Wednesday, September 23, 2020

Asia Times: The dollar continues its rebound on Powell’s call for fiscal stimulus; the S&P500 end four-day rout

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil
  • NZD
  • Reserve Bank of New Zealand

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Market Recap: The dollar continues its rebound on Powell’s call for fiscal stimulus; the S&P500 end four-day rout

US equities closed higher on Tuesday, putting the end to the S&P500's four-day rout as tech outperforms for the second day in a row. The four-day decline was the longest losing streak since February and it remains to be seen if market is still tilted towards the downside. While Tuesday's performance was skewed largely towards the upside, it may have been due to dip-buying in conjunction with easing selloffs in equity markets. Both VIX and VXN remains at elevated levels as well. But one thing is for sure, volatility is likely to continue as we move closer towards the presidential elections. After US markets closed, House Speaker Nancy Pelosi announced that Congress and the White House has managed to reach a deal on a stopgap funding bill to keep the government operating through December 11th. The House passed the bill on Tuesday night, and will now move to the Senate for a vote before the fiscal year ends on September 30th to prevent a government shutdown on October 1st. This stopgap bill may give investors some hope for a fiscal stimulus bill being passed before the November presidential elections.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.52% +140.48 27,288.18
S&P500 +1.05% +34.51 3,315.57
Nasdaq +1.71% +184.84 10,963.64
*Source: Bloomberg

Consumer discretionary leads gains among S&P500 sectors as Amazon's shares jump more than 5% on the announcement of its foray into the fitness space. Stocks of Facebook, Apple, Google and Microsoft each outperformed the S&P500, as tech and tech-related shares were the main drivers of yesterday's equity market performance. Amazon's new EX-Prime Smart Connect Bike will be sold at US$500, a large discount to Peloton's offerings, while also offering a free 30-day Echelon membership trials. The announcement from Amazon is the latest edition of mega-tech's entrance into the fitness world, days after Apple announced the launch of its Fitness+ service. Shares of Peloton fell as a result, as Amazon's new exercise bike directly competes with its own offerings at a fraction of a price. However, analysts noted that a similar bike by Echelon Fitness that is being sold at Walmart hasn't had any noticeable impact to Peloton's growth (Amazon's new exercise bike was developed through a partnership with Echelon Fitness as well), which likely helped Peloton's shares recover from an intraday loss of 6.7% to close less than 1% lower on Tuesday.

Nike blows past expectations as the company switches strategies to focus on e-commerce. The sportswear maker reported US$10.6 billion in revenue for its fiscal first quarter and earnings per share of US$0.95, largely beating analysts’ estimates of US$9.11 billion in revenue and earnings of US$0.46 per share. The company especially noted of the turnaround in sales in China, as the country benefits from an earlier recovery in comparison to the rest of the world due to the dynamics of the pandemic. Encouragement from the Chinese government for citizens to exercise more likely also drove sales in the country. Despite beating estimates, sales for the quarter is still about a percentage point lower than the same period in 2019 as the sportwear maker continues to deal with weak sales at brick-and-mortar stores. The rebound in the company's financial performance following last quarter's surprise loss and dampened margins likely boosted investors' sentiment of the company, driving shares of Nike higher by 13.1% in after-hours trading on Tuesday. Optimism also spilled over to shares of other sportswear makers such as lululemon.

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The dollar rose as risk aversion continues to play a role in markets. Part of the driver for the greenback was likely its safe haven properties, with another possible driver being the large outflows in equities markets as demand for liquidity rose with investors closing positions in the equity market during the four-day selloff before Tuesday. Fed Chair Jerome Powell's testimony to lawmakers on Tuesday probably boosted the greenback as the chairman intensified his calls for more fiscal stimulus from the US government. Powell's calls - in addition to that from US Treasury Steven Mnuchin - likely reinforced the dampened outlook for the US' economic recovery, pushing the dollar higher on the day as he reminded Congress that fiscal stimulus would be more effective for an economic recovery as opposed to the Fed's lending programs due to constraints of the central bank. Comments from Chicago Fed President Charles Evans likely also put upward pressure on the dollar after markets viewed the remarks as possibly contrasting from comments from Powell post-FOMC meeting, stating that the Fed's new guidance on interest rates doesn't preclude tightening before inflation averages 2% for some period of time. However, these views were also included in the Fed’s latest monetary policy statement, as the FOMC is still looking to keep the newest framework under debate.

