Friday, June 12, 2020

Asia Times: The Dow sinks 1,862 points on Thursday, erasing all of its gains from last week’s rally

Tags
  • Dollar
  • Gold
  • Yen
  • Oil
  • Dow Jones

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Market RecapThe Dow sinks 1,862 points on Thursday, erasing all of its gains from last week’s rally

Stocks dived in the US as renewed concerns over a potential second wave of Covid-19 cases in the US sparks the third day of sell offs. While the Fed's meeting likely had some additional impact on market sentiment moving into Thursday's trading session, the more likely explanation may be a mix of a number of factors. Covid-19 numbers have started to spike in multiple states across the US including states such as Texas, South Carolina and Florida, which likely sparked some fear that a second wave of Covid-19 is near and could potentially backtrack the US' plans for an economic recovery. Profit-taking may also have been a possible reason for the sharp decline earlier in the week, and could have been amplified by retail investors’ panic selling. Over the past few weeks, we have seen a rise in ETF flows, with record inflows into airline ETFs, suggesting that retail investors may have been entering the market in an attempt to profit from the sharp decline in stock prices seen earlier in March. The selloff in gold also indicates that some margin calls on equity market positions likely put even more pressure on equity prices, as some investors may have been forced to close call options or leveraged long positions, resulting in a sharper sell off.

The three major US indices plummeted on Thursday, falling more than 5% in its biggest one-day drop since March 15th. The three-day sell off seen in the equities market this week has now erased all gains in last week's rally. Energy and travel related stocks were affected the most. Boeing's stock, that saw gains of about 59% in last week's rally plunged 16.42% on Thursday to lose more than 26% over the past three trading sessions. Among S&P500 sectors, the energy sector lagged the most, shedding 9.45% with the financials sector close behind to fall 8.18%. Even sectors regarded as defensive ones such as consumer staples lost 3.81% on Thursday. It is also important to note that sentiment among investors was likely skewed heavily towards the downside, as major indices showed little sign of recovering through the trading session. Among individual S&P500 stocks, Kroger was the only stock on the S&P500 that made gains, inching 0.40% higher, while the majority of the top 10 laggards were airlines, cruise liners or energy stocks.

Indexes Daily Change (%) Net Change Closing Price
Dow -6.90% -1,861.82 25,128.17
S&P500 -5.89% -188.04 3,002.10
Nasdaq -5.27% -527.62 9,492.73
*Source: Bloomberg

The dollar recovered on Thursday, as demand for its safe haven aspects returned as a result of the plunge in equity prices. The greenback gained against all other G10 currencies, with the exception of the Japanese yen. commodity-related stocks lagged the most against the dollar, as optimism for a global economic recovery in the near future faded with increasing fears that a potential second wave of Covid-19 infections will bring back lockdown restrictions. Jobless claims data in the US released on Thursday likely also put some weight on investor sentiment.

Initial jobless claims continued to slow, but still remained above 1 million for the week ended June 5th. Continuing claims, which should be a stronger focus since layoffs in the US likely peaked in April, has underperformed expectations for the second week in a row. The number of people continuing to claim benefits fell slightly to approximately 20.93 million for the week ended May 29th, instead of the drop to 20 million expected from economists. The data supported Fed Chair Jerome Powell's expectations that while employment is likely to improve, it is unlikely to be a sharp recovery as some might expect. The dollar may have more room to rise as a result, with market sentiment strongly shifting back to risk aversion.

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Demand for safe haven assets were mixed on Thursday, possibly as a result of profit taking or margin covers. Gold inched lower along with shorter-termed US Treasuries. The Japanese yen managed to strengthen against the dollar, signalling that the Bank of Japan's worries for a strong currency will likely be renewed. Longer-termed US Treasuries rose as well, pulling benchmark 10-year yields down 5.7bps to 0.67%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.63% -11.00 1,727.70
Silver -2.55% -0.46 17.65
USD/JPY -0.23% -0.25 106.87
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +3.0bps 0.20%
10-Year -5.7bps 0.67%
30-Year -10.4bps 1.40%
*Source: Bloomberg

Crude oil futures dropped the most since late April, as fears for a potential spike in Covid-19 cases spilled over into the commodities market. Renewed fears as well as record high US oil stockpiles likely sparked a sell off in crude oil futures as well especially since the pace of recovery in crude oil future prices has been stronger than anticipated following constant news of lockdown restrictions easing instead of economic data. While oil prices are likely to remain low relative to prices seen earlier this year before the Covid-19 pandemic, a continued recovery in prices still looks likely, albeit at a much slower pace compared to before. This is due to the clamping down of crude oil supply, which should continue to show progress through this month and July. Demand should also slowly return as the economic activity picks up. As a result, while prices are unlikely to reach that of January's or 2019's, it is still more likely that oil prices have room to rise. It will also be important to note the downside risks, which at this point will be in the form of a second wave of Covid-19 cases, as well as OPEC+'s latest agreement breaking down due to non-compliance.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -7.62% -3.18 38.55
WTI -8.23% -3.26 36.34
*Source: Bloomberg

Asian equities look set for a day of large losses as well on Friday. The Nikkei will most likely suffer from the strengthening yen. The ASX200 and KOSPI were also trading more than 3% lower in the first hour of Friday's trading session. Other Asian markets are likely to follow, although the selloff may show some easing towards the end of the trading session ahead of the weekend. Futures tracking major indices in the US were trading higher as of Friday 8.45am (GMT +8), potentially signalling that the sharp decline in the US may ease today.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -1.83% -404.05 22,068.86 8:33:55 AM
KOSPI -3.49% -73.36 2,103.42 8:53:50 AM
ASX200 -3.39% -195.44 5,765.20 8:53:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.63% +158.00 25,189.00 8:43:54 AM
S&P500 Futures +0.51% +15.50 3,015.00 8:44:01 AM
Nasdaq Futures +0.41% +39.00 9,642.50 8:43:51 AM
*Source: Bloomberg

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

  • Japan Apr Industrial Production (F) (12.30pm)
  • UK Apr Industrial/Manufacturing Production (2pm)
  • US June Consumer Sentiment (U. of Mich) (P) (10pm)