Wednesday, July 15, 2020

Asia Times: Stocks surge across financial markets as risk appetite grows despite warnings from major US banks

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • Bank of Japan

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Market Recap: Stocks surge across financial markets as risk appetite grows despite warnings from major US banks

US equities rose on Tuesday as stocks from the energy, materials and industrials sectors spiked likely thanks to hopes for a potential Covid-19 vaccine fueled by positive data from phase one results of Moderna's experimental vaccine for Covid-19. Moderna announced the publication of an interim analysis of the open-label Phase one study of mRNA-1273, its vaccine candidate against Covid-19 in The New England Journal of Medicine on Tuesday, in which the results reaffirmed the positive interim data assessment that was announced earlier in May showing that the experimental vaccine induced rapid and strong immune responses against SARS-CoV-2 and that it was generally safe with no serious adverse events reported through Day 57. The reaffirmation of its interim data assessment earlier in May likely helped fuel optimism for the availability of a potential vaccine, sending the general stock market and Moderna's shares higher on the day. Moderna's stock ended Tuesday's trading session 4.54% higher, after surging as much as 18% on market open.

The rotation into higher risk sectors despite Covid-19 infections continuing to rise in the US also suggested that there may be investors or funds taking profits off of defensive positions to rebalance its positions to take on more risk. Bank stocks suffered the most on Tuesday, with the S&P500 bank industry index falling 1.19% after JPMorgan, Citi and Wells Fargo reported a total or near US$28 billion worth of provisions for credit losses. JPMorgan reported a smaller drop in Q2 profits than expected (A: US$1.38/share, E: US$1.01/share, P: US$2.82/share) thanks to surging trading revenue, which helped offset some of its record high loan-loss provision. Similarly, trading revenue helped boost bottom line earnings results for Citi as well. Wells Fargo in contrast, reported its first quarterly loss since 2008 and cut its quarterly dividend more than expected, by 80% to US$0.10/share. All three CEOs from the banks were cautious on the outlook for the US economy, highlighting what to expect for upcoming earnings reports from Goldman, Morgan Stanley and Bank of America. Shares of JPMorgan ended the Tuesday 0.57% higher, while shares of Citi and Well Fargo fell -3.93% and -4.57%. The outlook for banks looks likely to remain under pressure, as credit defaults start to materialise over the rest of the year and possibly next year as well. Trading revenues should start to moderate as volatility in financial market eases as well. Banks that are less exposed to lending segments and more exposed to trading are likely to outperform the industry in the current quarter as a result, but their profits from trading revenues may start to ease moving forward.

Indexes Daily Change (%) Net Change Closing Price
Dow +2.13% +556.79 26,642.59
S&P500 +1.34% +42.30 3,197.52
Nasdaq +0.94% +97.74 10,488.58
*Source: Bloomberg

In the foreign exchange market, most major currencies gained against the dollar, thanks to the rotation back into higher risk positions. Demand for the greenback may also have been impacted by the increasing cases of Covid-19 cases in the US, as investors shift diversify risk towards the euro and other safe haven currencies such as the Swiss franc.

The Japanese yen traded relatively muted on Tuesday, ahead of the Bank of Japan's (BoJ) decision on monetary policy today. The BoJ is set to announce its decision on monetary policy after its meeting, at around 11am (GMT +8). The central bank's key rate should remain unchanged, as the Japanese economy starts to show signs of recovery and as the yen trades at a range close to current levels. Its corporate bond and commercial paper holdings are currently still only near half of its respective upper limits after the bank tripled it in April, signalling that there is little reason for the BoJ to expand its corporate bond and commercial paper asset purchase programs. While there the central bank is likely to keep monetary policy on hold at today's decision, there may be room for the yen to fall as the BoJ will probably keep its dovish tone as the outlook for the Japanese economy remains weak, and to keep the yen from strengthening and weakening demand for its exports.

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Safe haven assets were mixed on Tuesday signalling the mixed sentiment among financial market participants. Gold inched higher, while the yen strengthened against the greenback while weakening against the euro. US Treasuries closed slightly lower across the board on Tuesday. Benchmark 10-year yields only fell by 0.5bps as a result, to 0.62%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.37% +6.60 1,809.36
Silver +0.74% +0.14 19.22
USD/JPY -0.05% -0.05 107.24
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.6bps 0.16%
10-Year +0.5bps 0.62%
30-Year +0.3bps 1.31%
*Source: Bloomberg

Oil futures rose slightly on Tuesday likely thanks to positive data from Moderna's experimental Covid-19 vaccine and signals that increased compliance members may offset some of the expected excess in crude oil supply next month if OPEC+ decides to taper back on the current output cuts. Iraq released a statement that said it had implemented almost 90% of its pledged supply cuts in June and will reach full compliance at the beginning of August, while Nigeria signalled that it would compensate until September for over-producing its quota in May and June. The increasing compliance among OPEC+ members likely helped drive investor sentiment for crude oil supply in the next month, despite expectations that the bloc is likely to taper off production limits to 7.7 million barrels per day from 9.6 million barrels starting from August. American Petroleum Institute's conflicting report on crude oil inventories in the US likely curbed some of gains in crude oil futures, after the body reported that while US crude stockpiles fell 8.32 million barrels last week, supplies in Cushing, Oklahoma rose by 548,000 barrels last week. Traders will likely be focused on today's official weekly US crude oil inventories report by the US Energy Information Administration as a result.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.42% +0.18 42.90
WTI +0.47% +0.19 40.29
*Source: Bloomberg

Stocks surged in Asia on Wednesday thanks to the reversal in risk sentiment in the US. The Nikkei and ASX200 were trading more than 1% higher in early hours of Wednesday's trading session while the KOSPI was 0.96% higher. Futures tracking major indices in the US surged as well, with Dow futures trading more than 1% higher, suggesting that risk-on sentiment may likely continue into Wednesday's trading session in both Asia and the US as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.36% +312.02 22,899.03 8:50:40 AM
KOSPI +0.96% +19.93 2,203.54 9:10:40 AM
ASX200 +1.12% +67.02 6,008.10 9:10:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +1.09% +292.00 26,783.00 9:00:43 AM
US Futures +0.90% +29.00 3,212.50 9:00:44 AM
Nasdaq Futures +0.73% +77.50 10,723.75 9:00:44 AM
*Source: Bloomberg

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

  • BoJ Monetary Policy Decision/Statement (11am)
  • UK Jun Inflation Rate (CPI/RPI) (2pm)
  • BoJ Governor Kuroda Press Conference After Monetary Policy Decision (2pm)
  • US Jun Industrial Production (9.15pm)
  • BoC Monetary policy Decision (10pm)
  • BoC Jul Monetary Policy Report (11pm)
  • BoC Governor Macklem Press Conference After Monetary Policy Decision (11.15pm)

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

  • Bank of New York Mellon Corp (6.30pm)
  • Goldman Sachs (7.30pm)