Friday, June 26, 2020

Asia Times: Equities advance on cautious optimism with bank stocks leading gains thanks to easing of regulatory requirements

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil
  • European Central Bank

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Market Recap: Equities advance on cautious optimism with bank stocks leading gains thanks to easing of regulatory requirements

Stocks on Wall Street closed Thursday's trading session higher despite a slow start to the day following higher-than-expected initial jobless claims data. Initial unemployment benefit claims for the week ended June 19th amounted to 1.48 million, falling short of economists' expectations of 1.32 million, continuing to signal that the labour market in the US is likely to recover slower than initially anticipated. A spill over of pessimism from Wednesday likely also put downward pressure on stocks at the beginning of Thursday trading session as the economic impact from rising Covid-19 infections in multiple states in the US start to materialise. Texas put a pause on the reopening of its economy as Houston's Intensive Care Units approaches maximum capacity. Apple’s announcement that it will be closing its 14 stores in Florida also likely added to the pressure on stocks during the trading session.

Financial stocks and possible dip-buying helped stocks gain through the session for the S&P500 to close higher on Thursday. Gains in the financial sector was mostly driven by the approval of changes to the Volcker rule by the Office of the Comptroller of the Currency, allowing banks to invests in funds such as venture capital as well as removing a margin requirement for lenders to guard against certain derivative trades. The easing of regulatory requirements was welcomed by stock markets, pushing bank stocks higher on the day ahead of an annual stress test. Most banks were however trading lower in after-hours trading after the Fed capped dividends and banned buybacks at the largest US banks for the next quarter.

In sector news, financials, energy and the technology sector led gains in the market while the utilities sector was the only loser among the S&P500 sectors. Apple's stock still managed to advance 1.33% despite the announcement of temporary store closures in Florida. Disney's shares dipped 0.63% as the company continues to feel the impact of the Covid-19 pandemic. Disney announced the delay of the reopening of its theme parks in Anaheim, California indefinitely as it deals with the logistics with the reopening of its theme park and wait for government approvals. News that the company is contemplating postponing the release of "Mulan" originally scheduled for July 24th likely also weighed on its share price. Nike's shares ended Thursday's trading session more than 1% higher but fell in after-hours trading after it reported a worse-than-expected loss for its fourth quarter results, impacted largely by store closures and a sharp dip in shipments to wholesalers.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.18% +299.66 25,745.60
S&P500 +1.10% +33.43 3,083.76
Nasdaq +1.09% +107.84 10,017.00
*Source: Bloomberg

Currencies were mixed against the dollar on Thursday but there were signs that there was some shift away from risk averse currencies. The euro fell the most against the dollar, followed by the safer Japanese yen and Swiss franc, signalling that investors were cautiously optimistic in Thursday's trading session. Gains in the dollar was most likely a result of mixed economic data and rising Covid-19 infections. While initial jobless claims for the week ended June 19th was more-than-expected, continuing claims for the week ended June 12th fell below 20 million to 19.522 million. The better-than-expected drop in continuing claims suggested that rehiring may be starting to pick up again, although the recent spike in Covid-19 cases in south States in the US may put some pressure on business sentiment and be reflected in the claims data in the coming weeks. Durable goods orders for May also largely surprised investors, rising more than 15.8%. While the headline number was mostly impacted by aircraft orders and vehicle orders, the stronger-than-expected orders excluding transportation implied that business investments were not as weak as initially thought. However, it does seem that business investments will remain flat following the jump in May, as a result of weak corporate earnings and as business sentiment gets impacted by the recent spike in Covid-19 cases across multiple states.

The euro fell the most among major currencies after the European Central Bank's (ECB) June monetary policy meeting minutes suggested that the central bank is unlikely to tighten its monetary policy tools anytime soon. The meeting minutes revealed that the central bank is growingly more pessimistic for inflation in the bloc, as earlier progress on the matter before the onset of the Covid-19 pandemic regresses. Risk of deflation is also now being monitored by the central bank, a major shift from when previous ECB President Mario Draghi was in office less than a year ago. The meeting minutes also highlighted that the ECB's economic outlook scenario analysis may be overly optimistic if an effective medical treatment is not available by mid-2021. The euro fell 0.29% against the dollar as a result.

