Wednesday, September 16, 2020

Asia Times: WTO’s ruling against the US unlikely to have material impact on markets; investors gear up for the Fed’s decision

  • China
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
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Market Recap: WTO’s ruling against the US unlikely to have material impact on markets; investors gear up for the Fed’s decision

Stocks in the US advanced on Tuesday ahead of the Fed's monetary policy decision set for Thursday as expectations build for the central bank to continue to maintain its current policy. Investors likely expects little-to-no changes to monetary policy and instead will focus on an updated dot plot and more details regarding the switch to average inflation targeting framework from Fed Chair Jerome Powell. In our view, the central bank is likely to update its official monetary policy statement to reflect the changes to its framework, although this is more probable to have more of a technical impact rather than a practical one as a result of already priced into financial assets. In terms of economic outlook, the central bank now has reason to revise its forecasts for the rest of the year higher as the US economy continues to rebound, with unemployment most recently falling below 9% to 8.4%. However, the lack of fiscal stimulus is likely to contribute to downward pressure in 2021, which we expect the Fed to have some indication of in its longer-term forecasts. The dot plot is likely to continue to show Fed officials having a bias for adopting low rates for longer as well and is probable to not show any changes to the overall outlook for interest rates in the US. We may also not see forward guidance from the Fed this week as a result of the higher levels of uncertainty moving forward especially with the upcoming presidential elections as the central bank reserves ammunition for its post-election meetings.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.01% +2.27 27,995.60
S&P500 +0.52% +17.66 3,401.20
Nasdaq +1.21% +133.67 11,190.32
*Source: Bloomberg

S&P500 sector performance signals a slowdown in a rotation to cyclical sectors as more defensive industries outperform the index. Banks suffered the most, as the Fed's monetary policy decision looks likely to continue to reiterate its lower-for-longer interest rate stance on Thursday. Apple's shares weighed on major indices after reversing most of its 3% gains in early trading to close the day flat as its product launch may have failed to impress investors with what appears to only be minor upgrades to its Apple Watch and iPad lines. Interestingly, the tech giant unveiled a new low-cost Apple Watch SE series that is set to debut at US$279, with a S5 chip from last year's model. The entrance into the lower budget devices will likely increase its already dominant market share (Strategy Analytics estimates Apple to have 55.5% market share of the global smartwatch market, with Samsung and Garmin trailing at 13.9% and 8.0% respectively based on Q1 2020 shipments) in the global smartwatch market as it more directly competes with offerings from Fitbit. The iPhone maker also announced the launch of its Apple One subscription plans that combines several of its services offerings, although this was likely already priced into the company's stock price. The lack of a new iPhone model may have put some downward pressure on the company's stock but any downside was limited due to earlier announcements from the company that it would be delayed by several weeks. Investors will likely be focused on the product launch of the newest iPhone which is expected to feature 5G connections in early October.

In other tech news, shares of Facebook dipped 1.73% in afterhours trading after reports came out that the US Federal Trade Commission (FTC) was preparing a possible antitrust lawsuit against the company. The report from Bloomberg cited a person familiar with the matter, and went on to say that a case may be filed by the end of the year. The report continues to show the increased scrutiny from US federal departments on tech giants on antitrust issues. Facebook CEO Mark Zuckerberg was questioned on the acquisitions of Instagram and WhatsApp last month by the FTC as part of the investigations, according to another Bloomberg report citing people familiar with the matter. It appears that tension between tech giants and US antitrust regulators are likely to continue to escalate in the short-term ahead of the US November presidential elections, and possibly after that as well.


