Monday, August 31, 2020

Asia Times: Abe unexpectedly steps down, causing large swings in the Nikkei; Gold regains its footing along with global stocks

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil

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Market Recap: Abe abruptly steps down, causing large swings in the Nikkei; Gold regains its footing along with global stocks

Stocks in the US surged on Friday, pushing the S&P500 to its reach a sixth consecutive high while the Dow turns positive year-to-date on better-than-expected consumer data, as well as spill over effects from Fed Chair Powell's comments on average inflation rate targeting the day before. Personal income (A: +0.4%, E: -0.2%, P: -1.0%) for July unexpectedly improved, despite the bulk of economists forecasting a decline for the month. Consumer spending beat expectations as well, growing 1.9% in July instead of the 1.6% growth that economists expected. The report did show that consumer savings rates continued to decline, suggesting that households were still dipping into their increased savings that resulted from the lockdown period earlier this year. While a reduced savings rate was a consensus among economists, it is also indicative that savings is still acting as a support for consumer spending, which likely won’t be sustained as it normalises back to pre-Covid-19 levels, after which we should see a dip in consumption should there be no supplementary income from either active rehiring from companies or in the upcoming stimulus bill.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.57% +161.60 28,653.87
S&P500 +0.67% +23.46 3,508.01
Nasdaq +0.60% +70.29 11,695.63
*Source: Bloomberg

Sectors were broadly up, likely thanks to the better-than-expected consumer spending data and an upward revision in the University of Michigan's consumer sentiment index for August that highlighted improved expectations by the end of the month. Leading the index were energy stocks, which likely was boosted by the milder-than-expected damages from Hurricane Laura to US oil producers and refineries in the Gulf of Mexico. Big tech also was a large contributor to gains in the S&P500, accounting for nearly half of the performance in the index for the day. The top performers in the S&P500 mainly consisted of stocks of companies that have faced large losses due to the onset of the pandemic, including hoteliers and cruise liners.

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Global indices were mixed with a strong tilt towards the upside last week, as tech stocks drive gains in the market. The uptick in the broad market following Fed Chair Jerome Powell's speech on Thursday likely spilled over into Friday's trading session as well. The broad market rally, along with strong performances in the tech sector helped drive the S&P500 to its best weekly performance in eight weeks, while the tech-heavy Nasdaq composite continued its dominance over other major indices. Among the losers were the FTSE100, the Nikkei and the ASX200. US indices (including the small cap Russell 2000 and S&P600) are on track the end August with its best monthly performance since April this year as well.

Indexes Weekly Change (%) Net Change Closing Price
Dow +2.59% +723.54 28,653.87
S&P500 +3.26% +110.85 3,508.01
Nasdaq +3.39% +383.83 11,695.63
FTSE100 -0.64% -38.32 5,963.57
Dax +2.10% +268.40 13,033.20
Stoxx +1.71% +55.79 3,315.54
Nikkei -0.16% -37.65 22,882.65
CSI300 +2.66% +125.43 4,844.27
KOSPI +2.14% +49.21 2,353.80
ASX200 -0.61% -37.37 6,073.81
HSI +1.23% +308.22 25,422.06
STI +0.44% +11.09 2,539.63
*Source: Bloomberg

The dollar fell across currencies in the G10 basket, with the Dollar Index falling past the its recent low in intraday trading before closing Friday near its two-year low of 92.29 as commodity-linked currencies led gains with a spike in risk-on sentiment. The greenback likely continued to be impacted by Powell's revelation of the Fed's new inflationary target framework on Thursday, after initially tracking higher following his speech while better-than-expected consumer data put downward pressure on the currency. While the overall two-and-a-half-year trend for DXY still shows the index trading within its uptrend channel, it is dangerously close to the bottom of the trend, signalling that we may see either a rebound or a decline to new lows in the near future. With fundamentals skewing the outlook for the US economic recovery to a slowdown, coupled with rock-bottom rates, the likelihood of the dollar falling to new lows looks to be higher. However, spiking Covid-19 infections in the EU will probably act as the support to DXY since the euro has the heaviest weightage in the index.

The Japanese yen was the highlight however, spiking 1.14% after Japanese Prime Minister Shinzo Abe abruptly announced that he would be stepping down due to a chronic illness. The question among investors is now on the future of Abenomics and the Japanese economy, which was the most likely reason for the sharp spike in the yen. The announcement sent the yen surging while the Japanese stock market suffered broadly thanks to the uncertainty of the situation. The spike in volatility in the Nikkei may be indicative of an opportunity however, with Bloomberg's Nikkei volatility index spiking above the 50-day moving average to closer right at the 200-day moving average mark to close the week well above the resistance retracement since mid-March 2020. While Abe's policies will likely be somewhat tweaked by his successor, it is unlikely that there will be drastic changes to Abenomics in the short-term. Consequently, this may be a short-term buying (Nikkei) or selling (USD/JPY) opportunity for speculators who do not see changes to his policies.

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Safe haven assets gained across the board, but was more likely a show of caution in the market rather than full-on risk aversion. Gold surged along with silver, but it still remains to be seen if gold can push back above 2,000. The Japanese yen gained against both the euro and the dollar. US Treasuries gained across the board, with benchmark 10-year yields falling 3.1bps to 0.72%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.83% +35.29 1,964.83
Silver +1.80% +0.49 27.50
USD/JPY -1.13% -1.20 105.37
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -3.1bps 0.13%
10-Year -3.1bps 0.72%
30-Year -0.9bps 1.50%
*Source: Bloomberg

Oil futures were mixed, as volatility faded with expectations of the aftermath of Hurricane Laura on the US oil industry. With Laura putting less-than-expected pressure on crude oil supply - and demand, oil traders likely shifted their focus back to Covid-19 and the general global economy. Baker Hughes reported that the US oil rig count fell by three to 180 last week, indicative of more pressure on US oil producers as flattening gains in crude oil prices likely deterred producers from restarting their rigs. This week, the focus for oil markets will likely be on the weekly US crude oil stockpile reports, which may be distorted by the shutdown in the Gulf of Mexico in preparation of Laura. Overall, the outlook for crude oil has been little changed, with possibly more downside after gains last week as demand concerns continue to take centre stage. Spikes in Covid-19 cases will also probably continue to weigh on gains in oil futures, likely along with the US Energy Information Administration’s (EIA) weekly report as it shows implied demand impacted by refinery shutdowns.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.46% +0.21 45.81
WTI -0.16% -0.07 42.97
*Source: Bloomberg

Stocks in Asia were surging on Monday morning, with the Nikkei spiking likely due to speculators taking advantage of the increased volatility to price in the likelihood of little changes to Japan's overall outlook despite Abe stepping down. The KOSPI and ASX200 were also trading higher, although it appears that the ASX200 may continue to face more downside with the Australian dollar continuing to strengthen. Futures tracking major indices in the US were spiked higher as of 8.52am (GMT +8) as well, suggesting that we may continue to see more gains moving into Monday's trading session in the US.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.62% +375.84 23,258.49 8:42:50 AM
KOSPI +0.64% +15.18 2,368.98 9:02:50 AM
ASX200 +0.12% +7.49 6,081.30 9:02:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.57% +165.00 28,776.00 8:52:45 AM
US Futures +0.53% +18.75 3,523.25 8:52:53 AM
Nasdaq Futures +0.74% +89.75 12,081.50 8:52:53 AM
*Source: Bloomberg

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

  • China Aug Manufacturing PMI (NBS) (9am)
  • Australia Aug Manufacturing PMI (Commonwealth Bank) (7am +1)
  • Japan Jul Unemployment Rate (7.30am +1)