Wednesday, September 9, 2020

Asia Times: US equities resumes pullback as traders return; oil prices dip to three-month low on stimulus and demand concerns

  • China
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil


Market Recap: US equities resumes pullback as traders return; oil prices dip to three-month low on stimulus and demand concerns

Stocks in the US continue last week’s selloff as US-China tensions and fiscal stimulus concerns likely added downward pressure. The US said on Tuesday that it had banned imports from three companies in the Xinjian region of China over the alleged repression of the Uighur Muslim minority group in the region. It also said that it plans to add restrictions on six more companies by the end of this fiscal year. On the stimulus front, House Speaker Nancy Pelosi expressed her opposition towards the stimulus proposal put forth by Republicans that Senate Majority Leader Mitch McConnell aims to put to a vote in the Senate later this week. Investors may have priced in the increased likelihood that the next stimulus bill may be delayed yet again, as well as the fact that the stimulus proposal being put forth in the Senate has been reduced to US$500 billion.

Indexes Daily Change (%) Net Change Closing Price
Dow -2.25% -632.42 27,500.89
S&P500 -2.78% -95.12 3,331.84
Nasdaq -4.11% -465.44 10,847.69
*Source: Bloomberg

Tech continued to bear the grunt of losses in the S&P500, closely followed by the energy sector. Semi-conductor stocks faced more downward pressure as downside for the sector persists from last week's news that China was reportedly planning to focus development on its domestic semiconductor industry in an effort to work around the US' restrictions on the sector. Oil companies suffered on Tuesday as well, falling in tandem with oil prices as energy demand concerns fuel a selloff in that market. In company news, shares of Tesla plunged 21.06% as the company failed to meet expectations of being added to the S&P500 index. Selloff in the automaker's shares were fuelled even more by General Motor’s announcement to take up a US$2 billion stake in electric truck maker Nikola in a plan to manufacture a new electric-pickup model with the company.

Traders are now likely now concerned with the pullback in stocks as we see a second day of a broader selloff across sectors in the US equity market. Where it will get interesting is in the Asian and European region, where valuations are still far from that in the US. In addition, while we do see buy-the-dip strategies being implemented by investors, the number of outstanding put contracts on an ETF tracking the Nasdaq 100 reached the highest in two years last week. Although not fully indicative of the direction of speculation, the increase in demand for put options on the highly tech correlated ETF suggests that there may have been a surge in downside protection against the fall in the tech sector. This would mean that even though buying-the-dip may be present, there is also a certain level of caution in the market. It may signal that there is more downside to come for the US equity market, especially as more bullish call options and broker hedges get unwound, and as more retail long positions have greater incentive to close their positions to lock in previous gains even though fundamentals for the tech sector remain strong.


In the forex market, the dollar gained across the board with the exception of the Japanese yen. We finally saw a shift in demand towards safe haven currencies yesterday with the Japanese yen and Swiss franc outperforming other G10 currencies, a signal that investors are becoming more concerned on the potential downside of the current selloff. The Norwegian krone led losses as oil prices affected demand for the currency.

Sterling fell for the fifth day in a row after a UK minister commented that the UK will be breaking international law by attempting to re-write parts of the Brexit Withdrawal Deal made last year. Northern Ireland Minister Brandon Lewis told lawmakers in the House of Commons on Tuesday that British Prime Minister Boris Johnson's planned changes to parts of the Brexit agreement between the UK and EU will "break international law, in a very specific and limited way". Lewis' comments in the Commons likely rattled investors and traders, sending sterling on a 1.40% dip. The pound’s most recent decline of more than 1% was last on August 19th. It appears that even with Brexit negotiations resuming this week, there may be little upside for sterling as tensions between the EU and UK regarding Brexit looks likely to escalate further. In addition, with risk aversion spiking up, investors look more likely to flood out of sterling to mitigate geopolitical risk surrounding the UK into safer currencies.


Gold remained mostly resilient despite inching lower, while other safe haven assets gained on increased risk aversion. Gold has declined for the third day in a row, but is still outperforming US equities. The yen outperformed both the dollar and euro. US Treasuries gained across the board, pulling benchmark 10-year yields down 3.9bps to 0.68%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.08% -1.61 1,932.03
Silver -0.60% -0.16 26.67
USD/JPY -0.23% -0.24 106.03
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.14%
10-Year -3.9bps 0.68%
30-Year -5.0bps 1.42%
*Source: Bloomberg

Oil futures tumbled on Tuesday as demand concerns and questionable progress on the US fiscal stimulus proposal dampens sentiment for the industry. Brent fell below US$40 per barrel since mid-June. Shipbroker and exchange data compiled by Bloomberg shows storing crude at sea has become profitable again thanks to the widening contango, which may incentivise energy traders to seek out storage for crude oil once again. This could mean that the current slump may be a buying opportunity for oil futures, although demand concerns may suggest waiting for more downside in crude oil to play out before entering into larger positions. Bank of America Merrill Lynch is the latest to add a more bearish outlook to energy demand, believing that it may take more than three years for global oil demand to recover from Covid-19, assuming that there is a vaccine or cure. A Bloomberg survey of Asian refiners suggested that demand continues to remain under pressure in the region, with four out of ten respondents indicating interest in buying more crude oil from Saudi Aramco following its price cut for October. WTI contracts dipped past the 100-day moving average, suggesting that more downside may be in store for the benchmark.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -5.31% -2.23 39.78
WTI -7.57% -3.01 36.76
*Source: Bloomberg

Stocks in Asia were trading lower in the early hours of Wednesday's trading session, while the S&P500’s 14-day RSI remains above 41. The Nikkei, ASX200 and KOSPI were all trading lower as of 9am (GMT +8). Traders will likely be watching stocks in the region today to see if there is a rebalance from US equities towards underperforming regions today, for a sign of confidence regarding the pullback across equity markets. Futures tracking major indices in the US were trading mixed, with Nasdaq 100 e-mini futures trading surprisingly higher while Dow and S&P500 e-mini futures faced downward pressure. The S&P500 is approaching its 50-day moving average which will likely add as a support. Traders may be looking towards the 14-day RSI in the S&P500 as well as the index currently trades at around the 41 support from early April, to see if it breaks past the 40.0 level, which would make it a new low since the end of March.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -1.42% -326.75 22,947.38 9:01:15 AM
KOSPI -1.02% -24.33 2,377.58 9:21:10 AM
ASX200 -2.38% -139.84 5,868.00 9:21:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.34% -91.00 27,434.00 9:11:17 AM
US Futures -0.22% -7.25 3,328.25 9:11:18 AM
Nasdaq 100 Futures +0.38% +42.25 11,103.00 9:11:19 AM
*Source: Bloomberg

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

  • China Aug Inflation Rate (CPI) (9.30am)
  • Switzerland Aug Unemployment Rate (1.45pm)
  • US Sept 4th Mortgage Applications (MBA) (7pm)
  • Canada BoC Monetary Policy Decision/Statement (10pm)