Tuesday, September 8, 2020

Asia Times: A no-deal Brexit looks increasingly likely; signs of rebalancing towards underperforming sectors and regions grow

Tags
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

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Market Recap: A no-deal Brexit looks increasingly likely; signs of rebalancing towards underperforming sectors and regions grow

Equities in the EU and the UK ended the day well into positive territory with US markets closed for the Labor Day holiday as investors price in the likelihood of a rotation away from growth into underperforming sectors and regions. FTSE100 stocks may also have benefitted from a declining sterling with Brexit talks set to resume later today, thanks to much uncertainty surrounding the state of the negotiations between the EU and UK. Reports from the Financial Times that British Prime Minister Boris Johnson is considering to alter parts of the withdrawal pact likely rattled investors and EU leaders with warnings from European Commission President Ursula Von Der Leyen that any future trade pact would be reliant on the UK adhering to the deal. Despite that, stocks still surged in both the EU and UK, signalling that investors remain confident of riskier assets despite last week's rout, most notably due to the lower reliance of UK and EU indices on tech sector stocks as compared to the US. Stocks that led the Euro Stoxx 50 index in gains was Airbus, Volkswagen, Safran and Daimler.

US President Donald Trump suggests that a vaccine may be ready as early as October, while US-China tensions continue to escalate. Trump spoke at a White House briefing on Monday suggesting that a vaccine for the novel coronavirus may be ready as early as October, as the President pushes for a cure ahead of the November presidential election. Democratic presidential nominee Joe Biden said that he would act on the advice of scientists when asked about a possible vaccine before the elections. During the briefing, Trump also said that he intended to curb the US' economic relationship with China by threatening to punish companies that create jobs overseas and limit companies that conduct business in China from winning federal contracts. 

Indexes Daily Change (%) Net Change Closing Price
FTSE100 +2.39% +138.32 5,937.40
Stoxx +1.64% +53.48 3,314.07
Dax +2.01% +257.62 13,100.28
*Source: Bloomberg

Sterling led losses in the basket of G10 as a no-deal Brexit becomes increasingly likely with both parties stuck on issues surrounding the split in addition to Johnson's plan to change the terms of the Withdrawal Agreement through legislation being tabled on Wednesday. In addition to the escalation from Johnson towards a potential no-deal Brexit, the British Prime Minister also added that both the EU and UK should "move on" if an agreement cannot be reached by October 15th, the date in which EU leaders are set to meet. The outlook for the sterling as a result seems to be tilted strongly towards the downside in the short-to-medium-term as investors are likely to continue to price in a higher likelihood of a no-deal Brexit. This seems especially true with regards to the dollar as sterling has enjoyed a strong performance against the greenback in the past three months. The euro's upside against sterling may however be limited since we are seeing increasingly more new daily infections of Covid-19 in member countries.

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Safe haven assets remained muted with the US closed for a holiday. In line with a wait-and-see approach from investors for assets highly correlated to US equities and the greenback, gold closed near flat, shedding only 0.02% on Monday. The Japanese yen weakened against the dollar but strengthened against the euro. The US Treasury market remained closed as well.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.02% -0.30 1,933.64
Silver -0.29% -0.08 26.83
USD/JPY +0.03% +0.03 106.27
*Source: Bloomberg

Oil futures declined yet another day, extending into a four-day rout. Oil futures has now declined 13 out of 21 of the last trading sessions as both benchmarks continue to dip back below levels last seen in July. Demand concerns for the rest of the year is likely the strongest reason for the recent pullback, with the spread between Brent futures for December this year and the next reaching the biggest since May. Comments from Russian Deputy Energy Minister Pavel Sorokin that global oil demand may not get back to pre-virus levels for another two to three years likely rattled investors as well.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.52% -0.65 42.01
WTI - - -
*Source: Bloomberg

Asian equities were trading higher on Tuesday morning along with futures tracking major indices in the US as signals that investors are rebalancing their portfolios into sectors outside of tech grow stronger. The Nikkei, KOSPI and the ASX200 were each trading higher in the early hours of Tuesday's trading session. Dow e-mini Futures led gains among futures tracking US majors. Nasdaq 100 e-mini futures however, continued to trade close to flat with a negative skew as it appears that investors and traders are still waiting to see if another tech selloff will take place today when the US equity market reopens. Goldman's chief global equity strategist optimistic stance on the tech sector may influence some decision making in markets later today, as investors may seek to continue to buy-the-dip in mega cap stocks that suffered during the pullback late last week. At this point, this may be the case since last week's rout has made the tech sector more attractive in terms of historical valuations, while the potential for the sector’s outperformance during this pandemic period has not materially changed. However, some rotation of profits into well positioned stocks in underperforming sectors may be beneficial since longer-term upside potential for tech sector stocks appear to be limited with the laws of diminishing returns kept in mind.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.31% +72.49 23,162.44 8:48:50 AM
KOSPI +0.74% +17.89 2,402.11 9:08:50 AM
ASX200 +1.08% +64.99 6,009.80 9:08:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.77% +218.00 28,292.00 8:58:53 AM
US Futures +0.49% +17.00 3,434.50 8:58:42 AM
Nasdaq 100 Futures -0.06% -6.75 11,542.00 8:58:44 AM
*Source: Bloomberg

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

  • Germany Jul Trade Balance (2pm)
  • Eurozone Q2 Employment Change (F) (5pm)
  • Eurozone Q2 GDP (F) (5pm)