Tuesday, June 16, 2020

Asia Times: Risk appetite returns with the Fed’s latest decision to expand its scope of its SMCCF program

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • Bank of Japan
  • Federal Reserve

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Market Recap:Risk appetite returns with the Fed’s latest decision to expand its scope of its SMCCF program

Wall Street started the week with gains as central bank news drives the market. The Fed made headlines on Monday after announcing that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility (SMCCF), expanding the scope of the program which was previously limited to ETFs. The expansion of scope of the program will be part of a strategy to purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified index of US corporate bonds. This would effectively provide added liquidity in the corporate bond market, since the central bank is essentially acting as a buyer of corporate bonds. The announcement from the Fed pushed stocks back to trade positive on Monday, after starting the trading session lower from Friday's close. The S&P500 as a result gained more than 2% from open and ended the day 0.83% higher from Friday's close.

The shift back to optimism was also seen in the stock market, with small-cap indices Russell 2000 and S&P600 outperforming the three major indices in the US. In sector news, financial stocks benefitted from the central bank's decision, leading S&P500 sectors in gains. The energy sector lagged the most, followed closely by healthcare sector stocks.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.62% +157.62 25,763.16
S&P500 +0.83% +25.28 3,066.59
Nasdaq +1.43% +137.21 9,726.02
*Source: Bloomberg

The dollar fell against all other major currencies as risk appetite returned following the Fed's decision. Commodity-related currencies were among the top performers, further signalling the reversal in investor sentiment seen just last week. Better-than-expected manufacturing data from New York Empire State likely also helped drive sentiment before the US stock exchange opened for trading. The Empire manufacturing index for June was -0.2, much more positive than the median economist forecast for -29.6. The improvement in economic data comes in addition to May’s better-than-expected employment data, and will likely help to fuel investor sentiment this week as well.

The Bank of Japan (BoJ) looks set to keep rates and most of its asset purchase programs unchanged. Only its small businesses lending program is expected to change, to better accommodate the Japanese government's additional stimulus measures that were announced last month. A deeper cut of interest rates into negative territory will very likely not be seen at today's decision, especially since the Japanese yen has not strengthen past its high in March. As a result, there should be some slight downside for the Japanese yen on the decision. The growing risk appetite in the market may however continue to push the Dollar Yen lower, as the demand for the greenback looks set to fall for the second day in a row as investors in Asia returns to the market.

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Risk-off sentiment was also seen in safe haven assets. Gold fell slightly on Monday, but remains well above the 1,700 mark. The yen strengthened slightly against the dollar, but this was mostly due to the dip in the greenback. The yen was however, the worst performing currency in the G10 basket and fell 0.53% against the euro. US Treasuries were mixed. Two-year Treasuries inched slightly higher, while longer-termed ones fell. Benchmark 10-year yields gained 1.8bps to 0.72% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.32% -5.59 1,725.16
Silver -0.62% -0.11 17.38
USD/JPY -0.05% -0.05 107.33
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.4bps 0.19%
10-Year +1.8bps 0.72%
30-Year +0.4bps 1.46%
*Source: Bloomberg

Oil futures gained more than 2% on Monday, as signs that both supply and demand were recovering in crude oil market helped drive investor sentiment despite growing risk of a second wave of Covid-19 infections. UAE Energy Minister Suhail Al Mazrouei signalled during a press conference that there were signs that demand for oil was picking up, likely helping to life oil prices higher. Reports from Bloomberg citing people familiar with the matter suggesting that Iraq was making moves to comply with the OPEC+ output limit agreement likely also helped drive oil prices despite there not being any official comments on the matter. Downside risks for oil are still present however, as new clusters of Covid-19 cases start to appear, risk that lockdown restrictions are re-enforced rises. But while there is potential of renewed lockdown restrictions across the world, the severity of it will likely not be near that of which was seen in March and April, implying that the downside risks for oil demand stemming from a second wave of the virus is present but limited.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.56% +0.99 39.72
WTI +2.37% +0.86 37.12
*Source: Bloomberg

In Asia, stocks look set to track gains in the US and recover most, if not all of Monday's losses. The Nikkei, KOSPI and ASX200 were each trading close to 3% or higher in the first hour of Tuesday's trading session. Futures tracking major indices in the US were trading close to 1% higher as of Tuesday 8.47am (GMT +8) as well, signalling that there may be room for another rally in the US market when it opens for its Tuesday session.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +2.73% +605.18 22,136.13 8:37:10 AM
KOSPI +3.36% +70.52 2,101.34 8:57:10 AM
ASX200 +3.11% +183.77 5,903.60 8:57:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.91% +237.00 25,912.00 8:47:14 AM
US Futures +0.70% +21.50 3,083.50 8:47:14 AM
Nasdaq Futures +0.68% +66.75 9,855.25 8:47:12 AM
*Source: Bloomberg

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

  • BoJ Monetary Policy Decision/Statement (11am)
  • UK Apr Unemployment Rate (ILO) (2pm)
  • BoJ Governor Kuroda's Speech on Monetary Policy (2pm)
  • Germany June Economic Sentiment Survey (ZEW) (5pm)
  • US May Retail Sales (8pm)
  • US May Industrial Production (9.15pm)
  • Fed Chair Powell Present Semi-Annual Policy Report to Senate Panel (10pm)