Thursday, June 25, 2020

Asia Times: Major US indices suffer its worst drop since June 11th after the IMF revises its forecast for the global economy downwards

Tags
  • Dollar
  • Yen
  • Euro
  • Stocks
  • Oil

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Market Recap: Major US indices suffer its worst drop since June 11th after the IMF revises its forecast for the global economy downwards

Equities slumped on Wednesday as investors start to discount stock prices on a potentially slower economic recovery in the US. Florida and California both set daily records for new Covid-19 infections. The consistently growing numbers of infections in a number of states prompted governors in New York, New Jersey and Connecticut to announce that visitors from states with high Covid-19 infections rates will be required to self-quarantine for 14 days on arrival. The announcement from the governors in states with flattening Covid-19 infection rates was likely the catalyst for yesterday's dip in stock prices as it confirmed the likely impact on the US' economic recovery. A downgrade by the International Monetary Fund (IMF) for the global economy's outlook likely also put downward pressure on investors' optimism and consequently stock valuations in the US. The IMF revised its forecast for global GDP down to -4.9% for 2020, from -3% in April and its forecast for US GDP growth for 2020 down to -8% from -5.9% in April. It's forecast for 2021 was revised downwards to 5.4% from 5.8% as well. Reports on Wednesday that the US is considering imposing new tariffs on US$3.1 billion worth of exports from France, Germany, Spain and the UK likely added to the prospects for downside risk opposing an economic recovery for the US in equity prices on Wednesday as well.

The energy, industrials and financials sectors lagged the most among S&P500 sectors on Wednesday thanks to fears for renewed lockdown restrictions across multiple states. Energy stocks lost the most as a result of worries on both crude oil demand and supply after the US Energy Information Administration (EIA) reported that US crude oil inventory hit a new record high after rising 1.44 million barrels to over 540 million for the week ended June 19th. Among companies, travel related stocks dropped the most, with cruise operators (Norwegian Cruise line, Royal Caribbean Cruises, Carnival Corp) falling the most as speculation for a slower recovery for travel demand starts to dominate investor sentiment once again.

Indexes Daily Change (%) Net Change Closing Price
Dow -2.72% -710.16 25,445.94
S&P500 -2.59% -80.96 3,050.33
Nasdaq -2.19% -222.20 9,909.17
*Source: Bloomberg

The dollar gained against all other major currencies as risk aversion spiked on worries for renewed lockdown restrictions in the US. Other lower risk currencies such as the Swiss franc and Japanese yen fell the least against the dollar, highlighting the shift away from riskier positions in the currency market as well. Commodity-related currencies were likely impacted by the IMF's more pessimistic outlook on global demand as traders discount asset prices on considerations for a greater dent in global economic activity, dampening the outlook for commodity reliant economies as a result.

The New Zealand dollar was one of the worst performers against the dollar among the basket of G10 currencies after the Reserve Bank of New Zealand's (RBNZ) announcement of its decision on monetary policy. As per market expectations, the RBNZ kept interest rates unchanged along with the size with its quantitative easing program on Wednesday. While the central bank did note of its increased confidence in New Zealand’s economic outlook, dovish comments from the RBNZ far outweighed any confidence that the central bank signalled in its statement. The RBNZ highlighted the negative impact of the virus outbreak for the New Zealand economy as continued border closure puts more downward pressure on its tourism industry and subsequently the domestic economy. In addition, the central bank also signalled a potential expansion of its Large Scale Asset Purchase (LSAP) program and possibly other additional monetary policy tools if needed.

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Gold fell slightly in contrast to equity prices, signalling that the precious metal likely still retained some demand as a hedge against high stock valuations in the US. Margin calls and a rise in the greenback may also have impacted gold prices on Wednesday as well. The Japanese yen fell against the dollar but managed to inch a touch higher against the euro on Wednesday. US Treasuries mostly rose across the board. Two-year yields inched slightly lower but remained mostly flat. Benchmark 10-year yields fell 3.3bps to 0.68%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.41% -7.24 1,761.17
Silver -2.47% -0.44 17.50
USD/JPY +0.49% +0.52 107.04
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.19%
10-Year -3.3bps 0.68%
30-Year -6.3bps 1.43%
*Source: Bloomberg

Oil futures erased gains over the past six trading session on Wednesday, weighed by both demand and supply woes. With travel restrictions over increasing Covid-19 cases in the US starting to materialise, the outlook for crude oil demand looks to be once again dampened as oil traders walk back on earlier optimism that crude oil demand was recovering. Supply woes continue to put pressure on crude oil prices as well after the EIA report for the week ended June 19th showed US crude oil inventories rose for a third week in a row. The EIA's report also showed gasoline demand improving in the US which should normally indicate that crude oil demand is on a recovery trajectory. However, an expansion in diesel inventories contradicts this sentiment, suggesting that the increase in demand for gasoline is likely unproductive and only a temporary result of lockdown restrictions easing across the US. Brent crude oil has started to shift back into a contango as well, further suggesting that market sentiment may be starting to shift back to expectations for crude oil supply to increase faster than demand.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -5.44% -2.32 40.31
WTI -5.85% -2.36 38.01
*Source: Bloomberg

In Asia, stocks opened Thursday's trading day lower as concerns that the US and the global economy is expected to recover at a slower rate than before weighs on investors' sentiment. The Nikkei fell the least in the first hour of Thursday's trading session as compared to the KOSPI and ASX200 which were both trading more than 1% lower. Futures tracking major indices in the US inched higher on Thursday morning, signalling that the selloff in equity markets may start to ease.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.69% -154.70 22,379.62 8:28:40 AM
KOSPI -1.08% -23.08 2,138.43 8:48:40 AM
ASX200 -1.05% -61.85 5,903.90 8:48:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.07% +20.00 25,412.00 8:38:42 AM
US Futures +0.02% +0.75 3,049.75 8:38:42 AM
Nasdaq Futures +0.04% +4.25 10,015.00 8:38:42 AM
*Source: Bloomberg

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

  • Germany July Consumer Confidence Survey (Gfk) (2pm)
  • ECB June Monetary Policy Meeting Minutes (7.30pm)
  • US May Durable Goods Orders (8.30pm)
  • US June 19th Initial Jobless Claims (8.30pm)
  • US June 12th Continuing Jobless Claims (8.30pm)
  • US Q1 GDP (F) (8.30pm)