Thursday, August 6, 2020

Asia Times: Disney and airline shares push the Dow up more than 1% as investors hang on to hopes for stimulus measures by the end of the week

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Bank of England
  • US payrolls

08062020a

Market Recap: Disney and airline shares push the Dow up more than 1% as investors hang on to hopes for stimulus measures by the end of the week

Growing risk appetite propelled stocks higher on Wednesday as hopes for stimulus continue to remain the focus in US markets. Better-than-expected services PMI data likely also helped drive optimism among financial market participants as the data seemingly showed that the services sector was recovering faster than economists anticipated. ISM's services PMI report for July continued to show a spike in new orders (A: 67.7, P: 61.6) and business activity (A: 67.2, P: 66.0) for the month as conditions improve and businesses continue to reopen in the US.  While the headline figure (A: 58.1, E: 55.0, P: 57.1) as well as commentary from respondents were generally an improvement from previous months, investors should continue to be concerned with the high levels of unemployment in the US as the report showed employment in the services sector contracting at a quicker pace than June (A: 42.1, P: 43.1), which was probably due to hiring freezes and layoffs resulting from renewed lockdown restrictions. Disney's stock soaring 8.80% also contributed to gains in both the S&P500 and DJIA after posting revenue and adjust earnings above analysts’ expectations, along with a better outlook for its streaming services.

The shift away from more defensive stocks were more apparent, with the airline industry stocks leading gains in the S&P500 in addition to a stronger shift into smaller-cap stocks and the DJIA. Airline industry stocks gained 4.54%, driven by expectations that the upcoming stimulus bill from the US government will contain measures to help the industry after US President Donald Trump said that he would back efforts in Congress to avoid more job losses in the industry as it continues to face low levels of demand amid the pandemic. Trump's support for airlines comes in addition to efforts by sixteen Republican senators who, on Wednesday, reportedly called on the Senate to add another US$25 billion in financial aid for airlines. While it is still unclear on whether it will be included into the upcoming round of stimulus measures since payroll assistance for the industry only expire on September 30th, both the House and Senate looks likely to agree on supporting the industry with more financial aid to avoid another round of layoffs across airlines and airline contractors. Small cap indices, the Russell 2000 (+1.91%) and S&P600 (+2.21%) also outperformed all three major indices despite the DJIA gaining 1.39%, signalling that financial markets have once again shifted towards riskier positions.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.39% +373.05 27,201.52
S&P500 +0.64% +21.26 3,327.77
Nasdaq +0.52% +57.23 10,998.40
*Source: Bloomberg

The Norwegian krone led gains against the dollar among G10 currencies, while the greenback extends its decline. A hike in oil prices helped the Norwegian krone to soar 1.55% against the dollar, while other currencies continued to benefit from risk-off sentiment among investors. The better-than-expected recovery in the services sector might have provided the dollar with some slight support, but it was only temporary. ADP's private employment payroll report undershot economists’ estimates expectations (A: +176k, E: +1200k), but this was likely already expected by the market as a result of a greater emphasis on the higher frequency jobless benefit claims data and had little impact on financial instruments. Details of ADP's report showed that weakness in employment growth was mostly from midsized firms (50-499 employees) and the goods-producing sector. This suggests that it is more likely that employment may continue to face a slowdown in job creation over the coming months as a result of an imbalanced recovery across states and sectors.

Sterling may have room for some temporary downside on the announcement of the Bank of England's decision on monetary policy later today. We expect no changes to the central bank's monetary policy tools at today's meeting, in line with market expectations. But a downward revision to its existing forecasts will likely be the focus for the day. Expectations from the BoE regarding H2's GDP is likely to be revised downwards closer to -23% as compared to the bank's forecast of -20% in June. There should be some emphasis on expectations of a spike in employment moving forward, thanks to the UK government's furlough scheme starting to taper off from this month until its deadline at the end of October. Inflation forecasts looks more likely to be revised downwards as well due to the sales tax cut for the hospitality and leisure industry and subsidies for restaurant dining as part of the government's efforts to help industries that were heavily impacted by the pandemic. As for negative rates, the BoE will probably reiterate that its costs outweigh its benefits but will not completely dismiss the possibility in future to avoid unnecessarily giving off an impression of tightening of policy. This should as a result put some downward pressure on sterling, but the net impact over the week from the weakening dollar looks likely to offset this, which should continue to put sterling in a stronger position against the dollar over the week but at the same time underperform in the basket of G10 currencies.

08062020b

Safe haven assets were mixed on Wednesday, but appears to be more skewed towards risk-off positions in line with movement in the stock market. Gold continued to remain in demand as the dollar declines. The Japanese yen gained against the dollar but fell against the euro, signalling that the dip in demand for the dollar was the focus for Wednesday’s trading instead. US Treasuries fell across the board, sending benchmark 10-year yields another 4.1bps higher to 0.55%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.94% +18.91 2,038.12
Silver +3.66% +0.95 26.96
USD/JPY -0.11% -0.12 105.60
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.0bps 0.12%
10-Year +4.1bps 0.55%
30-Year +3.6bps 1.22%
*Source: Bloomberg

Oil futures benefitted from the weaker dollar and dip in US crude oil stockpiles on Wednesday, as investors dismiss concerns that demand for energy may be stalling in the short-term. The official weekly report from the US Energy Information Administration (EIA) showed US crude oil stockpiles retreating to the lowest since April. But details of the report continued to show weakness in gasoline and distillate demand. The combined increase in stockpiles in both products rose 2 million barrels, with gasoline deliveries stagnating at around 8.6 million barrels a day (close to -10% YoY). On the supply side, the EIA's report also showed US crude oil production falling about 100,000 barrels a day last week, which traders likely welcomed in addition to signals from US oil producers that they may not be increasing oil output to help prevent oil prices from falling further.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.67% +0.74 45.17
WTI +1.18% +0.49 42.19
*Source: Bloomberg

Stocks in Asia looks set to track gains in the US on Thursday morning. Risk appetite is likely to spill over in Asia on Thursday, following a strong performance in riskier assets in the US on Wednesday as speculation for the US' upcoming stimulus measures help boost investor sentiment. The Nikkei, KOSPI and ASX200 were all higher on in the earlier hours of Thursday's trading session. The Nikkei may however be limited in gains due to the strengthening of the yen against the dollar. Futures tracking major indices in the US were also trading higher as of 8.56am (GMT +8), suggesting that the net buying of risky assets in the US may continue into today's trading session in the US as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.10% +23.34 22,538.19 8:46:40 AM
KOSPI +1.56% +36.60 2,348.46 9:06:40 AM
ASX200 +0.66% +39.80 6,041.10 9:06:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.38% +104.00 27,159.00 8:56:43 AM
US Futures +0.32% +10.50 3,326.50 8:56:44 AM
Nasdaq Futures +0.19% +21.50 11,113.25 8:56:41 AM
*Source: Bloomberg

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

  • Germany Jun Factory Orders (2pm)
  • BoE Monetary Policy Decision/Statement (2pm)
  • US Jul 31st Initial Jobless Claims (8.30pm)
  • US Jul 24th Continuing Jobless Claims (8.30pm)

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

  • Revlon (8.30pm)
  • Stamps.com (5am +1)
  • Booking Holdings (4.30am +1)
  • Uber (4.30am +1)