Monday, June 15, 2020

Asia Times: Last Friday’s recovery in equity markets may be short-lived as China reports a spike in Covid-19 cases

Tags
  • China
  • Dollar
  • Yen
  • Stocks
  • Oil
  • Bank of England

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Market RecapLast Friday’s recovery in equity markets may be short-lived as China reports a spike in Covid-19 cases

US equities recovered on Friday following a three-day selloff, but it wasn't enough to push the S&P500 to trade in the green year-to-date. The recovery in equity prices were likely due to the easing of the selloff earlier on Thursday, which saw the S&P500 and DJIA suffer its largest loss since March. Dip buying may also have been another contributor to equity market gains on the final day of the week. Breaking down the S&P500, the real estate, financials and energy sectors led gains on Friday, while utilities and consumer staples lagged the most. Companies that led gains in the S&P500 were dominantly airlines and cruise liners. The index data suggests that there was likely some dip buying or possibly rebalancing of portfolios as well to take advantage of the large dip in airline and energy stocks. The US Global Jets ETF posted net outflows on Thursday and Friday last week, the first record of outflows after 70 consecutive inflows.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.90% +477.37 25,605.54
S&P500 +1.31% +39.21 3,041.31
Nasdaq +1.01% +96.08 9,588.81
*Source: Bloomberg

Global equities were largely down on a week-to-week basis however, as the Fed's dim outlook for the US economy and renewed fears for a potential second wave of Covid-19 infections weighed largely on investor sentiment along the week. In addition, the high levels of inflows seen into ETFs earlier last week were suggestive of possible dip buying from retail investors, which may have resulted in an amplification of the selloff due to panic selling. The CSI300 was able to inch higher, as China remains the most likely to show quicker signs of recovery in its economy since it was able to ease lockdown restrictions earlier than its developed counterparts. The index may however face some headwinds this week as cases in Beijing spiked over the weekend as a potential new cluster emerges in a vegetables and fruits market. Officials reported 57 new cases, of which 38 were from Beijing. 36 out of the 38 reported cases in the city belonged to workers or visitors of the market, prompting officials to shut down the market and lockdown nearby housing districts to contain the spread.

Indexes Weekly Change (%) Net Change Closing Price
Dow -5.55% -1,505.44 25,605.54
S&P500 -4.78% -152.62 3,041.31
Nasdaq -2.30% -225.27 9,588.81
FTSE100 -5.85% -379.12 6,105.18
Dax -6.99% -898.40 11,949.28
Stoxx -6.81% -230.55 3,153.74
Nikkei -2.44% -558.25 22,305.48
CSI300 +0.05% +1.83 4,003.08
KOSPI -2.27% -49.57 2,132.30
ASX200 -2.52% -150.90 5,847.81
HSI -1.89% -469.03 24,301.38
STI -2.43% -66.87 2,684.63
*Source: Bloomberg

Major currencies were mixed against the dollar on Friday, but a shift away from risk aversion was apparent. The Swiss Franc and Japanese yen were among the laggards of the group of G10 currencies. Gains in the dollar index were mostly due to drop in the yen and euro. Commodity-related currencies led gains among major currencies, indicating that the easing in risk aversion was also seen in the forex market. The week ahead will be central bank heavy, with decisions from the Bank of England (BoE), Bank of Japan (BoJ) and the Swiss National Bank (SNB).

The BoE, BoJ and SNB looks likely to maintain its key interest rate targets at their respective meetings this week. But the BoE may expand its asset purchase program at this week's meeting, despite Q1's economic data being slightly better than the scenario put forward by the central bank. The decision to expand its quantitative easing program will likely to keep asset purchases at or the current pace of 13.5 billion pounds a week until its next meeting in August, instead of allowing the announced 200 billion pounds worth of purchases in March to end in July. There may be some slight downside for sterling on the announcement of the BoE's decision as a result, but the downward pressure on the currency may not be able to be sustained through the week.

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The safe haven asset market was mostly mixed on Friday, likely as investors strategies shifted in a number of directions over the week. Gold gained, signalling that demand for the precious metal continues to inch higher, likely as form of hedge against another possible selloff in equities. The Japanese yen weakened against both the dollar and euro on Friday, indicating that there was likely some shift back into equities following the sharp decline in stock prices on Thursday. US Treasuries were mixed as well. Short-term treasuries fell while longer-termed once fell. Benchmark 10-year yields were 3.4bps higher at 0.70% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.18% +3.05 1,730.75
Silver -0.91% -0.16 17.49
USD/JPY +0.48% +0.51 107.38
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.4bps 0.19%
10-Year +3.4bps 0.70%
30-Year +5.5bps 1.46%
*Source: Bloomberg

Oil traded relatively muted last Friday, but looks likely to start this week in the red as China announces a new cluster of Covid-19 infections in Beijing. With risk of a spike in Covid-19 infections surfacing across the world, crude oil prices are likely to suffer as demand for energy may potentially face more headwind. But oil prices may not be as volatile this week ahead of an OPEC+ technical committee meeting this Wednesday. Bloomberg reported that the meeting may result in another recommendation for a further extension of production limits if it's deemed necessary, citing a delegate as its source. The meeting may however, highlight an additional risk in the form of members compliance in production limits. This may put some downward pressure on oil prices especially since it seems more likely that the majority of oil producing countries will be more inclined to keep the current level of extensions up until July instead of extending it to August.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.47% +0.18 38.73
WTI -0.22% -0.08 36.26
*Source: Bloomberg

In Asia, equities look set for losses as fears for a spike in Covid-19 infections is likely to weigh on investor sentiment. The Nikkei, KOSPI and ASX200 were all trading lower in the first hour of the trading day on Monday. Futures tracking major US indices were trading lower as of 8.56am (GMT +8) as well, signalling that there may be another selloff in US equities later today.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.52% -114.43 22,191.05 8:46:25 AM
KOSPI -0.86% -18.08 2,114.22 9:06:20 AM
ASX200 -0.59% -34.31 5,813.50 9:06:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -1.56% -389.00 25,009.00 8:56:29 AM
S&P500 Futures -1.47% -43.50 2,980.00 8:56:30 AM
Nasdaq Futures -0.94% -90.00 9,542.25 8:56:29 AM
*Source: Bloomberg

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

  • China May Industrial Production (10am)
  • US June Manufacturing Index (NY Empire State) (8.30pm)