Wednesday, July 8, 2020

Asia Times: Aussie falls on downbeat comments from the RBA on an economic recovery following flare ups of Covid-19 cases in the state of Victoria

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  • Dollar
  • Gold
  • Yen
  • Euro
  • Oil
  • AUD
  • RBA

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Market Recap: Aussie falls on downbeat comments from the RBA on an economic recovery following flare ups of Covid-19 cases in the state of Victoria

US equities ended Tuesday's trading session lower, possibly as optimism from recent upbeat economic data releases started to ease in financial markets. All three major indices in the US fell, ending the week-long rally for the S&P500 and the Nasdaq. Profit-taking coupled with some risk aversion was likely a factor in Tuesday's pullback in the equities market, as new Covid-19 infections continued to spike up across multiple states in the US. New cases of Covid-19 in Texas, California, Arizona and Florida continued to trend up, along with the percentage of people testing positive in the respective states according to data from John Hopkins University. The data signals that it is likely that we will continue to see infections rise in those states as the states ramp up their rate of testing, before the uptrend starts to ease. As a result, equity prices may face some downward pressure from this, along with the upcoming corporate earnings season which should kick off in the third week of July with quarterly reports from major US banks. Expectations for additional fiscal stimulus towards the end of the month may help to drive equity markets, along with economic data in the US that is likely to continue to show that the US economy is recovering. But the spike in Covid-19 infections is likely to have more negative medium-term impacts, since it is looking more likely that we will see renewed lockdown restrictions in multiple states as hospitals fill up with Covid-19 patients.

The consumer staples sector was the only S&P500 sector that managed to eke out gains on Tuesday. Energy and financial stocks lost the most among S&P500 stocks, highlighting that there may be a slight shift back into defensive positions in light of the reintroduction of lockdown restrictions in Miami, Florida. Walmart's stock surged 6.78% on Tuesday after Recode reported that the company is looking to launch its membership program in July. The report cited unidentified sources, but suggested that the membership program will adopt a subscription model and will be called Walmart+. The report also said that the program will include perks such has same-day delivery of groceries, discounts on fuel at Walmart gas stations and early access to product deals. Recode’s report likely helped fuel sentiment that Walmart is starting to become more competitive with Amazon, helping the company to better retain or even possibly gain more market share domestically in the US.

Indexes Daily Change (%) Net Change Closing Price
Dow -1.51% -396.85 25,890.18
S&P500 -1.08% -34.40 3,145.32
Nasdaq -0.86% -89.76 10,343.89
*Source: Bloomberg

The dollar strengthened against almost every other G10 currencies on Tuesday, likely as risk aversion rose amid the selloff in the equities market. Remarks from Atlanta Fed President Raphael Bostic that the accelerating pace of new Covid-19 infections may affect a domestic recovery in the US likely weighed on investor sentiment and contributed to demand for the greenback's safe haven properties as well. Sterling managed to gain against the dollar on Tuesday, likely due to increased speculation that a meeting between chief negotiators from the EU and the UK might result in progress towards a post-Brexit trade agreement by the end of the year.

The Australian dollar fell against the greenback after more downbeat comments from the Reserve Bank of Australia (RBA) regarding its economic outlook both internationally and domestically. The RBA kept its monetary policy on hold as expected, providing slight upside for the Aussie to peak at 0.6975 in the hour following the decision. But comments from RBA Governor Philip Lowe were relatively pessimistic as compared to before, with the central banker highlighting the difficulty in controlling the spread of the novel coronavirus, evident from the most recent flare-up of Covid-19 cases in the state of Victoria (Victoria announced a six-week lockdown for its capital city of Melbourne after the RBA’s monetary policy decision on Tuesday, to slow the spread of the novel coronavirus). Lowe also reiterated that the central bank will not increase its cash rate target until progress is being made towards full-employment and it is confident that inflation will be sustainably within the 2-3% target band, suggesting that monetary policy will likely be on hold for an extended period of time. Finally, Lowe suggested that it is likely we have seen the peak of economic contraction in the global economy and will now move towards a bumpy recovery phase, with high levels on uncertainty.

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Safe haven assets mostly rose on Tuesday, reflecting demand for risk averse positions within financial markets. Gold continued to gain and is inching closer towards 1,800. The Japanese yen fell against the dollar but rose against the euro. Two-year US Treasuries closed near flat, while 10-year and 30-year Treasuries rose, with benchmark 10-year yields ending the day 3.6bps lower at 0.64%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.57% +10.18 1,794.86
Silver -0.00% -0.00 18.27
USD/JPY +0.16% +0.17 107.52
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.0bps 0.16%
10-Year -3.6bps 0.64%
30-Year -6.4bps 1.37%
*Source: Bloomberg

Oil futures were inched slightly lower on Tuesday but were close to flat, likely as concerns regarding downward pressure on energy demand resulting from renewed lockdown restrictions in the US weighed on oil prices. American Petroleum Institute's weekly crude oil report showing that gasoline fuel supplies fell 1.83 million contrasted a Bloomberg survey that reported gas supplies expanded by 550,000 last week in the US likely also contributed to crude oil futures trading flat on Tuesday. Traders will likely be focused on the official report on US crude oil stockpiles that will be released later today by the US Energy Information Agency as a result. Consequently, expect crude oil futures to face more volatility, as while the fourth of July holiday should have helped demand for crude oil, health concerns regarding the accelerating cases of Covid-19 infections in the US may have outweighed the seasonal demand for gasoline.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.05% -0.02 43.08
WTI -0.02% -0.01 40.62
*Source: Bloomberg

In Asia, stocks look likely to mostly track losses in the US on Wednesday morning, as investors in the Asian region will likely also start to consider more defensive positions against a resurgence in Covid-19 infections as well. The Nikkei and ASX200 were trading lower in the first hour of trading, while the KOSPI managed to eke out gains. Futures tracking major indices in the US were trading higher as of 9.08am (GMT +8), signalling that the pullback seen in equities the US on Tuesday is likely to have been a result of risk aversion and profit-taking instead of a major selloff.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.30% -67.17 22,547.52 8:58:50 AM
KOSPI +0.28% +6.08 2,170.25 9:18:50 AM
ASX200 -0.25% -14.82 5,998.10 9:18:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.26% +68.00 25,838.00 9:08:50 AM
US Futures +0.20% +6.00 3,142.75 9:08:50 AM
Nasdaq Futures +0.23% +24.50 10,556.75 9:08:50 AM
*Source: Bloomberg

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

  • Switzerland June Unemployment Rate (1.45pm)
  • US July 3rd Mortgage Application (MBA) (7pm)
  • US July 3rd Crude Oil Stocks Change (EIA) (10.30pm)