Wednesday, July 1, 2020

Asia Times: S&P500 ends Q2 2020 19.95% higher as hopes for additional stimulus measures help eke out gains in June

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Market RecapS&P500 ends Q2 2020 19.95% higher as hopes for additional stimulus measures help eke out gains in June

Stocks on Wall Street advanced on Tuesday as hopes for more stimulus and better-than-expected consumer sentiment helped outweigh the increasing Covid-19 infections in US. As per market expectations, Fed Chair Jerome Powell mostly reiterated statements in previous speeches during his testimony in front of the House Financial Services Committee on Tuesday in the US. The highlights of the joint testimony with US Treasury Secretary Steven Mnuchin included an emphasis on the containment of the Covid-19 pandemic in the US to ensure a robust economic recovery. Powell also noted during the testimony that the central bank has room to lower the threshold for the Fed's Main Street Lending Facility Program to increase support for small and medium sized businesses. Powell also again warned against pulling back on any form of stimulus too early, which would be detrimental to an economic recovery in the US while Mnuchin reiterated the Trump administration's goal to pass an additional fiscal stimulus bill by the end of July. The statements from both Powell and Mnuchin likely helped fuel expectations for more stimulus in the US, which in large part has been a driver for the US equities market since March. The S&P500 and Nasdaq rose more than 1.50% as a result, while the DJIA only rose 0.85%.

The energy and technology sector rose the most on Wednesday among S&P500 sectors. Energy was likely driven by optimism for an economic recovery following the better-than-expected consumer confidence index from the US Conference Board, which rose to 98.1 for June. Technology stocks were mostly driven by Micron's bullish outlook for the rest of the year. Datacenter demand was highlighted in Micron's report, prompting multiple analysts to revise their target price for the company’s stock upwards. The company's expectations for smartphone and consumer end-unit sales to continue to improve also helped drive investor sentiment for demand for technology amid the new Covid-19-induced working environments. Micron's stock rose 4.83% on Tuesday as a result. In company news, Boeing's stock plunged 5.75% on Tuesday following a 14.40% surge on Monday after Norwegian Air announced in a statement that the airline is cancelling its 97 orders from Boeing and seeking compensation from the aircraft maker for losses related to the grounding of the 737 Max aircraft.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.85% +217.08 25,812.88
S&P500 +1.54% +47.05 3,100.29
Nasdaq +1.87% +184.61 10,058.77
*Source: Bloomberg

Stocks in the US ended the second quarter of the year with the biggest percentage gain since 1998 after a sharp decline in the first quarter of the year. Most of the quarter’s gains were derived in May, as easing lockdown restrictions and strong stimulus measures fueled expectations for a sharp economic recovery in the US. Gains in June were relatively subdued, with the DJIA and S&P500 gaining slightly more than 1.5% during the month. The S&P500 is still 4.04% lower year-to-date, while the DJIA is 9.55% lower. The Nasdaq has reaped the most benefits during the period, advancing 12.11% year-to-date and 30.63% during Q2 2020 as investors shift to technological stocks as a form of defence against the global lockdowns, expecting those stocks to recover much faster as opposed to other sectors. Moving forward, volatility in the next quarter is likely to ease, which implicitly means that we should see lower gains or losses over the quarter. An economic recovery is still likely, but at a much more gradual pace than expected especially with new Covid-19 infections spiking in the US. A potential stimulus bill from the US government in July is likely to drive stock markets once again, but the surge may be temporary as a longer-term recovery is more reliant on the ability of the US to curb the spread of Covid-19 infections. Renewed lockdown restrictions in several states looks to be increasingly likely, although a nationwide-lockdown is unlikely. This would mean that the US economy is likely to experience an imbalance in an economic recovery. The employment market should then be closely watched, as multiple industries are likely to continue to experience large amounts of downward pressure, which could potentially lead to an extended period of unemployment for workers in those industries.

