Monday, August 17, 2020

Asia Times: Postponed US-China trade discussions appear to have little impact on markets as investors shift towards riskier sectors

Tags
  • China
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • US Retail Sales

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Market Recap: Postponed US-China trade discussions appear to have little impact on markets as investors shift towards riskier sectors

US equities were mixed last Friday thanks to conflicting economic data in the US. Headline retail sales data likely put some initial pressure on stocks early in the trading session after growing less-than-expected in July (A: +1.2%, E: +2.1%, P: 8.4%). But core retail sales (retail sales ex auto and gas; A: +1.5%, E: +1.0%, E: +7.7%) and the retail sales control group (A: +1.4%, E: +0.8%, P: +6.0%) dataset beat expectations for July, implying that weakness in consumer spending outside the recovery in oil and gas may have been overstated by economists. At the same time, the University of Michigan’s consumer sentiment index for August (preliminary estimate) inched slightly higher, beating expectations for another month of souring sentiment. Both datasets likely incited slightly more optimism from market participants, although it was likely that the upcoming November presidential elections in the US had some impact on market sentiment as well. While the US and China postponed planned talks to discuss the progress of the US-China phase one trade agreement, the impact on markets appeared to be limited.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.12% +34.30 27,931.02
S&P500 -0.02% -0.58 3,372.85
Nasdaq -0.21% -23.20 11,019.30
*Source: Bloomberg

A shift towards riskier sectors on Friday were more present as a result of better-than-expected signals on consumer sentiment. Sectors considered as safer positions (technology, health care) fell on the day while riskier ones (energy, industrials, financials) benefitted from indications of slight improvements in consumer spending. Energy sector stocks rose the most in the S&P500, likely thanks to industrial production for July meeting economists' forecasts to grow 3% month-on-month.

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Asian indices along with European indices outperformed their US counterparts over the week as valuations outside of the US and China start to catch up as risk aversion continues to normalise among market participants. Last week's performance among major global indices suggests that the earlier correction in tech stocks may resulted in a shift towards not only riskier sectors and financial assets in the US, but also towards assets in the Asian region as investors seek out more value stocks moving forward. Hedging against the November presidential elections may also have been present over the past week, as more headlines surrounding the event starts to appear in the media and investors start to price in speculation on the final results of the elections.

Indexes Weekly Change (%) Net Change Closing Price
Dow +1.81% +497.54 27,931.02
S&P500 +0.64% +21.57 3,372.85
Nasdaq +0.08% +8.32 11,019.30
FTSE100 +0.96% +57.86 6,090.04
Dax +1.79% +226.46 12,901.34
Stoxx +1.61% +52.40 3,305.05
Nikkei +4.30% +959.42 23,289.36
CSI300 -0.07% -3.30 4,704.63
KOSPI +2.37% +55.82 2,407.49
ASX200 +2.02% +121.41 6,126.25
HSI +2.66% +651.39 25,183.01
STI +1.41% +35.81 2,581.32
*Source: Bloomberg

The dollar shifts gears back into a decline on Friday. Demand for the greenback fell as more data indicating that the economic recovery in the US was slowing down. The dollar's decline may also be explained by a shift towards assets in regions outside the US, namely the EU and Asia. The Japanese yen rose the most in the G10 basket of currencies, but it doesn't appear to be a result of a strong shift towards safe haven assets and instead looks more like a correction after five straight days of losses against the greenback. Oil-related currencies fell along with oil prices, ahead of the OPEC+ meeting to discuss the current levels of production limits this week.

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Safe haven assets were mostly mixed last Friday, but was slightly tilted towards upside. Gold fell along with silver. The Japanese yen gained against both the dollar and euro. Shorter-term US Treasuries rose while longer-term ones fell. Benchmark 10-year yields fell 1.1bps as a result, to 0.71%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.44% -8.59 1,945.12
Silver -3.85% -1.06 26.45
USD/JPY -0.31% -0.33 106.60
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.8bps 0.15%
10-Year -1.1bps 0.71%
30-Year +1.9bps 1.45%
*Source: Bloomberg

Oil slightly fell on Friday after the US and China postponed planned trade talks over the weekend to review progress of the ongoing phase one trade deal. A larger dip in oil prices was likely curbed by a third month of improvement in industrial production in the US. The Energy Information Administration's (EIA) weekly report released last Wednesday showing a decline in gasoline and distillate stockpiles fuelling bullish sentiment for energy demand likely somewhat extended into Friday's trading session as well. Oil is likely to trade with higher volatility ahead of OPEC+'s meeting this week, that was reportedly postponed a day to August 19th by Bloomberg, citing unidentified delegates. With a prolonged period of muted trading in crude oil futures, there may be room for large swing this week if OPEC+ decides to surprise the market with a decision on output limits.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.36% -0.16 44.80
WTI -0.54% -0.23 42.01
*Source: Bloomberg

Stocks in Asia were trading lower on Monday morning, likely impacted by weaker-than-expected Q2 data in Japan. The Nikkei and ASX200 were both trading lower in the early hours of Monday's trading session. Japan's preliminary estimate for Q2 GDP missed expectations, coming in at -27.8% QoQ, almost a percentage point lower than economists' estimates of -26.9%. Weaker-than-expected Q2 GDP data and an uptick in the Japanese yen last Friday likely put pressure on Japanese stocks early on Monday. Futures tracking major indices in the US were trading higher on Monday morning as of 8.58am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.66% -152.50 23,136.86 8:48:50 AM
KOSPI - - 2,407.49 -
ASX200 -0.88% -53.15 6,073.10 9:08:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.23% +63.00 27,855.00 8:58:39 AM
US Futures +0.22% +7.25 3,368.75 8:58:35 AM
Nasdaq Futures +0.22% +24.00 11,157.75 8:58:48 AM
*Source: Bloomberg

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

  • Japan Jun Industrial Production (12.30pm)
  • US Aug Manufacturing Index (Empire State) (8.30pm)

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

  • JD.com (7.30pm)