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Safe haven assets were a mixed bag on Thursday once again, as cautious optimism is likely to dominate investors’ positions with Covid-19 infections rising and economic data indicating a recovery for the global economy. Gold inched higher, likely as a hedge against high valuations in the equity market. The yen fell against the dollar but advanced against the euro, although most of it was likely a result of the movements in the euro and greenback. US Treasuries were close to flat, but benchmark 10-year yields managed to eke out some gains, rising 0.7bps to 0.69%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.15% +2.62 1,763.79
Silver +1.72% +0.30 17.80
USD/JPY +0.14% +0.15 107.19
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.19%
10-Year +0.7bps 0.69%
30-Year +0.5bps 1.43%
*Source: Bloomberg

Oil futures rose on Thursday thanks to a Bloomberg report saying that Russia is planning to cut its Ural crude exports in July by 40% MoM to 785,000 barrels a day. While official reports were not available, exports of Urals crude were already scheduled to drop to 880,000 barrels a day for the first 10 days of July, suggesting Moscow's willingness to comply with the OPEC+ agreement earlier this month. Demand issues still put downward pressure on oil prices however, after Texas announced that it would be pausing its reopening of its economy. Oil at its current price may start to increase interest for US shale oil drillers to restart oil rigs, which will likely complicate the outlook for crude oil prices. More than a third of shale explorer polled by the Dallas Fed said that they plan to restart most of their idled output by the end of the month. More than half of the surveyed executives also said that they planned to restart production by the end of July, signalling that a new inflow of supply is likely to put some downward pressure on crude oil prices. The upside potential for crude oil as a result looks to be fading as global demand is likely to continue to recover, but at a slower rate than expected. In addition, with the strong recovery in crude oil prices over May and June, the market may be overly optimistic of a recovery in energy demand and a reduction in crude oil supply without fully reflecting the increasing levels of downside risk.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.84% +0.74 41.05
WTI +1.87% +0.71 38.72
*Source: Bloomberg

Asian stocks look likely to rise on Friday and recover some of its losses over the week. The Nikkei, KOSPI and ASX200 were all trading higher in the first hour of Friday's trading session. Futures tracking major indices in the US were mixed however, with only Nasdaq futures trading in the green as of 8.51am (GMT +8). This suggests that there may be more room for stocks in the US to fall today. Personal income and spending figures for May will likely be a driver for stock prices today, with personal income expected to drop following inflated figures in April thanks to the government pay outs. It may decline less-than-expected in May however, since there will likely be some spill over in government pay outs in May after it was reported that approximately two-thirds of government pay outs reached consumers in the US. Personal spending is likely to be close to expectations, supported mostly by the reopening of businesses in May. US consumer savings rate will also be a closely watched figure, which should start to fall slightly from the record high of 33% in April. A reversal to below 10% in savings is unlikely to materialise however, since consumer sentiment will likely impact spending and the likelihood of spending in May to compensate for reduced spending in March and April is unlikely.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.78% +175.85 22,435.67 8:41:30 AM
KOSPI +0.72% +15.40 2,127.77 9:01:30 AM
ASX200 +1.11% +65.02 5,882.70 9:01:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.35% -89.00 25,507.00 8:51:33 AM
US Futures -0.07% -2.00 3,068.75 8:51:34 AM
Nasdaq Futures +0.04% +3.75 10,092.00 8:51:31 AM
*Source: Bloomberg

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

  • US May Inflation Rate (PCE) (8.30pm)
  • US May Personal Income/Spending (8.30pm)
  • US June Consumer Sentiment (U. of Mich) (F) (10pm)