Indexes Quarterly Change (%) Quarterly Net Change Closing Price
Dow +23.25% +4,869.37 25,812.88
S&P500 +25.49% +629.79 3,100.29
Nasdaq +36.66% +2,698.18 10,058.77
FTSE100 +13.11% +715.17 6,169.74
Dax +28.98% +2,766.18 12,310.93
Stoxx +20.66% +553.77 3,234.07
Nikkei +23.37% +4,222.73 22,288.14
CSI300 +13.30% +488.88 4,163.96
KOSPI +25.09% +422.87 2,108.33
ASX200 +12.16% +639.25 5,897.88
HSI +5.81% +1,341.40 24,427.19
STI +6.13% +149.64 2,589.91
*Source: Bloomberg

The dollar mostly fell against other major currencies on Tuesday, signalling another spurt in risk appetite. The Japanese yen and the euro were among the losers in the G10 basket of currencies on Tuesday, with the yen being the worst performer. The drop in the dollar was likely thanks to increasing speculation for stimulus from both the Fed and US government following Powell and Mnuchin's testimony on Tuesday in the US. Sterling surged the most among major currencies on Tuesday after EU Brexit Chief Negotiator Michel Barnier said that a Brexit deal is possible and that the EU is working towards it.

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Safe haven assets were skewed towards the downside on Tuesday thanks to growing optimism in the financial markets. Gold inched higher towards 1,800, likely as hedging positions increases as the equity market continues to rise despite rising Covid-19 infections in the US. The Japanese yen fell against both the dollar and the euro, while US Treasuries fell across the board. Benchmark 10-year yields rose 3.3bps as a result, to 0.66%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.46% +8.14 1,780.96
Silver +1.95% +0.35 18.21
USD/JPY +0.33% +0.35 107.93
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.0bps 0.15%
10-Year +3.3bps 0.66%
30-Year +3.7bps 1.41%
*Source: Bloomberg

Oil futures fell on Tuesday, but may be able to eke out gains on Wednesday after the American Petroleum Institute's (API) weekly crude oil report suggested that US crude oil stockpiles fell for the week ended June 26th. While there may be some upside potential for crude oil futures today, traders will likely also be focused on the official report from the US Energy Information Administration (EIA) later today at 10.30pm (GMT +8). API reported on Tuesday in the US that US crude stockpiles had declined 8.16 million barrels last week, and if confirmed by the official report from EIA, would be the largest decline since December last year. The report however, suggested that inventories in Cushing, Oklahoma rose, which may be a signal of a slight ease in demand for energy. China's economic data continuing to suggest that economic activity in its domestic economy is continuing to recover is likely to help crude oil prices as well. As a result, the outlook for oil prices should remain relatively similar to before, i.e. a continued recovery at a slower pace as supply and demand for energy extends into a gradual normalisation at levels lower than that was seen before the Covid-19 pandemic earlier this year.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.39% -0.58 41.27
WTI -1.08% -0.43 39.27
*Source: Bloomberg

Stocks in Asia looks set to rise, albeit at a slower pace than yesterday as optimism from the US spills over into Asian markets while at the same time regressing back towards cautionary positions. The Nikkei, KOSPI and ASX200 were each trading higher in the first hour of the trading day. Futures tracking major indices in the US were trading lower as of 8.50am (GMT +8), signalling that optimism is starting to ease among financial market participants and we may see a slight pullback in stock valuations later when the US stock market reopens.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.22% +48.25 22,335.45 9:08:20 AM
KOSPI +1.00% +21.31 2,128.85 9:28:20 AM
ASX200 +0.68% +40.32 5,934.60 9:28:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.32% -83.00 25,617.00 9:18:21 AM
US Futures -0.28% -8.25 3,083.00 9:18:24 AM
Nasdaq Futures -0.16% -16.25 10,134.25 9:18:18 AM
*Source: Bloomberg

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

  • China June Manufacturing PMI (Caixin) (9.45am)
  • Germany June Unemployment Rate/Change (3.55pm)
  • US June Private Employment Change (ADP) (8.15pm)
  • US June Manufacturing PMI (ISM) (10pm)