500 Futures -0.41% -12.50 3,042.00 8:40:16 AM
Nasdaq Futures -0.25% -24.00 9,575.50 8:40:18 AM
*Source: Bloomberg

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

  • RBA Monetary Policy Decision/Statement (12.30pm)
  • UK Apr Mortgage Approvals (4.30pm)