The Reserve Bank of New Zealand (RBNZ) has an easing bias, but we may only see additional easing in the November meeting instead of today’s meeting. While Auckland's reintroduction of lockdown measures following its last meeting in August is likely to fall under consideration, New Zealand's economic recovery has not been derailed. In addition, with over-pessimism from the RBNZ on the economic contraction earlier in the year and New Zealand's general elections coming in October, it looks less likely that the central bank will find any urgency in easing monetary policy further. That said, we expect the central bank to reinforce its easing bias in its statement, by re-emphasising the packages of monetary policy tools that is under considerations to provide the New Zealand economy more support in future, setting up a possible easing cycle in November. NZD/USD may as a result have more room to drop later today, possibly closer towards its second support at 0.6584.

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Safe haven assets were mixed, but there may be a skew towards cautious optimism again. Gold fell along with silver. The Japanese yen fell against the dollar but gained against the euro to be have the second-best performance against the dollar on Tuesday. US Treasuries were mixed, with shorter-termed treasuries gaining slightly while longer-termed ones edged a touch lower. Benchmark 10-year yields were 0.5bps higher at 0.67% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.64% -12.30 1,900.21
Silver -1.28% -0.32 24.40
USD/JPY +0.27% +0.28 104.93
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.14%
10-Year +0.5bps 0.67%
30-Year +0.8bps 1.42%
*Source: Bloomberg

Oil futures inched slightly higher, as gains from a spill over in optimism from the equity market was likely curbed by supply worries. The American Petroleum Institute report suggested that US crude stockpiles rose by 691,000 barrels last week, while gas and distillate supplies declined, according to people familiar. Oil traders will be looking to the official report from the US later today as a result. Oil markets continue to face downside risks as a result of seasonally weak demand, pandemic-related factors and a supply glut from earlier in the year. Upside as a result will likely continue to be curbed, especially with more supply from Libya expected to come online in the near future.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.68% +0.28 41.72
WTI +0.66% +0.26 39.80
*Source: Bloomberg

In Asia, stocks were mixed in the early hours of Wednesday's trading day. The Nikkei may suffer some downside today, as it plays catch-up to other global major indices after reopening from a two-day holiday. The weaker yen may help to limit some of that downside. The KOSPI appears to be suffering correction, with the index falling below its 50-day moving average for the first time April in early trading on Wednesday. The ASX200 was trading more than 1% higher in contrast, which may also be seen in other Asian indices as the recovery in the US spills over to the region. Futures tracking major indices in the US were mixed, with the Dow leading gains as of 9.09am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.71% -164.39 23,195.91 8:59:10 AM
KOSPI -1.40% -32.30 2,300.29 9:19:10 AM
ASX200 +1.63% +96.14 5,880.20 9:18:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.19% +54.00 27,197.00 9:09:10 AM
US Futures -0.14% -4.25 3,295.00 9:09:11 AM
Nasdaq 100 Futures -0.57% -63.50 11,086.00 9:09:10 AM
*Source: Bloomberg

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

  • RBNZ Monetary Policy Decision/Statement (10am)
  • Germany Sep Manufacturing/Services PMI (Markit) (P) (3.30pm)
  • US Sep Manufacturing/Services PMI (Markit) (P) (9.45pm)
  • Fed Chair Powell Appears Before House Panel on Covid-19 (10pm)
  • US Sep 18th Crude Oil Stocks Change (EIA) (10.30pm)