Wednesday, June 10, 2020

Asia Times: Optimism in financial markets ease as investors take profits in equities after a week-long rally

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil

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Market RecapOptimism in financial markets ease as investors take profits in equities after a week-long rally

Wall Street suffered a pull back as equities in the US fell on Tuesday following a strong rally since last week that likely resulted in an overheated market. Stocks may have fell as a result of profit taking ahead of the Fed's monetary policy meeting today that is widely expected to result in little change to its current monetary policy tools. There were little headlines that caused the selloff, other than the ongoing protests in the US which may have had some downward pressure on investor sentiment. The Nasdaq however, was able to hold onto gains as demand for tech stocks returned to the market. S&P500 sectors fell across the board with only tech and communications services being the exceptions. The energy stocks were the worst hit, followed by industrials as airlines sank.

In company news, Boeing reported net cancellations in orders for its aircraft, likely putting pressure on its stock to dive 5.97% on Tuesday. The aircraft maker reported only four deliveries in May, from six in April, down approximately 87% from deliveries in May last year. Cancellations totalled 18, which includes 14 that were the grounded 737 Max aircrafts. Only nine new orders for May were recorded, out of which three were air freighters that were re-sold following legal issues with the original customer. The aircraft maker continues to face pressure from both the grounding of the 737 Max aircraft as well as weak demand for air travel, possibly prompting a selloff after upbeat sentiment on recovering demand for flight travel pushed the aircraft maker 58.04% over the last six trading sessions. We may see more selloffs in the airline industry if last week's rally continues to ease as optimism starts to ease as well, although record inflows into the US Global Jets ETF amounting to US$127 million on Monday may be able to provide some support for prices in the airline industry. The record level inflows into the airline industry focused ETF suggests that more retail investors may be trying to buy the badly affected industry, to profit from a similar rally seen last week, which saw the ETF gain more than 45% over the last six trading sessions.

Indexes Daily Change (%) Net Change Closing Price
Dow -1.09% -300.14 27,272.30
S&P500 -0.78% -25.21 3,207.18
Nasdaq +0.29% +29.01 9,953.75
*Source: Bloomberg

In the foreign exchange market, the dollar was largely mixed against other major currencies on Tuesday. Commodity-related currencies fell, as optimism for an economy recovery resulting from lockdowns easing started to fade. Lower risk currencies were the top performers of the day, highlighting caution in the market as traders await the Fed's monetary policy decision. Traders will likely be focused on FOMC members' outlook for the US, which may be less positive than expected. While last week's employment data was surprisingly better-than-expected, Fed officials are more likely to be cautiously optimistic and acknowledge the high amount of uncertainty that the US economy faces in the short-term. In addition, with protests in the US ongoing, the risk for an acceleration in new Covid-19 cases increases as well. We also expect the Fed to elaborate more on its new Main Street lending program as well as its other stimulus programs to help the US economy recover from the Covid-19 crisis. As a result, demand for lower risk currencies may increase slightly following the Fed's monetary policy decision, providing some possible upside for the dollar against the euro.

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Similar to the forex market, a shift to risk averse assets could be seen among safe haven assets as well. Gold regained its footing, rising close to 1% to close above 1,700. The yen strengthened against the dollar as well. US Treasuries gained across the board, as benchmark 10-year yields fell 5bps to 0.83%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.99% +16.80 1,715.33
Silver -1.35% -0.24 17.46
JPY +0.62% +0.67 107.76
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -2.4bps 0.20%
10-Year -5.0bps 0.83%
30-Year -6.6bps 1.58%
*Source: Bloomberg

Oil futures edged higher on Tuesday, as Bloomberg reports suggested Libya shut production at its top oilfield, Sharara, for the second time on Tuesday. The report cited its sources as unnamed people with direct knowledge of the situation. The oilfield was shut the first time on Monday after armed men entered the site and told employees to end activities but was reopened later. While no official news of the second production halt for the oilfield was given, the news highlighted the uncertainty surrounding oil exports for Libya, which likely provided some upside for crude oil prices. Downside risks for oil has however, risen over the past week despite OPEC+'s decision to extend its current level of production limits to the end of July before tapering it off after. This signals that the pace of oil's recovery is likely to continue to ease, corresponding to the downward trending open interest in WTI crude oil futures since the end of April.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.93% +0.38 41.18
WTI +1.96% +0.75 38.94
*Source: Bloomberg

Asian stocks were mixed on Wednesday morning following the selloff in riskier stocks in the US. The Nikkei will likely continue to face pressure from the stronger yen, while the ASX200 will probably be pulled down by the mining sector as optimism for a global economic recovery eases in the market. In the first hour of trading in their respective markets, the Nikkei and ASX200 were trading lower while the KOSPI was trading higher. Futures tracking major indices in the US were trading higher however, signalling that yesterday's selloff may ease later during today's trading session in the US.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.62% -142.88 22,948.15 8:15:00 AM
KOSPI +0.10% +2.64 2,191.56 8:35:00 AM
ASX200 -0.43% -26.45 6,118.50 8:34:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.35% +97.00 27,361.00 8:24:57 AM
S&P500 Futures +0.34% +11.00 3,216.50 8:25:03 AM
Nasdaq Futures +0.42% +42.00 9,993.00 8:25:00 AM
*Source: Bloomberg

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

  • China May Inflation Rate (CPI) (9.30am)
  • US Jun 5th Mortgage Applications (MBA) (7pm)
  • US May Inflation Rate (CPI) (8.30pm)
  • FOMC Monetary Policy Meeting (2am +1)