Elsewhere, G10 currencies were largely mixed against the dollar on Tuesday. Major developed Asia Pacific currencies gained against the dollar after China reported better-than-expected retail sales and industrial production figures for August. Importantly, retail sales in China grew for the first time since the pandemic this year at 0.5% YoY in August, fuelling optimism that the Chinese economy continues to recover at a healthy pace. The New Zealand and Australian dollar as well as the Japanese yen all benefitted from the upbeat data. Sterling continued to recover against the dollar thanks to the growing risk appetite as well and as signals that British Prime Minister Boris Johnson and rebels in his Conservative Party are coming to a compromise on conflicts surrounding the controversial Internal Market Bill. While Johnson managed to cross an initial hurdle on Monday with a majority vote on the first reading of the bill in the House of Commons, stronger resistance against the proposal has emerged within his own party with Sir Bob Neill, chairman of the Commons justice committee, tabling an amendment to prevent the government from breaking international law without Parliament's support.

The greenback may also have been impacted by news that the World Trade Organisation (WTO) ruled against the US in its most recent report that the US violated international regulations by imposing tariffs on more than US$234 billion of Chinese exports. However, we view this ruling to have little to no material impact despite handing a win to China. This is due to the US simply being able to appeal the judgement, which in turn will be sent to a panel that has already been undermined by the US earlier this year. It is also unclear on whether China had violated WTO rules by implementing retaliatory tariffs ahead of the ruling. In addition, US Trade Representative Robert Lighthizer's comments that the ruling would have no effect on the US-China phase one trade deal also solidifies that we are unlikely to see US-China trade relations break down into a void in the short-term, even as US-China relations on other issues are likely to continue to escalate.


Safe haven assets were mixed yet again, with some skew towards the downside as cautious optimism returns to the market. Gold fell slightly while silver inched higher. The Japanese yen gained against both the euro and dollar, but was much more due to investors waiting on expectations that Japanese ruling party leader Yoshihide Suga's formal election in a parliamentary vote later today. Investors will then wait on Suga for his cabinet minister picks, although it has already been reported by media outlets that he will be keeping Finance Minister Taro Aso and Foreign Minister Toshimitsu Motegi in their current positions. US Treasuries remained mostly muted with a slight downside bias for the second day in a row, with benchmark 10-year yields inching only 0.7bps higher to 0.68%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.14% -2.71 1,954.15
Silver +0.05% +0.01 27.14
USD/JPY -0.27% -0.29 105.44
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.14%
10-Year +0.7bps 0.68%
30-Year +1.9bps 1.43%
*Source: Bloomberg

Oil futures surge on a bullish view on the crude oil market from Vitol Group, the largest independent oil trader in the world. Vitol Group CEO Russell Hardy said in an interview during the Platts APPEC 2020 conference that he continues to expect inventories to decline this year, thanks to production curtails. Improvements in a manufacturing index in New York state in addition to a report suggesting that US crude oil stockpiles shrank last week by 9.52 million barrels likely helped drive sentiment as well. Expect movements on the official weekly crude oil inventories report from the US Energy Information Administration later today as a result of the conflicting data that was reported yesterday.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.32% +0.92 40.53
WTI +2.74% +1.02 38.28
*Source: Bloomberg

Asian indices were trading mixed on Wednesday as investors in the region continue to wait on the Fed's upcoming monetary policy decision. The Nikkei and KOSPI were both trading close to flat with a downside bias, while the ASX200 inched higher in the early hours of Wednesday's trading session. Futures tracking major indices in the US were trading lower as of 9.22am (GMT +8) as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.08% -19.65 23,435.24 9:12:10 AM
KOSPI -0.03% -0.72 2,442.86 9:32:10 AM
ASX200 +0.69% +40.77 5,935.60 9:31:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.06% -17.00 27,891.00 9:22:06 AM
US Futures -0.12% -4.00 3,391.00 9:22:09 AM
Nasdaq 100 Futures -0.30% -34.25 11,416.00 9:22:10 AM
*Source: Bloomberg

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

  • UK Aug Inflation Rate (RPI/CPI) (2pm)
  • US Sep 11th Mortgage Applications (MBA) (7pm)
  • US Aug Retail Sales (8.30pm)
  • US Sep 11th Crude Oil Stockpiles (EIA) (10.30pm)
  • Fed Monetary Policy Decision/Statement (2am +1)
  • Fed Chair Powell Post Meeting Press Conference (2.30am +1)