Tuesday, October 6, 2020

Asia Times: Renewed hopes for stimulus fuels investors’ risk appetite; AUD may have room to fall on the RBA’s decision today

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • AUD
  • RBA

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Market Recap: Renewed hopes for stimulus fuels investors’ risk appetite; AUD may have room to fall on the RBA’s decision today

Stocks comes off a winning day as US President Donald Trump get set to return back home after being treated for Covid-19. US equities surged on open as optimism for an agreement on stimulus between US lawmakers grew among investors, after US President Donald Trump's tweet earlier on Sunday suggesting that the US "wants & needs stimulus". Reports from before market open suggesting that Trump could be discharged from hospital as soon as Monday may have also boosted investor sentiment. Then towards the end of the trading session, confirmation that Trump would be discharged helped spur another buying spree, sending major indices surging to close the day more than 1% higher for the Dow and S&P500, and upwards of 2% for the Nasdaq, reversing all losses from last Friday.

Interestingly, polls continued to widen on Monday, which could imply that traders may be pricing in a more certain Democrat win which would consequently reduce the likelihood of a contested election after the presidential election's outcome. This could be due to Trump's election campaign schedule being derailed by his contracting of the novel coronavirus, which is expected to impact the odds of him being able to target swing states with live speeches.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.68% +465.83 28,148.64
S&P500 +1.80% +60.19 3,408.63
Nasdaq +2.32% +257.47 11,332.49
*Source: Bloomberg

S&P500 sectors were broadly higher, with oil and tech leading gains. Energy stocks were likely boosted by a jump in oil prices, as expectations for additional fiscal stimulus rose. Tech recovered after Friday's selloff, driven mainly by companies in the semi-conductor space. At the bottom of the table were real estate, and the safer consumer staples sector. Tech-heavy indices widely outperformed major indices, while the small-cap Russell 2000 and the S&P600 continued to dominate gains over other major indices as well.

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Risk-on behaviour was observed in the foreign exchange market for the most part. The Norwegian krone led gains over the dollar. The Japanese yen was the only currency in the G10 basket to weaken against the dollar. In addition to news surrounding the US elections and fiscal stimulus, upbeat economic data may also have been another driver for reduced risk aversion. ISM's non-manufacturing PMI continued to improve in September to 57.8, from 56.9 in August. The headline figure also beat expectations for a slight drop to 56.2, signalling to investors that the US' service sector may be experiencing additional tailwinds in its recovery despite Covid-19 cases continually rising in the US.

The Australian dollar may have some room for weakness with the Reserve Bank of Australia (RBA) set to announce its decision on monetary policy this morning. The central bank has already signalled its willingness for further easing during its last meeting, and a speech from RBA Deputy Governor Guy Debelle has reiterated this as well. The preference from the central bank appears to be for a reduction of its cash rate target to levels just before negative territory, as well as bond purchases that targets yields at the back end of Australia's yield curve. That said, the RBA may choose to delay stimulus measures to its next meeting in November instead, to first factor in the Australian government's budget statement that will be happening later today and to wait on additional data on the imbalance of the recovery in the Australian economy before acting on an appropriate stimulus package. It also appears that there is likely to have limited urgency for central bankers to act, since the Australian economy has shown relative improvements since its last meeting. However, we expect the statement from the bank to continue to feature dovish language, which may put downward pressure on AUD/USD as investors and traders continue to price in a higher likelihood for a rate cut later this year.

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Risk aversion broadly faded during Monday's trading session. Gold and silver rose in tandem with equities. The Japanese yen fell against both the euro and the greenback. US Treasuries fell across the board, with benchmark 10-year yields spiking higher by 8.1bps to 0.78%, the highest level since June. However, VIX rose for the fifth straight day, signalling that there may be some hedging happening even as the S&P500 rose back above its 50-day moving average. Expect more volatility ahead as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.72% +13.69 1,913.53
Silver +2.71% +0.64 24.38
USD/JPY +0.44% +0.46 105.75
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.6bps 0.14%
10-Year +8.1bps 0.78%
30-Year +10.2bps 1.59%
*Source: Bloomberg

Oil futures rose on the back of rising optimism for additional stimulus in the US and a weaker dollar. As in equity markets, sentiment that US lawmakers were closer to an agreement on a stimulus package likely helped improve the outlook for the energy demand. Additional downward pressure on supply may also have factored into the spike in oil prices on Monday. A strike in Norway by some managers at Norway's offshore oil and gas field is estimated to cut off about 330,000 barrels a day worth of output. The strike in Norway grew by 126 offshore workers to 169 as of Monday. In the US, Tropical Storm Delta is forecast to turn into a Hurricane and hit the Gulf of Mexico later this week, which should prompt another temporary shutdown of a number of refineries and rigs in the area. However, without a strong robust catalyst for energy demand, Monday's surge may only be temporary before oil futures suffer a mean reversion cycle before returning to a slow and gradual recovery.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +5.14% +2.02 41.29
WTI +5.86% +2.17 39.22
*Source: Bloomberg

Investors in Asia appears to only be cautiously optimistic of the US' stock market recovery on Monday as Asian indices open only a touch higher on Tuesday morning. The Nikkei, KOSPI and the ASX200 were all trading higher, but to a smaller extent when compared to Monday's performance. Futures tracking major indices in the US were mixed, with only the Dow making gains as of 9.15am (GMT +8). This could be a signal of increased volatility as investors may be mixed on Trump's recovery and the lack of stimulus news.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.33% +76.50 23,388.64 9:05:55 AM
KOSPI +0.51% +11.99 2,369.99 9:25:50 AM
ASX200 +0.03% +2.02 5,943.60 9:25:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.07% +21.00 28,016.00 9:15:56 AM
US Futures -0.03% -1.00 3,392.00 9:15:54 AM
Nasdaq 100 Futures -0.22% -24.00 11,444.00 9:15:58 AM
*Source: Bloomberg

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

  • RBA Monetary Policy Decision/Statement (11.30am)
  • Germany Aug Factory Orders (2pm)
  • US Aug Trade Balance (8.30pm)
  • Fed Chair Powell Addresses NABE Conference (10.40pm)