Monday, September 7, 2020

Asia Times: SoftBank and retail investors’ aggressive options positioning likely contributed to a market rally that was primed for consolidation

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • US payrolls

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Market Recap: SoftBank and retail investors’ aggressive options positioning likely contributed to a market rally that was primed for consolidation

US equities moved into a second day of losses on Friday following the sharp selloff in tech shares on Thursday, but recovered later slightly during the trading session after a report by the Financial Times suggested that a bulk of the bullish activity in the options market was driven by SoftBank. The Financial Times reported that the Japanese conglomerate had been acquiring options during the past month in large amounts, speculating that the unexplained upward movements seen in mega-cap tech and tech related shares during August may have been attributed to the aggressive positioning on call options by the company. The report cited people familiar with the matter, and had a follow-up report on Monday that said SoftBank is sitting on trading gains of about US$4 billion. While SoftBank's speculative momentum positions were a likely contributor to gains over the past two weeks up to Thursday, a surge in retail interest in the options market should also be considered. Calculations by Sundial Capital Research showed that the absolute dollar amount spent by small traders on speculative options bets were estimated at around US$5.5 billion, the highest since June and more than double the amount seen in February. This may have been further fuelled by stock splits from Apple and Tesla, which may have made option contracts on those shares more accessible (fractional contracts are not available in the options market). The high levels of speculation in the options market may have put upward pressure by brokers or banks who were on the other side of the contract as they bought up underlying assets to hedge against their own positions. As a result, Thursday and Friday's selloff may have been fuelled by the exercising or expiration of the options contracts which subsequently led to brokers and banks closing their long positions on those stocks. But with news that the pullback was mostly due to SoftBank's involvement, traders and investors may have interpreted the opportunity as a chance to buy-the-dip since these companies had not materially changed in value despite losing more than one week's value.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.56% -159.42 28,133.31
S&P500 -0.81% -28.10 3,426.96
Nasdaq -1.27% -144.97 11,313.13
*Source: Bloomberg

Among sectors, losses were predominantly in the tech, communications services and consumer discretionary sectors but a deeper dive showed that shares that fell were mostly tech and tech-related stocks in those sectors. Financial led gains, possibly due to the perceived rotation into more value stocks and as headline unemployment data came in better-than-expected. The US Bureau of Labor Statistics reported NonFarm payrolls had grown by 1.371 million in August, higher than the median estimate by economists at 1.35 million. Unemployment rate as a result had dipped to 8.4% as well, much lower than forecasts of 9.8%. Important to note that these numbers, while is an improvement, is still hovering at extremely high levels with some distortion from temporary hiring for the 2020 Census as well as a still-recovering labour participation rate (A: 61.7%, E: 61.8%, P:61.4%). The better-than-expected labor market data likely helped provide support for financial stocks after Fed Chair Jerome Powell indicated that the numbers were positive. Powell also reiterated his stance on the need for more government support for the unemployed and small businesses.

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Last week may not have been great for equities, but we are still nowhere close to a crash. The Nasdaq was the hardest hit among major indices thanks to its exposure to the tech sectors. Global indices performance also distorts the overall performance of the market due the increasing weightage of tech and tech-related shares due to their strong growth as a result of the sector's resilience through the Covid-19 pandemic. In terms of gains, the Dow, S&P500 and Nasdaq were all still trading well above levels from two weeks ago. A larger rotation into the Asian region may also have taken place towards the end of the week, with performances from some of the major Asian indices losing much less than their American counterparts even after tracking some of the sharp losses in US equities on Friday.

