Wednesday, October 7, 2020

Asia Times: Stocks plunge as Trump halts stimulus negotiations; AUD falls as RBA signals higher likelihood of easing in November

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  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • RBA

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Market Recap: Stocks plunge as Trump halts stimulus negotiations; AUD falls as RBA signals higher likelihood of easing in November

Stocks on Wall Street reversed course on dashed stimulus hopes on Tuesday, sending all three major indices diving more than 1%. US President Donald Trump ended stimulus negotiations with Democrats late on Tuesday in the US, prompting stock prices to pare all of its gains earlier in the trading session as investors were likely pricing in a higher likelihood of additional stimulus being passed ahead of the November presidential elections before the announcement. In addition, comments from Fed Chair Jerome Powell in a speech earlier that may have added extra pressure on stocks prior to the announcement, after the chairman reiterated his stance that the lack of additional stimulus measures is likely to add onto the pressure on households and businesses. Interestingly, smaller cap indices fell less than the major indices, signalling that there may have been additional speculative positions on growth stocks as compared to value. VIX has risen for the sixth day in a row, as the fear gauge rises back closer towards the 30s.

Indexes Daily Change (%) Net Change Closing Price
Dow -1.34% -375.88 27,772.76
S&P500 -1.40% -47.68 3,360.95
Nasdaq -1.57% -177.89 11,154.60
*Source: Bloomberg

S&P500 sectors were mostly down, with the exception of utilities. But the industry that faced a strong drawdown on Tuesday's news were airlines as the lack of financial aid is likely to exasperate the already damaged industry. The consumer discretionary sector fell the most, as the lack of stimulus suggests that consumer spending in the fourth quarter may remain subdued as we are already seeing households spending normalise in line with dipping income and high levels of unemployment. Boeing weighed heavily on major indices, after the company released its first long-term forecast since the start of the pandemic. The aircraft maker now estimates 11% fewer deliveries through 2030 from its forecast last year, with growth only expected to pick up in the 2030s. The new forecast from the company highlights the damage that has already been done to the air travel sector and underlines the expected shift in consumer behaviour. Boeing expects the focus to shift to midsize aircrafts for twin-aisle planes in the next five to 10 years, while wide body demand should continue to face headwinds. This could signal that air travel demand isn't expected to return to pre-Covid-19 levels in the near future, possibly due to expectations from the aircraft maker for a longer lasting economic downturn and reduced business travel. Boeing's shares closed the day more than 6% lower as a result.

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G10 currencies promptly reversed gains in tandem with equities as the market flooded back towards the safer greenback. The Norwegian krone fell the most, followed by commodity-linked currencies. The Japanese yen was the only currency that gained against the dollar, strong indications of a flip in investor sentiment from the day before.

The Australian dollar briefly spiked on the Reserve Bank of Australia's (RBA) decision to keep monetary policy unchanged before proceeding to fall more than 1% on the central bank's dovishness and dollar's strength. The RBA kept its main monetary policy tools on hold ahead of the government's fiscal budget statement but showed increased dovishness in its statement on Tuesday. Prominent parts of the statement were on the emphasis on unemployment in the country as the central bank looks for ways to implement additional monetary policy measures to help prop up jobs in the midst of an economic recovery. The statement further supports the case for a November easing cycle, which many economists are likely to expect as well. Furthermore, a lacklustre fiscal budget statement from the Australian government highlighted expectations for a slow recovery in employment (unemployment expected to stay above 5% for four years, a slower recovery to pre-crisis levels when compared to the 2008 and 2000 crisis) signals that the RBA is more likely to try to deliver more support as well. Futures tracking the RBA's decision indicated that markets were pricing in a higher likelihood of easing by November in the hours following the central bank's announcement.

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Safe haven assets spiked higher on Tuesday on renewed risk aversion. Metals were the exception, as both gold and silver continued to move in tandem with equities. The gold/silver cross appears to have entered a new range between 82 and 78, topping out at around 81's level yesterday before falling back lower towards 80.66 on Wednesday morning in Asia. The Japanese yen strengthened against both the dollar and the euro. US Treasuries mostly advanced, with benchmark 10-year yields dipping down 4.6bps to 0.74%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.85% -35.35 1,878.18
Silver -5.38% -1.31 23.07
USD/JPY -0.11% -0.12 105.63
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.15%
10-Year -4.6bps 0.74%
30-Year -5.3bps 1.54%
*Source: Bloomberg

Oil futures initially jumped on Tuesday following a couple of bullish signals in both the demand and supply space before reversing some of those gains by the end of the session on fading stimulus hopes. Oil prices benefitted from the Gulf of Mexico reportedly shutting 29% of oil production facilities ahead of Hurricane Delta, a category four hurricane that has a possibility of turning into a category five storm before hitting the US Gulf Coast later this week. On the demand side, Bloomberg's report that Saudi Arabia's Aramco raised its pricing for its Arab Light crude oil for Asia likely helped to alleviate worries of weakening demand. The American Petroleum Institute's non-official report of US crude oil inventories also helped spur some bullish behaviour in oil markets after it showed both crude oil and distillate stockpiles in the US falling last week. Oil traders will be focused on the official report from the US Energy Information Administration later today as a result, although a spike in put option interest for both Brent and WTI options may be an indicator of additional volatility moving forward, possibly with risk tilted towards the downside.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +3.29% +1.36 42.65
WTI +3.70% +1.45 40.67
*Source: Bloomberg

Stocks in Asia were mostly trading lower in the early hours of Wednesday's trading session as pessimism regarding fiscal stimulus in the US will likely added to downward pressure on stocks in the Asian region as well. The Nikkei and KOSPI were both trading lower, while the ASX200 may have been supported by additional dovishness from the RBA, a new fiscal budget by the Australian government and a weaker Australian dollar. Futures tracking major indices in the US were trading lower as well as of 9.11am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.51% -117.82 23,315.91 9:01:35 AM
KOSPI -0.10% -2.27 2,363.63 9:21:40 AM
ASX200 +0.56% +33.53 5,995.60 9:21:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.21% -59.00 27,641.00 9:11:40 AM
US Futures -0.24% -8.00 3,345.25 9:11:40 AM
Nasdaq 100 Futures -0.16% -18.50 11,255.25 9:11:39 AM
*Source: Bloomberg

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

  • Germany Aug Industrial Production (2pm)
  • Canada Sep PMI (Ivey) (10pm)
  • US Oct 2nd Crude Oil Stocks Change (EIA) (10.30pm)