Wednesday, June 17, 2020

Asian Times: Risk appetite grows on fiscal stimulus hopes and improving consumer spending in the US

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  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • CAD

06172020a

Market RecapRisk appetite grows on stimulus hopes and improving consumer spending in the US

US equities advanced for the third day in a row on Tuesday, as better-than-expected retail sales data fuels investor optimism in addition to hopes for additional fiscal stimulus from the US government. May's headline retail sales in the US far exceeded all of the 64 economists that Bloomberg surveyed to grow 17.7% MoM. Core retail sales (excluding auto and gas) also beat expectations, rising 12.4% MoM. Investors welcomed the better-than-expected retail sales data as a sign that the US economy is recovering faster than anticipated, fuelling a shift to risk on positions. A Bloomberg report citing people familiar with a possible US$1 trillion infrastructure stimulus plan from the Trump administration likely also helped drive investor sentiment on Tuesday. The report also said that a preliminary version of the stimulus proposal is being prepared by the Department of Transportation, in which the bulk of funds is expected to be set aside for traditional infrastructure work and 5G network infrastructures.

But while the change in sentiment was apparent when the US stock market opened, Fed Chair Jerome Powell's dim outlook for the US economy during his testimony to a US Senate committee weighed slightly on the optimism. Powell mostly reiterated his statement from the Fed's most recent monetary policy meeting, saying that the US economic still faces high levels of uncertainty and that while employment has shown a significant recovery in May, it is still likely that the labour market well be well short of unemployment levels seen before the Covid-19 pandemic. Financial markets were likely somewhat rattled on the Chairman's speech, as stock prices reversed some of its gains in the hour following the start of his speech. Major indices in the US still managed to each close more than 1.50% higher on Tuesday. The distribution of gains among S&P500 were mixed however, with energy, healthcare and technology stocks rising the most among S&P500 sectors. The mixture in riskier and lower risk sectors implied that while risk appetite likely grew, there may have been hedges in safer sectors against another possible sharp selloff as well.

Indexes Daily Change (%) Net Change Closing Price
Dow +2.04% +526.82 26,289.98
S&P500 +1.90% +58.15 3,124.74
Nasdaq +1.75% +169.84 9,895.87
*Source: Bloomberg

The dollar rose against almost all other major currencies with the exception of the Canadian dollar and Japanese yen, possibly as demand for the greenback's safe haven properties rose on growing risk for another spike in Covid-19 cases. China shut its schools and cancelled 40% of outbound flights to help curb community spread after discovering a new cluster for Covid-19 infections. In the US, Florida reported that new cases of the novel coronavirus rose to the highest level since the pandemic began. Texas is also experiencing a spike in new cases. Powell's testimony on Tuesday likely also had some impact on demand for the dollar.

The Canadian dollar was mostly trading relatively muted in comparison to other major currencies on Tuesday, as traders awaited Bank of Canada (BoC) Governor Tiff Macklem’s testimony to policy makers. Macklem's more dovish statements regarding monetary policy likely helped fuel some demand for the Canadian dollar, rising slightly during the central banker's testimony. During his first public speech since taking over as Governor earlier this month, Macklem signalled that the outlook for Canada remains highly uncertain and that the central still has room on its balance sheet for expansion. He also highlighted that the biggest risk for the Canadian economy would be that stimulus measures for the economy was too weak, which would prolong an economic contraction. Financial markets were likely upbeat on the possibility for new stimulus measure by the BoC, which led the Canadian dollar to gain slightly against the dollar on the Governor's testimony. Gains may be short-lived however, as possible pressure on oil demand and a recovery in demand for the greenback may put pressure on the Canadian dollar.

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Safe haven assets were mostly mixed on Tuesday as a result of contrasting economic signals. Gold and the Japanese yen only managed to inch slightly higher while US Treasuries fell across the board. Benchmark 10-year yields were 3.1bps higher at 0.75% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.08% +1.37 1,726.53
Silver +0.43% +0.07 17.46
USD/JPY -0.01% -0.01 107.32
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.0bps 0.20%
10-Year +3.1bps 0.75%
30-Year +8.2bps 1.54%
*Source: Bloomberg

Oil futures gained on Tuesday on signals that oil supply is continuing to fall. Dated Brent contracts, the benchmark for physical North Sea crude oil, indicates that oil refineries are starting to be more willing to pay premiums to procure immediate barrels, the most bullish signal for oil demand since March. The data suggests that the oil supply cuts by OPEC+ members are starting to show some positive impact on oil supply as energy demand continues to be weighed down by the Covid-19 pandemic. The growing demand from oil refineries were likely driven by a pickup in consumption in China, as the country returns to full capacity after being on lockdown for an extended period of time. There may be some downside for oil prices today however, as China starts to deal with a new cluster of Covid-19 infections. The spike in infections in the US is also likely to weigh on oil traders' sentiment for a recovery in demand as well.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +3.12% +1.24 40.96
WTI +3.39% +1.26 38.38
*Source: Bloomberg

Asian stocks look likely to be mixed on Wednesday, as the prospects for a quicker-than-expected recovery in the US economy is likely to be weighed down by news of rising Covid-19 infections in China and the US. The Nikkei was trading lower, while the KOSPI and ASX200 rose in the first hour of the trading day. Futures tracking major indices in the US were trading slightly higher, but was to flat as of 8.51am (GMT +8), signalling that the last three days of recovery in stock markets may be coming to an end today.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.76% -170.95 22,411.26 8:41:35 AM
KOSPI +0.60% +12.94 2,150.99 9:01:30 AM
ASX200 +0.46% +27.30 5,969.60 9:01:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.06% +15.00 26,208.00 8:51:30 AM
US Futures +0.07% +2.25 3,120.50 8:51:33 AM
Nasdaq Futures +0.14% +14.25 9,975.75 8:51:30 AM
*Source: Bloomberg

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

  • UK May Inflation Rate (CPI/RPI) (2pm)
  • Canada May Inflation Rate (CPI) (8.30pm)