Friday, September 4, 2020

Asia Times: Tech shares plummeting erases close to two-weeks of gains in major US indices, but is it only an overdue correction?

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  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

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Market Recap: Tech shares plummeting erases close to two-weeks of gains in major US indices, but is it only an overdue correction?

US equities plummet thanks to pressure from tech shares suffering a sharp downturn on Thursday likely due to a stronger rotation away from growth stocks fuelling a selloff among retail investors. Economic data releases yesterday didn't appear to be yesterday's catalyst for the stock market performance, as it was mostly a mixed bag of signals with little surprises. Instead, it was more likely that the economic data put additional pressure on the already dampened equities market as it mostly failed to meet expectations. The Nasdaq suffered the most, losing close to 5% to wipe out gains from this week and part of last week. The less tech heavy Dow fell the least in contrast. Despite these losses, the S&P500 and the Nasdaq 100 is still trading above its 20-day, 50-day, 100-day and 200-day moving averages, signalling that the selloff may be an overdue correction following two weeks of strong gains across major indices. The sharper-than-usual selloff might also have been fuelled by speculative inexperienced investors and traders, which has been thought to be the driver of the recent rally especially in shares such as Tesla which jumped more than 80% in the lead up from its stock split announcement to the actual date of the split.

Indexes Daily Change (%) Net Change Closing Price
Dow -2.78% -807.77 28,292.73
S&P500 -3.51% -125.78 3,455.06
Nasdaq -4.96% -598.34 11,458.10
*Source: Bloomberg

The S&P500 tech sector fell 5.83%, putting the most drag on the S&P500, along with stocks that have performed extremely well through the pandemic. Large cap shares that remained resilient were cruise liner shares, along with oil stocks whose businesses have been impacted heavily by the pandemic. The movement within sectors was indicative of a larger rotation of profits from growth stocks into value stocks.

Another explanation for Thursday's dip may also be attributed to higher-than-normal speculation in the options market, with investors and traders buying 22 million more call contracts as compared to puts last week, higher than the previous record in June according to Sundial Capital Research. If true, then market makers were likely forced to buy up more underlying shares which could have caused an initial upside before the larger downside movement as seen today when those positions along with call positions were unwound possibly due to option expiries or positions closing. There were also warning signs over the week on these occurrences, with both the CBOE's VIX and VXN indices rising in tandem with indices. Still, it does appear that yesterday's selloff was a likely correction after a prolonged run of gains among tech and tech-related shares. That said, it may be wise to add some downside protection to portfolios with heavier tech and growth stock allocations since it does look likely that the selloff will spill over into Asia and eventually back into Friday's trading session in the US ahead of the Labour Day holiday on Monday. This may however also mean that future upside in those stocks may be limited as the market shifts towards a broader rally.

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Most currencies fell against the dollar, with only the Swiss franc managing gains against the greenback. The dollar's gains against the euro appears to have been capped by slightly weaker than expected non-manufacturing PMI in the US, along with a worsening labour market in the US. ISM's non-manufacturing PMI index in August weakened to 56.9 (E: 57.0) from 58.0 in July, confirming expectations that the initial pace of economic recovery wouldn't be able to be sustained.

While jobless claims figures were better-than-expected, seasonally adjusted figures cannot be reliably compared to the previous reading due to changes in seasonal adjustment methodologies by the US Bureau of Labour Statistics (BLS) (The BLS has changed its adjustment factor to be additive as opposed to multiplicative, which is intended to better reflect the current situation). However, the changes to the methodology seems more likely to distort figures more, and consequently unadjusted figures will be a better reflection of the real labour market. Unadjusted initial claims figures pointed to an increase of 7,951 claims for the week ended August 29th. The BLS' report also showed that while there was a 306,659 decline in claims for regular state unemployment benefits, the total number of claims across all programs (including pandemic unemployment compensation programs) increased by 2.196 million. Also, the predictive powers of the claims data set will start to weaken thanks to the maximum duration of 26 weeks of unemployment benefits in a year for the conventional unemployment insurance (It has currently been about 24 weeks since the initial spike in unemployment in the week ending March 20th 2020).

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Safe havens were mixed, with metals falling in tandem with stocks probably thanks to a stronger dollar and as some investors retreated out of those positions to buy the dip or meet margin calls for leveraged bullish positions on equities. Gold and silver both fell but to a much lower extent when compared to US stocks. The Japanese yen was relatively muted on Thursday against both the dollar and the euro. US Treasuries inched higher, with 10-year yields falling 1.3bps to 0.63%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.62% -12.01 1,930.91
Silver -3.14% -0.86 26.59
USD/JPY +0.01% +0.01 106.19
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.6bps 0.13%
10-Year -1.3bps 0.63%
30-Year -1.7bps 1.36%
*Source: Bloomberg

Oil dipped slightly on Thursday, extending into a two day decline likely more due to a stronger dollar adding to the downward pressure on concerns surrounding spikes in Covid-19 cases around the globe. Spill over from the strong pullback in the equities market also likely curbed any gains in the commodities market, pushing investors towards more risk aversion in oil markets as well. The outlook for both demand and supply for crude oil remains mostly unchanged, with some additional downside due to seasonal changes likely to impact consumer behaviour. Refinery activity will likely be closely watched moving forward as demand for crude is expected to weaken this fall season in the US. Traders will probably be focused on the depth of the decline in refinery activity in addition to the already weak demand amid the pandemic.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.81% -0.36 44.07
WTI -0.34% -0.14 41.37
*Source: Bloomberg

Stock performance in Asia looks likely to mirror that of US today, with major Asian indices already starting the day upwards of 1% lower. The Nikkei, KOSPI and ASX200 were all trading lower in the earlier hours of the trading day. We may not see as deep of a selloff as compared to the tech sector in the US however, since institutional investors may be more attracted to the already low valuations in Asian markets relative to that in the US. Futures tracking major indices in the US were trading mixed, with a strong skew towards the downside in tech once again suggesting that we may see more downward consolidation in US tech equities in Friday's trading session ahead of the holiday on Monday.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -1.20% -277.86 23,187.67 8:59:05 AM
KOSPI -1.21% -28.69 2,367.21 9:19:00 AM
ASX200 -2.66% -158.11 5,954.50 9:18:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.03% +8.00 28,359.00 9:09:05 AM
US Futures -0.17% -6.00 3,455.50 9:09:05 AM
Nasdaq Futures -0.93% -108.00 11,692.25 9:09:05 AM
*Source: Bloomberg

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

  • US Aug Change in NonFarm Payrolls (8.30pm)
  • Canada Aug Unemployment Rate (8.30pm)