Friday, July 17, 2020

Asia Times: Euro spikes on Thursday after the ECB’s decision to keep monetary policy on hold but reverses gains thanks to concerns on the US’ economic recovery

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

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Market Recap: Euro spikes on Thursday after the ECB’s decision to keep monetary policy on hold but reverses gains thanks to concerns on the US’ economic recovery

Wall Street ended Thursday's trading session lower, dragged down mostly by major tech companies as economic concerns start to outweigh the optimism from positive data from experimental Covid-19 vaccines trials earlier this week. Better-than-expected retail sales in June may have supported equity prices from falling further on Thursday, but details of the report likely put additional pressure on the tech sector as online and mail-order retail sales fell 2.4%. More emphasis was likely on the more-than-expected growth in initial jobless claims in the US, growing 1.30 million instead of the 1.25 million median economists forecast for the week ended July 10th. While continuing claims fell below expectations for the week ended July 4th, focus was likely to have been put on the more recent initial claims as investors speculate on the impact of reintroduced lockdown restrictions in parts of the US due to the resurgence of Covid-19 cases.

In sector news, the utilities, materials and communication services sectors led the S&P500 sectors while tech, real estate and energy dropped the most. The industrials sector in the S&P500 was dragged down by cruise liners and airlines after American Airlines announced that it will be sending out notifications to 25,000 employees (29% of its US workforce) that they are at risk of retrenchment later this year in an effort to cut costs as demand for flights continue to wane. The news reinforced Delta Airlines' comments on its expectations for air travel demand to stagnate for the rest of the year during its quarterly earnings report earlier this week, expecting to add back at most 500 flights in August, less than half of its initial plan.

In company news, Bank of America and Morgan Stanley's quarterly earnings report fell in line with the overall quarterly performance of the US banking industry. Bank of America reported US$5.1 billion in provisions for loan losses while its trading revenue from fixed income beat estimates. The highlight of its report was that consumer banking profits nosedived 98% while its overall net interest income fell 11%, signalling the severity of the pandemic's economic impact on both consumers and businesses in the US. Similar to Goldman, Morgan Stanley beat estimates in its latest quarter, as the high levels of volatility helped boost revenue from its trading units to outweigh the adverse effects of the pandemic on its consumer banking segment. As a result, Bank of America's shares slipped 2.72% while Morgan Stanley's stock advanced 2.51%.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.50% -135.39 26,734.71
S&P500 -0.34% -10.99 3,215.57
Nasdaq -0.73% -76.66 10,473.83
*Source: Bloomberg

Risk aversion returned in the foreign currency market, sending the basket of G10 currencies lower against the dollar on Thursday. Commodity-linked currencies led losses, while the safer Swiss franc fell the least. The stagnation in decline for initial unemployment benefits in the US likely caused investors to ease on their exposures to higher risk positions, and likely caused the dollar to strengthen. A recovery for the dollar was also likely due after falling seven out of the last 10 trading sessions. A potential delay in fiscal stimulus from the US government likely also contributed to gains in the dollar, after White House Spokesman Judd Deere said on Thursday in a statement that US President Donald Trump believes that a payroll tax holiday for Americans should be a part of the next stimulus package.

The euro rose against the dollar after the European Central Bank (ECB) announced that it would keep its rates and Pandemic Emergency Purchases Programme (PEPP) unchanged after its monetary policy meeting on Thursday, although EUR/USD reversed its gains later in the trading session as demand for the dollar rose. Less pessimism from policy makers likely helped push the euro higher in the hours following the ECB's decision on Thursday, although ECB President Christine Lagarde continued to reiterate the central bank's pledge to keep monetary policy unconstrained in its efforts to support the EU's economic recovery from the pandemic. Contrasting reports later in the trading session from Bloomberg may have put additional downward pressure on the euro, after it was suggested that the central bank's Governing Council was split on their outlooks regarding the full use of its PEPP.

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Safe haven assets were mixed, but falling yields suggested higher risk aversion amid the general financial markets. Gold fell below 1,800, possibly as some investors take profits to cover losses in the tech sector. The Japanese yen fell against both the euro and greenback. US Treasuries gained across the board, pulling benchmark 10-year yields 1.3bps to 0.62%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.73% -13.13 1,797.16
Silver -1.34% -0.26 19.16
USD/JPY +0.31% +0.33 107.27
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.0bps 0.15%
10-Year -1.3bps 0.62%
30-Year -2.4bps 1.31%
*Source: Bloomberg

Oil futures slipped as OPEC+'s decision to continue with its tapering of production cuts starting in August coupled with a weaker outlook for energy demand weighed on crude oil prices. The weaker-than-expected labour market data in the US likely put some pressure on energy demand's outlook on Thursday as well. Increasing risk aversion in the equities market likely had some impact on crude oil prices as well. There may be some room for oil to rise today however, after OPEC+'s deal was said to continue until April 2022, with a possibility of extending beyond two years if needed.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.96% -0.42 43.37
WTI -1.09% -0.45 40.75
*Source: Bloomberg

Asian stocks were trading relatively muted on Friday morning as investors weigh on the conflicting data in the US. The Nikkei and ASX200 were close to flat, while the KOSPI was up in the early hours of the trading session on Friday. Futures in the US were trading higher as of 9.15am (GMT +8), but there may be another sell off among tech stocks today after Netflix expected only 2.5 million new users in the current quarter, falling far short of expectations. The streaming giant's weak outlook may also weigh on tech stocks as the sector's boost from stay-at-home restrictions start to fade. Expect focus to be on the University of Michigan's consumer sentiment survey for July later today as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.06% -13.41 22,756.95 9:05:55 AM
KOSPI +0.50% +10.99 2,194.75 9:25:50 AM
ASX200 +0.01% +0.74 6,011.60 9:25:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.16% +43.00 26,596.00 9:15:56 AM
US Futures +0.20% +6.25 3,200.75 9:15:58 AM
Nasdaq Futures +0.53% +56.50 10,568.25 9:15:55 AM
*Source: Bloomberg

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

  • Eurozone Jun Inflation Rate (CPI) (5pm)
  • US Jun Housing Starts (8.30pm)
  • US Jul Consumer Sentiment Survey (U. of Mich) (P) (10pm)