Thursday, July 23, 2020

Asia Times: Risk-on sentiment grows as hopes for additional stimulus eclipse US-China tensions

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil
  • US earnings' season

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Market Recap: Risk-on sentiment grows as hopes for additional stimulus eclipse US-China tensions

US-China tensions escalate, but investors mostly brushed off the news and chose to focus instead on optimism surrounding the upcoming fiscal stimulus bill and potential vaccine trials. The US has said that it will be giving China 72 hours to close its consulate in Houston on Wednesday, with the US State Department citing the protection of American intellectual property and private information as its reason for asking the consulate to close. Reuters then later reported that Beijing was considering shutting the US consulate in Wuhan in retaliation, citing sources with knowledge of the matter. Despite the escalating geopolitical tensions, stocks still managed to advance on Wednesday, suggesting that investors were still bullish on a net positive effect from the upcoming US fiscal stimulus bill, even after it was suggested earlier this week that it may only arrive in two weeks after the increased unemployment benefits expire at the end of July. Reports that White House officials were in discussion with Senate Republicans for a short-term extension to the US$600-a-week unemployment insurance under the CARES Act likely helped stock prices as well.

The S&P500 advanced for the fourth trading session in a row, driven by the utilities, real estate and materials sectors. Real estate stocks likely found some support from the rise in home sales in June. Existing home sales rose 20.7% MoM in June, after a 9.7% decline in May. While the figure was slightly below estimates (A: 20.7% MoM, E: 21.4% MoM), it still signalled that the housing market was experiencing a recovery, even though it may be slower-than-expected. Energy and financials sector stocks dragged on the stock market, most likely due to profit taking after Tuesday's gains in both sectors.

Tesla managed to post its fourth consecutive quarterly profit, meaning that it now meets the criteria to be included into the S&P500 index. The company beat estimates for both revenue (A: US$6.04 billion, E: US$5.4 billion) and earnings (A: US$0.50/share, E: -US$1.06/share) in its latest quarterly report, and the automaker also announced that its next US factory will be located in Texas at a site outside of Austin. CEO Elon Musk also said that he was “very confident” of the company's Full Self Driving feature, which is expected to be completed by the end of 2020, after test-driving the product. Tesla's shares were trading 4.06% higher in after-hours trading as a result. While Tesla is now eligible to be added to the S&P500 index, the final decision will still lie with the index committee. If added to the S&P500, Tesla's stock price may have more headroom, since ETFs or funds tracking the major index will now have to purchase the stock as an inclusion to their portfolios.

Microsoft shares dip 2.24% in after-hours trading after the tech major reported a slowdown in growth for its Azure computing business. Azure revenue rose 47% for the quarter ending June 30th, falling short of the 49% growth that analysts expected and the 59% jump it experienced in the previous quarter. Aside from its cloud segment missing expectations, Microsoft's quarterly results were mostly in line with the current outlook given the current environment. Segments that benefitted from the earlier spike in demand for remote working environments due to Covid-19 demands were starting to ease, while LinkedIn continued to suffer as hiring and advertising started to slump. The company still managed to beat earnings estimates of US$1.36/share at US$1.46/share. The outlook for the company still looks strong despite its cloud segment falling short of expectations, with revenue from surface devices and windows surfaces continuing to grow thanks to demand with workers who need better work-at-home equipment. Its upcoming Xbox release is still on track for its release later during the holiday season this year and may benefit from the general population's increased time at home as well. Comments from the tech giant's executives also remained mostly optimistic, in contrast to outlooks from other companies who have reported earnings earlier this week and last week.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.62% +165.44 27,005.84
S&P500 +0.57% +18.72 3,276.02
Nasdaq +0.24% +25.77 10,706.13
*Source: Bloomberg

The dollar fell against most major currencies yet again, pushing the euro to its highest level since October 2018. With infections continuing to rise in the US, the outlook for the EU looks increasingly more attractive in comparison after EU leaders managed to agree on a 750-billion-euro stimulus fund earlier this week. Worries of the dollar devaluating as the US prepares to roll out more fiscal stimulus measures likely also impacted demand for the greenback, as investors diversify into other safer currencies and assets such as the Swiss franc.

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Safe haven assets were mixed, but gold and silver remain the highlights as investors flock to precious metals to hedge against the falling dollar and possible pullback in stock prices after optimism fades. Gold rose another 1.60% and looks on track to retest the 1,900.20 level back in 2011. The Japanese yen fell against the dollar and the euro, possibly due to weak preliminary PMI data in Japan showing that its economy continues to contract in July. US Treasuries were mixed, as short-term treasuries fell while longer-term ones advanced. Benchmark 10-year yields traded relatively flat, inching 0.3bps lower to 0.60%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.60% +29.50 1,871.41
Silver +7.94% +1.69 23.00
USD/JPY +0.33% +0.35 107.15
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.8bps 0.15%
10-Year -0.3bps 0.60%
30-Year -1.6bps 1.29%
*Source: Bloomberg

Oil futures fell close to 2% during Wednesday's trading session after official data showed US crude oil stockpiles rising by almost 5 million barrels last week, although reports that discussion between US officials to extend the unemployment insurance helped lift oil prices higher for both Brent and WTI to close the day flat. While an additional fiscal stimulus bill from the US is likely to help lift crude oil prices, there may be more room for the oil to drop in the short-term instead as Covid-19 cases continue to rise across multiple countries at record rates. Upcoming earnings reports from US oil companies is also likely to shed additional light on the extent of the damage done to the US oil industry and may expose crude oil prices to more downside as their outlook for energy demand looks likely to be bleak. With additional oil output set to kick in during August as OPEC+ tapers off production cuts, oil supply is likely to be impacted as well, putting downward pressure on oil prices. Hence while the longer-term outlook for oil remains mostly in line for a recovery, there may be room for crude oil prices to drop in the short-term as optimism starts to fade.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.07% -0.03 44.29
WTI -0.05% -0.02 41.90
*Source: Bloomberg

Asian stocks look set to fall on Thursday morning, mostly due to the escalation in US-China tensions. Investors will likely shift away from riskier positions to more risk averse ones in anticipation US-China tensions to escalate further as China considers its options for retaliation to the US. Futures tracking major indices in the US were mixed, with Nasdaq futures trading higher while Dow and S&P500 futures were trading lower as of 8.51am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei - - 22,751.61 -
KOSPI -0.63% -14.06 2,214.60 9:01:20 AM
ASX200 -0.12% -7.06 6,068.00 9:01:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.12% -32.00 26,852.00 8:51:15 AM
US Futures -0.10% -3.00 3,262.25 8:51:21 AM
Nasdaq Futures +0.13% +14.00 10,818.25 8:51:18 AM
*Source: Bloomberg

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

  • Germany Aug Consumer Confidence Survey (Gfk) (2pm)
  • US Jul 17th Initial Jobless Claims (8.30pm)
  • US Jul 10th Continuing Jobless Claims (8.30pm)
  • Eurozone Jul Consumer Confidence (P) (10pm)

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

  • Southwest Airlines (Aft US Market Close)
  • Twitter (8pm)
  • American Airlines (8.30pm)
  • Intel Corp (5am +1)