Thursday, June 4, 2020

Asia Times: ADP’s measure of unemployment in the US surprises investors, fuelling optimism in the market

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil
  • Bank of Canada

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Market Recap: ADP’s measure of unemployment in the US surprises investors, fuelling optimism in the market

Stocks in the US gained on Wednesday, likely thanks to better-than-expected labour market data and increasing optimism for the US to experience a quick economic recovery. ADP's survey for change in private NonFarm payrolls largely surprised economists, falling 2.8 million from April instead of the consensus for a 9 million decline. The smaller-than-expected job losses in May helped fueled optimism that the worse economic impact resulting from the Covid-19 pandemic has passed. Interestingly, job losses eased the most in smaller-sized firms (less than 50 employees), dropping only 1.57% as compared to medium-sized firms (50-499 employees) and larger-sized firms (500 or more employees) which dropped 2.86% and 2.83% for May. This likely helped small-cap indices extend its outperformance of major indices for the third day in a row.  

Industrials, financials and energy sector stocks led gains in the S&P500 once again, further solidifying that investors are bullish on an economic recovery. Risks in the US are rising however, with protests continuing to be held, increasing the likelihood of new Covid-19 infections in the country. Boeing surged more than 12% on Wednesday, largely boosting the Dow after the company appeared in hedge fund Third Point's list of winners for May. News that Amazon plans that lease 12 additional Boeing 767-300 converted cargo aircrafts from Air Transport Services Group as the ecommerce giant expands its existing fleet of 70 aircrafts to meet the sharp increase in demand is likely to also boost sentiment on Boeing. The aircraft maker traded more than 2% higher in after-hours trading as a result.

US-China tensions heightened once again, with the airlines industry at center stage after the US said that it would suspend passenger flights to the US by Chinese airlines. The decision comes as US airlines continues to push to reinstate routes to China, although Beijing has not given its approval for it yet. The order is set to take effect on June 16 but could be changed to be enforced earlier if US President Donald Trump chooses to do so. Airlines in the US gained in the result, with American, Delta and United airlines surging 5.61%, 7.80% and 12.50% respectively on Wednesday.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +2.05% +527.24 26,269.89
S&P500 +1.36% +42.05 3,122.87
Nasdaq +0.78% +74.54 9,682.91
*Source: Bloomberg

The dollar continued to fall against most major currencies on Wednesday and is on track for its third weekly loss in a row. The greenback has lost 1.09% since the start of the week, inching closer to pre-Covid-19 levels as optimism continues to surge in the US, fueling risk appetite among investors. The Norwegian krone led gains among G10 currencies, while only the Japanese yen fell against the dollar. The euro surged after German Chancellor Angela Merkel managed to secure a stimulus package worth 130 billion euros to help support consumer spending and business investments in Germany. A temporary reduction to the value-added-tax, planned spending on 5G data networks and additional incentives for electric vehicles were among the details of the stimulus plan. The surge in the euro brought the EUR/USD back to trading positive year-to-date and is now the second-best performing currency against the dollar in terms of year-to-date returns, just behind the Swedish krona. The euro is likely to continue to experience more volatility today, as the European Central Bank (ECB) is set to decide on monetary policy later today.

The Bank of Canada's (BoC) decision and statement for monetary policy on Wednesday also helped the Candian dollar strengthen against the greenback. The BoC, as widely expected, kept monetary policy on hold during its June meeting. BoC officials had a more optimistic tone, similar to that of the Reserve Bank of Australia (RBA), saying that the impact from the Covid-10 pandemic has likely peaked, even though uncertainty remains high. The central bank also said that it will shift its focus back to supporting the economy instead of ensuring market functions, signalling that additional quantitative easing programs are unlikely to be implemented in the short-term. The Canadian dollar reversed losses against the dollar on the announcement of the decision, with CAD/USD rising from as low as 0.7372 in the hour before the decision to as high as 0.7415 in the hour following.

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Safe haven assets fell as expected from optimism-driven risk appetite in the financial markets. Gold fell 1.62%, dipping below 1,700, marking the largest loss for the precious metal since mid-April. The Japanese yen weakened against the dollar and will likely help ease pressure on Japanese exports. US Treasuries dipped across the board, pushing benchmark 10-year yields higher by 6.1bps to 0.75%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.62% -28.03 1,699.67
Silver -2.30% -0.42 17.47
JPY -0.20% -0.22 108.90
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +2.8 0.19%
10-Year +6.1 0.75%
30-Year +4.3 1.53%
*Source: Bloomberg

Oil gained slightly on Wednesday, as both crude oil benchmarks pared gains likely as risk that OPEC+ production limits may start to be eased in July increased. Bloomberg reported that an extension to the current production limit was conditional on other members' compliance on the agreement, citing its source as people familiar with the matter. The report, while not official, likely increased risk aversion on the possibility that the record level output cuts from the bloc might be eased in July, potentially putting downward pressure on oil prices as additional supply starts to flow in to energy markets despite reduced demand resulting from the Covid-19 pandemic. While an extension to the current level of production limits are still likely, downside risks for oil prices are rising. The news also means that crude oil futures are likely to be more volatile in the coming days as more official information starts to be available on a confirmed date for the next OPEC+ meeting after news that the bloc could potentially bring forward its meeting to this week.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +0.56% +0.22 39.79
WTI Crude +1.30% +0.48 37.29
*Source: Bloomberg

In Asia, stocks look set to track gains in the US on Thursday morning. The Nikkei is likely to find support from the weakening yen while the ASX200 continues to rise in part thanks to the RBA's more optimistic outlook for the Australian economy. The Nikkei, KOSPI and ASX200 were all trading higher in the first hour of the trading session as a result. Futures tracking major indices in the US were trading slightly lower as of 8.45am (GMT +8), possibly as a result of normalisation of sharp gains from Wednesday and increasing risk of over-valuation in the financial markets.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +0.82% +184.86 22,812.95 8:35:20 AM
KOSPI Index +0.96% +20.54 2,168.79 8:55:20 AM
ASX200 Index +1.48% +88.20 6,029.20 8:55:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.16% +43.00 26,227.00 8:45:24 AM
S&P500 Futures +0.03% +1.00 3,113.50 8:45:22 AM
Nasdaq Futures +0.02% +2.00 9,675.50 8:45:23 AM
*Source: Bloomberg

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

  • ECB Monetary Policy Decision/Statement (7.45pm)
  • US May 29th/22md Initial/Continuing Claims (8.30pm)
  • ECB President Lagarde's Speech on Monetary Policy Decision (8.30pm)