Thursday, September 3, 2020

Asia Times: Stimulus hopes and risk-reward rotations drive stocks into a broader market rally; oil dips to lowest in more than 3 weeks

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

09032020a

Market Recap: Stimulus hopes and risk-reward rotations drive stocks into a broader market rally; oil dips to lowest in more than 3 weeks

The risk-on rally continued into Wednesday's trading session in the US, with stronger signs of rotation into industries with relatively muted performances year-to-date as a result of the pandemic relative to tech and tech-related stocks. Instead, stocks that came off winning days earlier in the week started to return gains, likely as investors started to take profits and reduce positions on growth stocks in a larger shift towards value stocks. Signals that there may some positive progress on stimulus negotiations probably also contributed to the shift in investor sentiment after US Treasury Secretary Steven Mnuchin recently suggested that the Trump administration may be open to a stimulus package for as much as US$1.5 trillion, an increase of US$500 billion from its previous proposal and closer to the Democrats stimulus proposal plan of US$2.2 trillion. Consequently, we saw the Dow and S&P500 outperform the Nasdaq for the first time in the last four trading sessions. While the Dow has yet to rise past its record highs this year, Apple's stock split has reduced the overall holding in tech companies to 24.4% from 27.8%, despite the inclusion of salesforce. The exclusion of Exxon from the index has also reduced its exposure to the downturn in US oil producers over the past few days, which has likely helped in improving gains in the index when compared to the S&P500 with a weightage closer to 50% in the technology sector.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.59% +454.84 29,100.50
S&P500 +1.54% +54.19 3,580.84
Nasdaq +0.98% +116.77 12,056.44
*Source: Bloomberg

Utilities, materials and real estate stocks led the S&P500 in gains, while the energy sector continued to be depressed after crude oil prices dipped to its lowest in more than three weeks. Apple dragged on the technological sector as its shares suffered a pullback after two straight days of gains. Shares of Tesla dipped as much as 15% in intraday trading before recovering to close 5.83% down as Baillie Gifford cut its stake to 4.25% in its latest report from 7.67% back in February as a result of its guidelines restricting the maximum weight of a single stock in its client portfolios. The drop was also likely in addition to the earlier announced US$5 billion worth of stock offerings that the company plans can make from “time to time” in a deal with banks. Outside of Apple and oil stocks, AMD was also among the top 10 losers in the S&P500, likely as investors are growingly concerned on whether the company will be able to compete with Nvidia's new RTX 3000 series line of GPUs, which the company touts as the biggest generational leap in its history.

09032020b

In forex, the dollar gained against most major currencies for the second day, probably due to concerns on employment in the US in addition to a weaker outlook for the euro. ADP's private change in employment report suggested that job growth was starting to weaken in the US as the net growth in jobs grew only 428,000 in August, less than half of the 1 million forecasted by economists. The report may be a precursor of what is to come this Friday in the official employment report from the US Bureau of Labor Statistics (BLS), which likely resulted in some upward pressure on the dollar. That said, the figure was still an improvement from July, even after an upward revision as jobs grew across companies of all sizes.

Growing Covid-19 cases in the EU is likely starting to impact the euro, in addition to reduced positions from institutional investors. Germany, Spain, Netherlands and now France continues to show signs of accelerating Covid-19 cases as it appears that the EU will likely continue to experience in what is likely to be a second wave of Covid-19 infections in member countries. Institutional net long positions on the euro also dipped last week, signalling that the asset management space may be rotating away from the euro after the recent rally, possibly into other markets.

09032020b

Safe haven assets were mixed on Wednesday, but it appears that sentiment was mostly skewed to risk-off rather than risk-on. Gold and silver both fell retreated. The Japanese yen fell against the dollar but rose against the euro. US Treasuries mostly gained, with benchmark 10-year yields falling another 2.1bps to 0.65%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.38% -27.26 1,942.92
Silver -2.36% -0.66 27.45
USD/JPY +0.21% +0.22 106.18
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.13%
10-Year -2.1bps 0.65%
30-Year -4.1bps 1.38%
*Source: Bloomberg

Oil futures dived on Wednesday with as traders switched into bearish positions on the outlook of the industry with gasoline demand looking likely to weaken due to seasonal factors. Demand is expected to be impacted by less drivers as the US enters the fall season. Increasing Covid-19 cases in the EU is likely to also impact crude oil demand as consumers reduce their activities thanks to renewed uncertainty. The decline in oil futures came in despite of the US Energy of Information Administration's (EIA) weekly crude stockpiles report showing inventories in the US dipped by more than nine million barrels along with a 4.32 million decline in gasoline inventories in part due to shutdowns in preparation for Hurricane Laura.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -2.52% -1.15 44.43
WTI -2.92% -1.25 41.51
*Source: Bloomberg

Asian equities were trading higher on Thursday morning, and looks likely to continue into the day as stock valuations in the region will probably be boosted by the broader risk on sentiment in addition to larger shift towards the region as investors rotate into underperforming markets. The Nikkei, KOSPI and ASX200 were all trading higher in the early hours of Thursday’s trading session. Futures tracking major indices in the US were trading lower however as of 9.09am (GMT +8), a signal that we may see a normalisation in stock prices in the US after two straight days of strong performances.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.93% +219.16 23,466.31 8:59:45 AM
KOSPI +0.84% +20.13 2,384.50 9:19:40 AM
ASX200 +0.45% +27.19 6,090.40 9:19:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.17% -49.00 29,041.00 9:09:34 AM
US Futures -0.16% -5.75 3,573.50 9:09:48 AM
Nasdaq Futures -0.26% -32.50 12,379.00 9:09:41 AM
*Source: Bloomberg

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

  • China Aug Services/Composite PMI (Caixin) (9.45am)
  • Germany Aug Service/Composite PMI (Markit) (F) (3.55pm)
  • US Aug 28th Initial Jobless Claims (8.30pm)
  • US Aug 21st Initial Jobless Claims (8.30pm)
  • US Aug Non-Manufacturing PMI (ISM) (10pm)