Tuesday, September 29, 2020

Asia Times: Equities extends gains on the back of stimulus hopes; Brexit negotiators signals progress on trade agreement

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

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Market Recap: Equities extends gains on the back of stimulus hopes; Brexit negotiators signals progress on trade agreement

Investors continue their buy backs as US equities climb higher for the second day in a row to push all three major US indices to its best single day gain since September 9th. Continued optimism for US lawmakers to resume negotiations, Dip buying, along with rebalancing of portfolios into equity positions appears to be the drivers on Monday yet again. House Speaker Nancy Pelosi’s remarks that she and US Treasury Secretary Steven Mnuchin is planning to resume stimulus measures talks again on Monday likely boosted optimism for a stimulus pact before the November presidential elections. A general shift to cautious risk-on positions was observed across markets, with cyclical sectors, small-cap indices and commodity-linked foreign currencies outperforming the broad market while the VIX index inched only a touch lower to continue to hover above 26. The S&P500 is now trading right at its 50-day moving average after rebounding at its 100-day moving average. Fund window dressing may also be present, with fund managers shifting out of cash positions into the equity market before the end of the quarter. Tomorrow marks the end of the third quarter of the year, and the tech-heavy Nasdaq and KOSPI indices continue to remain largely in the lead.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.51% +410.10 27,584.06
S&P500 +1.61% +53.14 3,351.60
Nasdaq +1.87% +203.97 11,117.53
*Source: Bloomberg

All 11 sectors in the S&P500 advanced on Monday, signalling a healthier and broader rebound in equity markets as opposed to a tech-centric driven market.  Energy curbed losses to lead the index as it rebounds on the back of increasing oil prices, while financials were the next best performing sector in the S&P500. That said, shares of Apple and Amazon continued to give the largest boost to the S&P500, due to its heavier weightages in the index, rising 2.39% and 2.55% respectively. Shares of Alibaba gained 1.81% on Monday following the first day of its three-day investor event. Multiple analysts upgraded their outlook for the ecommerce giant as they become more bullish on the outlook for the company as a result of strong opportunity for across its products and offerings. Most notably, the company and analysts highlighted growing opportunities in lower tier cities in China, opportunities for Lazada in the south east Asian region, and increasing synergies via integration of its cloud computing and ecommerce businesses to provide new offerings for its merchants and partners.

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Elsewhere, the dollar fell against every G10 currency on Monday, likely as a result of cautious optimism and possibly rebalancing of portfolios away from cash positions. Most commodity-linked currencies closed at the top of the table, while the safer Japanese yen underperformed.

Sterling benefitted from renewed investor sentiment on Brexit negotiations after both the EU and the UK's chief negotiators expressed cautious optimism that a deal between the two blocs can be met. While it remains to be seen if the two sides can come to a post-Brexit trade agreement, it does look increasingly likely that some form of a compromise could be made in time for a summit of EU leaders on October 15th, a deadline that was self-imposed by British Prime Minister Boris Johnson himself. If it is to be a repeat of the timeline for the Brexit Withdrawal Agreement, we could potentially see some upside in sterling, particularly against the euro which may show additional weakness against other G10 currencies in the short-to-medium-term. Downside risks may limit some of sterling’s upside however, as a result of an impending uptick in unemployment.

The euro dipped in intraday trading on European Central Bank (ECB) President Christine Lagarde's dovish comments on Monday during her address to European lawmakers. Lagarde said that the ECB is ready to deploy more monetary policy stimulus to aid a recovery if needed. She also expressed that the EU faces additional downside risks as the pandemic continues to weigh on economic activity. The comments from the ECB president comes as restrictions are resurfacing across multiple countries in the bloc. This likely weighed on the euro as speculation for additional easing from the central bank - most likely in the form of an expansion to its Pandemic Emergency Purchase Programme (PEPP) - by the end of the year increases. German Chancellor Angela Merkel's warnings on Monday that the country may continue to see its daily cases of Covid-19 accelerate to more than 19,000 by Christmas may have had some pressure on the euro as well. Still, the euro managed to close higher on the dollar’s retreat.

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Safe haven assets remain muted on Monday, in a sign of cautious optimism instead of a solid shift away from risk aversion. Metals gained, but were most likely a result of a weaker dollar and growing risk appetite. The Japanese yen gained against the dollar but fell against the euro to underperform in the G10 currency basket. US Treasuries were mixed, with 2-year and 10-year treasuries inching only slightly higher while 30-year treasuries fell. Benchmark 10-year yields retreated slightly by 0.2bps to 0.65% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.07% +19.90 1,881.48
Silver +3.44% +0.79 23.68
USD/JPY -0.08% -0.08 105.50
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.4bps 0.13%
10-Year -0.2bps 0.65%
30-Year +1.4bps 1.41%
*Source: Bloomberg

Oil futures rose to a one-week high on Monday, possibly due to a spill over in optimism from equity markets into oil markets. The potential of resumption of stimulus talks likely helped improve sentiment for energy demand as well, but it is important to note that fundamentals in terms of supply and demand issues in the energy market remains mostly the same. Reintroductions of Covid-19 restriction in multiple countries, seasonality factors and uncertainty all continue to weigh on the demand outlook for crude oil prices. The addition of oil production in Libya is also expected to weigh on crude oil prices.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.22% +0.51 42.43
WTI +0.87% +0.35 40.60
*Source: Bloomberg

In Asia, stocks were trading higher in the early hours of Tuesday's trading session as stocks in the region continue to track gains in the US. The Nikkei was the exception, trading negative as of 8.44am (GMT +8) as it suffers from the effects of a strengthening Japanese yen. The KOSPI and ASX200 were both trading higher in contrast. Futures tracking major indices in the US were trading slightly higher as of 8.54am (GMT +8). In elections news, the first presidential debate between Joe Biden and US President Donald Trump will be tomorrow, at 8pm (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.60% -140.97 23,370.65 8:44:05 AM
KOSPI +1.15% +26.91 2,334.99 9:04:00 AM
ASX200 +0.52% +31.09 5,983.40 9:03:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.32% +87.00 27,569.00 8:54:08 AM
US Futures +0.34% +11.25 3,357.25 8:54:01 AM
Nasdaq 100 Futures +0.36% +41.25 11,436.00 8:54:06 AM
*Source: Bloomberg

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

  • Germany Sep Inflation Rate (Harmonised CPI/CPI) (P) (8pm)
  • US Sep Consumer Confidence (Conf. Board) (10pm)