Indexes Weekly Change (%) Net Change Closing Price
Dow -1.82% -520.56 28,133.31
S&P500 -2.31% -81.05 3,426.96
Nasdaq -3.27% -382.50 11,313.13
FTSE100 -2.76% -164.49 5,799.08
Dax -1.46% -190.54 12,842.66
Stoxx -1.66% -54.95 3,260.59
Nikkei +1.41% +322.78 23,205.43
CSI300 -1.53% -74.05 4,770.22
KOSPI +0.61% +14.45 2,368.25
ASX200 -2.44% -148.30 5,925.51
HSI -2.86% -726.61 24,695.45
STI -1.18% -29.99 2,509.64
*Source: Bloomberg

The forex market was relatively muted on Friday, with the basket of G10 currencies largely mixed against the dollar. The euro did fall against the dollar when US investors re-entered the market to as low as 1.1781. But the strong jobs report, coupled with a reversal of some of the losses in equities market likely helped push the euro back into demand to end the day mostly flat. As per our latest Analysts' Pick report, the upside for the currency may be present in the medium-term but we think it is likely to be limited due to the number of risks the EU faces, which includes the recently EU-leader-approved 750-billion-euro stimulus plan facing hurdles in national and the EU parliaments, Brexit negotiations and the US presidential elections.

Commodity-linked currencies fared better than other major currencies, as better-than-expected unemployment figures helped to support gains in those currencies. The Canadian loonie rose the most, followed by the New Zealand and Australian dollars as investors likely priced in the positive effect that higher employment will have on personal income - and consequently consumption - in the US. Coupled with the downtick in the Swiss franc, traders may still be looking to be having a more risk-on attitude despite the downside correction across equity markets.

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Safe haven assets were highly mixed on Friday, with a larger skew towards lower risk aversion. Gold and silver gained. The Japanese yen inched lower against the dollar but climbed slightly higher against the euro. US Treasuries fell much lower across the board, pushing benchmark 10-year yields back higher by 8.3bps to 0.72%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.16% +3.03 1,933.94
Silver +1.22% +0.32 26.91
USD/JPY +0.05% +0.05 106.24
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.6bps 0.14%
10-Year +8.3bps 0.72%
30-Year +11.0bps 1.47%
*Source: Bloomberg

Oil futures dipped on Friday for the third day of losses in a row as it appears to be a larger consolidation of the asset into the downside. Demand factors likely fuelled the selloff, as diesel's premium to Brent crude dipped to as low as US$3.41 a barrel on Thursday (data calculated from ICE Futures Europe compiled by Bloomberg), its lowest since 2011. The dip in diesel’s pricing suggests that the economic recovery is still slowing despite the positive economic data we see coming from the US and other developed markets. On Monday morning, oil prices extended into additional losses after it was reported that Saudi Aramco reduced its pricing of its key Arab Light grade of crude to Asia. If true, then the cut in pricing suggests that we may see increased imports in China over the month of September and October, which may help alleviate the pressure off of the growing supply in the crude oil market and expected waning demand due to the change in seasonality in the US.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -3.20% -1.41 42.66
WTI -3.87% -1.60 39.77
*Source: Bloomberg

In Asia, stocks in the region were trading mostly higher in the early hours of Monday, a signal that we may have seen the end of a sharp downside correction in the equities market. The Nikkei opened the day lower but reversed some of those losses in the first hour of the trading session. The KOSPI and the ASX200 were both trading higher. Figures tracking major indices in the US were mixed, with Dow futures showing strong gains while the tech heavy Nasdaq continued to face losses as of 9.05am (GMT +8). This suggests that tech may face more downside, but at a slower rate than before while other sectors may benefit from a profit taking and rebalancing cycle. US markets will remain closed on Monday for the Labor Day holiday and will only reopen on Tuesday.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.02% -4.67 23,200.76 8:55:10 AM
KOSPI +0.52% +12.37 2,380.62 9:15:10 AM
ASX200 +0.24% +14.39 5,939.90 9:15:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.32% +91.00 28,165.00 9:05:13 AM
US Futures -0.01% -0.50 3,417.00 9:05:13 AM
Nasdaq Futures -0.69% -79.00 11,470.00 9:05:13 AM
*Source: Bloomberg

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

  • China Aug Trade Balance
  • Germany Jul Industrial Production (2pm)
  • Japan Q2 GDP (F) (7.50am +1)