Thursday, June 18, 2020

Asia times: Geopolitical risks and fears for renewed lockdown restrictions put pressure on financial markets on Wednesday

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil
  • Bank of England

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Market RecapGeopolitical risks and fears for renewed lockdown restrictions put pressure on financial markets on Wednesday

Stocks in the US ended its three-day recovery on Wednesday as Covid-19 fears start to outweigh optimism in the financial markets. Covid-19 cases in the US spiked across multiple states, most notably in Texas, Florida and Arizona. New York however, looks to be on track to ease lockdown restrictions to the second phase on Monday. Fed Chair Jerome Powell's reiteration of the central bank's warnings for a decrease in fiscal support from the US government during his testimony to the House Financial Services Committee likely continued to put pressure on stocks as well.

Increasing geopolitical risks may have possibly weighed on investors' sentiment as well, as trade friction rises between the US and the EU rises. US Trade Representative Robert Lighthizer told Congress that US Treasury Secretary Steven Mnuchin withdrew the US from international trade talks over digital taxes with the EU as there was little progress on the issue with countries looking to impose taxes on revenue of large tech companies such as Amazon and Facebook. The move could potentially end in both the EU and US both imposing taxes on various large digital technology companies in retaliation, although this looks to be unlikely as both parties deal with the Covid-19 pandemic. Lighthizer did also signal that there is still room for negotiations between the countries, signalling that a lengthy negotiation on global tax issues are likely to ensue. Most S&P500 sectors were down on the day as a result. The shift back towards more defensive sectors were seen again on Wednesday, with the energy and financial sector lagging the most among S&P500 sectors while the consumer discretionary, communication services and technology sectors were the only ones that managed to inch higher on the day.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.65% -170.37 26,119.61
S&P500 -0.36% -11.25 3,113.49
Nasdaq +0.15% +14.66 9,910.53
*Source: Bloomberg

The dollar was mixed on Wednesday among major currencies, but the skew in demand for lower risk currencies were apparent. The Japanese yen and Swiss franc outperformed the dollar index on Wednesday, while the euro led losses among major currencies. The fall in demand for the euro was likely due to the breakdown in trade talks with the US, which may put downward pressure on the currency as traders shifted back to the dollar for its safe haven properties. The Swiss National Bank (SNB) will be deciding on its monetary policy later today, but no change to its current policy is expected. Interest rates will likely on hold, and the central bank will likely reaffirm its commitments to prevent its currency from over-appreciating. As a result, the central bank’s decision is unlikely to largely influence the Swiss franc, which should instead be more affected by the fluctuating risk sentiment in financial markets.

Sterling looks likely to be less volatile ahead of the Bank of England's (BoE) decision on monetary policy later today. Economists mostly expect an expansion to its asset purchase program of 100 million pounds, which will allow the central bank to continue its pace of purchases to its next meeting in August. While there were earlier signals from BoE Governor Andrew Bailey that negative interest rates were part of a broader discussion for the use of unconventional monetary policy tools, it looks unlikely that the central bank will be inclined to move in that direction at today's meeting. This is due to the UK's economy being mostly on track with the BoE's expectations for Q1 2020. Instead, the central bank will likely save that strategy to much later in the economic cycle, especially with Brexit negotiations likely to develop more in the second half of the year. Sterling may as a result have some slight downside potential on the announcement of the decision.

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Demand for safe haven assets grew on Wednesday as downside risks continue to materialise. Gold was mostly flat, but managed to inch slightly higher. The Japanese yen gained against both the dollar and euro as well. US Treasuries rose across the board. Benchmark 10-year yields fell 1.5bps to 0.74% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.02% +0.42 1,726.95
Silver +0.28% +0.05 17.51
USD/JPY -0.29% -0.31 107.01
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.4bps 0.20%
10-Year -1.5bps 0.74%
30-Year -1.4bps 1.53%
*Source: Bloomberg

Oil futures fell slightly on Wednesday as traders digest OPEC’s June report while waiting on OPEC+ members to meet on Thursday to review the current economic environment for crude oil. In its June report, the coalition signalled that while it expects a gradual recovery in oil demand 2H 2020, certain sectors such as travel and leisure are likely to continue to face downward pressure. The report also noted the high levels of unemployment and potential default rates are likely to weigh on an economic recovery, which may result in a recovery being unable to compensate for the significant decline earlier in the first half of the year. The US Energy Information Administration's (EIA) report may have provided some support for crude oil prices despite increasing US stockpiles. The EIA's report showed that crude production fell by 600,000 barrels per day for the week ended June 12th, although this may only be temporary due to the forced closures of facilities along the Gulf of Mexico due to Tropical Storm Cristobal. Diesel inventories in the US also fell for the first time in 11 weeks, signalling that industrial demand has started to pick up with factories reopening in the US.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.61% -0.25 40.71
WTI -1.09% -0.42 37.96
*Source: Bloomberg

In Asia, stocks were trading lower on Thursday morning and looks likely to continue on a downward trend as geopolitical risk rises and fears for a resurgence in Covid-19 cases continues to heighten. The Nikkei was trading lower on Thursday morning and will likely be impacted by a strengthening yen as well. The KOSPI and ASX200 were trading lower in the first hour of Thursday's trading session. Futures tracking major indices in the US fell on Thursday morning in Asia, signalling that optimism may continue to fade in financial markets when the US market opens for Thursday's session.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.54% -121.37 22,334.39 8:37:05 AM
KOSPI -0.21% -4.42 2,136.63 8:57:00 AM
ASX200 -0.95% -56.57 5,935.20 8:56:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.85% -219.00 25,806.00 8:47:08 AM
US Futures -0.75% -23.25 3,083.75 8:47:08 AM
Nasdaq Futures -0.57% -56.50 9,926.50 8:47:06 AM
*Source: Bloomberg

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

  • SNB Monetary Policy Decision/Statement (3.30pm)
  • SNB Chair Jordan's Speech on Monetary Policy (4pm)
  • BoE Monetary Policy Decision/Statement (7pm)
  • US June 12th Initial Jobless Claims (8.30pm)
  • US June 5th Continuing Jobless Claims (8.30pm)