Tuesday, July 14, 2020

Asia Times: Stocks reverse early gains as infections and US-China tensions weigh on investors sentiment; JPMorgan, Wells Fargo, Citi & Delta report earnings next

  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil
  • US earnings' season


Market Recap: Stocks reverse early gains as infections and US-China tensions weigh on investors sentiment; JPMorgan, Wells Fargo, Citi & Delta report earnings next

Wall Street ended the day lower after the S&P500 briefly reached a new post-pandemic high as worries on spiking infections as well as an escalation in US-China tensions likely weighed on optimism in financial markets. The US rejected China's expansive claims in the South China Sea on Monday, with Secretary of State Mike Pompeo stating that China's claims to offshore resources across most of the South China Sea are completely unlawful. The statement from Pompeo signalled that US-China tensions were no closer to easing in the short-term, and likely caused investors to shift into less risky positions to hedge against potentially increasing geopolitical risk. The selloff in the stock market was then amplified by Covid-19 infections in the US showing no signs of slowing, most notably in California, which reintroduced several lockdown restrictions, including the state-wide closing of bars and banning of indoor restaurants, and the closing of churches, gyms and hair salons in several counties.

Healthcare and industrials led gains while tech and the communications services sectors fell the most on Monday. The tech sector saw losses across all major companies, including all of the FAANG stocks, as well as Tesla, Microsoft and AMD. A regression back to its mean probably also contributed to the plunge in tech companies, as investors take profits after a strong rally last week.

In company news, chipmaker Analog devices announced a US$21 billion deal to buy rival Maxim Integrated Products Inc. The news sent stocks of Maxim surging 8.11% on Monday, while Analog's shares fell 5.82%.

Pepsi's stock spiked after the company reported better-than-expected quarterly earnings thanks to a surge in demand for snack foods. The company said that consumers' increased time at home resulted in higher demand for its snacks food products, helping drive core EPS for the second quarter to US$1.32 per share, beating the median analyst estimate at US$1.25 per share. While increased demand for snack foods saw double digit sales growth for brands such as Tostitos and Cheetos, Beverage sales and restaurant sales remained weak during the lockdowns. The company's performance for the quarter suggests that consumer spending has likely shifted to products that take advantage of stay-at-home restrictions. But there should be some expectations for growth in the snack foods segment in the company to moderate back down while its more affected segments such as beverages should start to recover some of its losses later this year.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.04% +10.50 26,085.80
S&P500 -0.94% -29.82 3,155.22
Nasdaq -2.13% -226.60 10,390.84
*Source: Bloomberg

The dollar fell on Monday, but starting to climb back up towards the end of the trading session as risk aversion started to dominate the financial markets. The euro outperformed the basket of G10 currencies, possibly as traders start to become more bullish on the outlook for the bloc in comparison to the US as it starts to look more successful in its containment of the spread of the novel coronavirus. Investors may also be starting to diversify into the euro to hedge against a possible depreciation in the dollar over a longer time horizon after the US posted its largest budget deficit in June as a result of the Covid-19 pandemic. The US' budget statement for June was announced to be -US$864.1 billion, above economists' estimates for -US$863.0 billion.

Sterling fell the most among major currencies as the prospects for the British economy starts to look increasingly dire as the UK prepares to exit the EU bloc at the end of the transition period at the end of 2020. A survey conducted by the Institute of Directors showed that only a quarter of business leaders in the UK said that their organisations were fully ready for a post-Brexit environment. Almost half of the 978 directors polled last month that they were unable to prepare for a transition in the current environment, highlighting that the pandemic as well as the little progress on Brexit negotiations has impacted the ability of companies to prepare for the end of the Brexit transition period. The escalation in tension between US and China likely also contributed to sterling weakening against the greenback.


Safe haven assets mostly advanced on Monday thanks to escalating fear in financial markets. The CBOE's fear gauge, VIX, spiked 17.96% on Monday, its largest one-day rally since June 11th. Gold continued to climb, inching past 1,800 again. The Japanese yen against both the dollar and euro, possibly impacted by muted trading ahead of the Bank of Japan's monetary policy meeting tomorrow. US Treasuries rose across the board, pulling benchmark 10-year yields lower by 2.6bps to 0.62%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.23% +4.06 1,802.76
Silver +1.90% +0.35 19.08
USD/JPY +0.34% +0.36 107.29
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.15%
10-Year -2.6bps 0.62%
30-Year -2.8bps 1.31%
*Source: Bloomberg

Oil futures fell on speculation that the OPEC+ committee meeting this week may result in the tapering of production of cuts despite the potential second wave of Covid-19 infections seen in multiple countries across the world. The reintroduction of lockdown restrictions in California likely also impacted sentiment for energy demand, since the materialisation of renewed lockdown restrictions suggests that more are to come as more states in the US, as well as countries in different parts of the world continue to deal with a resurgence in Covid-19 infections. This week's earnings reports from major US banks and Delta airlines will likely also impact oil prices, depending on the outlook of those companies. It looks more likely that the short-term outlook for oil prices are tilted to the downside, with OPEC+ members more likely to scale back on production cuts as crude oil prices stabilises, and corporate earnings’ likelihood to skew negative as banks continue to make high levels of loan loss provisions and air travel demand continue to remain weak.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.20% -0.52 42.72
WTI -1.11% -0.45 40.10
*Source: Bloomberg

In Asia, stocks look set to fall on Tuesday, tracking the performance in US stock markets. Risk aversion is likely to spill over into Asian markets today, and prompt some investors to take profit off of last week's rally. Expectations for corporations' top and bottom line to be largely negatively impacted for the quarter ended in June is likely to put downward pressure on stock prices as well, erasing some of the optimism seen the start of the month. Futures tracking major indices in the US were trading slightly higher, signalling that we may see a slight reversal in the selloff on Monday, although trading on Tuesday in the US will largely depend on corporate earnings from JPMorgan, Wells Fargo and Citigroup today.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.70% -159.41 22,625.33 8:44:15 AM
KOSPI -0.55% -11.96 2,174.10 9:04:10 AM
ASX200 -0.79% -46.82 5,930.70 9:04:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.21% +55.00 26,023.00 8:54:14 AM
US Futures +0.17% +5.50 3,153.75 8:54:15 AM
Nasdaq Futures +0.40% +42.75 10,642.75 8:54:15 AM
*Source: Bloomberg

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

  • UK May GDP (2pm)
  • Germany Jun Inflation Rate (Harmonised CPI/CPI) (2pm)
  • Germany Jul Current Situation/Economic Expectations Survey (ZEW) (5pm)
  • US Jun Inflation Rate (CPI) (8.30pm)

Companies reporting earnings next include (all timings in GMT +8):

  • JPMorgan Chase & Co (6.45pm)
  • Wells Fargo & Co (8pm)
  • Citigroup (8pm)
  • Delta Airlines (Aft US Market Close)