Thursday, October 8, 2020

Asia Times: Markets rally as investors find comfort in possibility for standalone stimulus measures

Tags
  • China
  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • Oil
  • NZD

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Market Recap: Markets rally as investors find comfort in possibility for standalone stimulus measures

US equities rallied on Wednesday in what appears to be a reversal in tone from US President Donald Trump on an additional fiscal stimulus package. Trump tweeted late Tuesday in the US that he is open to a standalone bill for stimulus checks of US$1,200 as well as legislation to provide financial aid for airlines and replenishment of the Paycheck Protection Program, a few hours after he had said that he would halt stimulus talks with House Speaker Nancy Pelosi. Investors took Trump's tweet as a strong signal that there would be separate stimulus packages upcoming, prompting a strong buy reaction to reverse all of Tuesday's losses. House Speaker Nancy Pelosi's willingness to continue stimulus negotiations on standalone stimulus packages likely also helped markets.

It was also reported that the Trump administration is starting to explore restrictions on China-based digital payment platforms over national security concerns. Among the companies that fall under these investigations would be Ant Group and Tencent holding, according to the Bloomberg report citing people familiar with the matter. The report stated that while officials were concerned that the two platforms will dominate global digital payments which may lead to China having access to millions of people's banking and personal data, they also acknowledged that it would be difficult to move forward on this proposal due to legality concerns. The news is likely to impact Ant Group's share sales in its dual listing IPO, reportedly on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. In addition, if acted upon on, the measure is likely to fuel US-China tensions to a higher degree compared to previous measures due to Ant Group's Alipay and Tencent's WeChat Pay being closely knit into China's payment ecosystem.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.91% +530.70 28,303.46
S&P500 +1.74% +58.50 3,419.45
Nasdaq +1.88% +210.00 11,364.60
*Source: Bloomberg

All 11 S&P500 sectors gained on Wednesday as investor reprice standalone stimulus packages into the market. More stimulus sensitive sectors appeared to benefit the most on Wednesday, with Materials, consume discretionary and industrial stocks leading gains in the index. The small cap Russell 2000 outperformed all other indices on Wednesday, a possible signal that there may be a secular shift towards more value plays as smaller-cap companies may be able to benefit from the potential stimulus package to a higher degree than larger cap companies.

A House panel proposed late on Tuesday to implement antitrust reforms in an effort to break up the power between US Big Tech companies, namely Amazon, Google, Facebook and Apple. While Republicans have largely opposed the efforts so far, the report from the panel recommended structural separation to prevent the firms from competing with other companies that are dependent on firms' platforms. The proposal appears to be similar to the Bank Holding Company Act, which prevented large banks from acquiring insurers, real estate firms and other non-banking companies. If the proposal manages to pass through Congress, Big Tech companies may be limited in their economies of scope, which we have seen a strong shift in recent years from the likes of Apple and Amazon in their ventures into the fitness and smart wearables space. Despite this, Most of the FAANG stocks still managed to close higher on Wednesday, with Amazon and Netflix outperforming major indices.

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Most G10 currencies strengthened against the dollar on risk-on attitude. Growing risk appetite due to bullish positions on additional stimulus was the main driver of the day. The Fed's September monetary policy meeting minutes had little impact on the dollar. But the most notable takeaways of the meeting minutes were that the majority of Fed officials were in favour of keeping flexibility with respect to the new framework on interest rates, and that most Fed officials had factored in additional stimulus measures from the US government, which may be a sticking point during the next meeting in November which could potentially lead to a downward revision in the central bank's economic projections during then. Still, the Fed's decision come November will be heavily dependent on the presidential elections, which will be the main driver of the future of fiscal decisions.

The kiwi was the only risk-on currency to drop against the dollar, mainly due to additional dovish comments from Reserve Bank of New Zealand's (RBNZ) Assistant Governor Christian Hawkesby and Chief Economist Yuong Ha. Remarks from both officials reiterated the central bank's more aggressive stance on monetary policy, with statements such as "we'd rather do too much too soon than too little too late", pressuring the New Zealand dollar to fall. Reports from traders that leveraged funds were shorting the kiwi may also have added to that downward pressure. Nonetheless, the RBNZ has signalled before that an additional easing cycle is likely to come, possibly early next year. Yesterday's comments were just a reminder of that. We may continue to see weakness in the New Zealand dollar as more details on potential easing unfolds towards the end of the year, but potential weakness in the dollar over the medium-to-long-term may be a limited factor for downside in the NZD/USD currency pair.

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Safe haven assets were lower as a result of a broad risk-on market on Wednesday. Gold and silver gained, with the gold/silver cross reaching closer towards the bottom of the current range of around 78.47 to 81.82. The Japanese yen fell against both the dollar and the euro. US Treasuries fell across the board, pushing benchmark 10-year yields higher to 0.79%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.49% +9.24 1,887.42
Silver +3.19% +0.74 23.80
USD/JPY +0.33% +0.35 105.98
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.4bps 0.15%
10-Year +5.2bps 0.79%
30-Year +4.9bps 1.59%
*Source: Bloomberg

Oil futures suffered a reversal on Wednesday, after the official report from the US Energy Information Administration's (EIA) weekly report showed US crude oil stockpiles rising. However, the short-term outlook for the oil prices may be skewed towards the upside, as multiple factors appear to be limited supply in the market while demand continues to gradually recover. On the supply side, output from Norway continue to limited by a workers' strike, while Hurricane Delta has reportedly shut off about 80% of oil output in the US Gulf of Mexico. While the EIA's report showed US crude oil inventories rising for the first time in four weeks, distillate inventories continued to decline while gasoline supplies dropped below the five-year average for the first time since March. While inventories do not paint the full picture, a decline in distillate stockpiles suggests that the US economy may be experiencing an accelerated recovery in economic activity, which is also supported by Bloomberg's alternative factor model of economic activity. It is however important to note that our longer-term view for only a slow and gradual recovery in oil prices suggests that short-term upside is limited as well.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.55% -0.66 41.99
WTI -1.77% -0.72 39.95
*Source: Bloomberg

On Thursday morning in Asia, stocks were benefitting from a spill over in optimism from the US, although only to a small extent. Most Asian indices already profited from Trump's change in tone earlier on Wednesday, suggesting any gains today may be limited. The Nikkei, KOSPI and ASX200 were all trading higher in the earlier hours of the trading day. Futures tracking major indices in the US were positive as of 9.19am (GMT +8) as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.51% +119.50 23,542.32 9:09:50 AM
KOSPI +0.04% +0.90 2,387.84 9:29:50 AM
ASX200 +1.07% +65.52 6,101.90 9:29:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.12% +34.00 28,213.00 9:19:52 AM
US Futures +0.15% +5.25 3,412.00 9:19:45 AM
Nasdaq 100 Futures +0.15% +17.75 11,487.75 9:19:42 AM
*Source: Bloomberg

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

  • Germany Aug Trade Balance (2pm)
  • ECB Monetary Policy Meeting Minutes (7.30pm)
  • US Oct 2nd Initial Jobless Claims (8.30pm)
  • US Sep 25th Continuing Jobless Claims (8.30pm)