Monday, October 12, 2020

Asia Times: Stimulus headlines drives Dow to best weekly performance since July; US banks kicks off earnings season this week

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil

10122020a

Market Recap: Stimulus headlines drives Dow to best weekly performance since July; US banks kicks off earnings season this week

US Stocks closed the day higher on Friday with investors still hopeful on a stimulus deal between US lawmakers. Optimism continued to be driven by optimism that Republicans and Democrats would be able to reach an agreement on the details and size of a stimulus package soon, especially with White House officials looking more accommodative to meet the Democrats' revised proposal. US President Donald Trump has increasingly come forward with more remarks on expanding the size of his administrations' proposal, even after an expansion to US$1.8 trillion on Friday. Despite this, House Speaker Nancy Pelosi and Treasury Speaker Steven Mnuchin still failed to come to an agreement on Friday but signalled that negotiations would still continue. While the White House has clearly switched to a much more accommodative tone, the concern for any stimulus proposal should still be whether Senate Republicans will approve of the bill. Republicans in Congress has repeatedly signalled their disapproval for a large stimulus package, while Senate Majority Leader Mitch McConnell has also signalled the divide between lawmakers on the need of another rescue package.

Increasing certainty may have been another driver for markets the past week, especially after Trump was hospitalised for Covid-19. Both the electoral polls and betting markets have strongly shifted to favour a Joe Biden victory last week. FiveThirtyEight's forecasted chance of a Biden victory hit its highest on Sunday (88% chance of Biden winning; forecasted to win 345 of electoral votes), while RealClearPolitics' average betting odds data reached its widest spread (+35.2 in favour of Biden) on Sunday as well. The increased certainty for a Democratic sweep may have positively impacted markets as it firstly reduces the risk of a post-election outrage by the opposing party, and secondly allows traders to position themselves for the post-election macro environment. 

Indexes Daily Change (%) Net Change Closing Price
Dow +0.57% +161.39 28,586.90
S&P500 +0.88% +30.30 3,477.13
Nasdaq +1.39% +158.96 11,579.94
*Source: Bloomberg

Tech gains were the main drivers for major indices in the US on Friday. In contrast, energy led losses as the industry deals with both shutdowns in the US Gulf Coast due to Hurricane Delta and low oil prices in the wake of the Covid-19 pandemic. Increasingly supply-side woes may have also impacted the outlook for the energy industry as it looks increasingly unlikely that crude oil prices will experience a sharp recovery in the short-term. A possible explanation for tech stocks regaining their footing last week may be due to the incoming earnings season, in which the sector is most likely to continue to outperform that of others. However, sustainability will remain key, as momentum in demand for tech products will likely start easing post-third quarter.

10122020b

Global equities surged over the week, with the ASX200 and Nasdaq leading gains. The Dow and Nasdaq had its largest weekly gain since July. With last week's gains, the S&P500 has recovered more than half of its losses in September, and has closed well above its 50-day moving average in what appears to be a bullish signal. US financial stocks will set the tone for the week as the sector kicks off earnings season, while two of the major US airlines quarterly reports will be closely watched as a primer for other airlines over the world. Stimulus headlines may continue to drive stock markets, as will US election news.

Indexes Weekly Change (%) Net Change Closing Price
Dow +3.27% +904.09 28,586.90
S&P500 +3.84% +128.69 3,477.13
Nasdaq +4.56% +504.92 11,579.94
FTSE100 +1.94% +114.53 6,016.65
Dax +2.85% +362.19 13,051.23
Stoxx +2.58% +82.19 3,273.12
Nikkei +2.56% +589.79 23,619.69
CSI300 +2.04% +93.74 4,681.14
KOSPI +2.75% +64.07 2,391.96
ASX200 +5.36% +310.67 6,102.17
HSI +2.81% +660.08 24,119.13
STI +1.48% +36.85 2,532.96
*Source: Bloomberg

Reduced risk aversion was also present in the foreign exchange market. The dollar and the Japanese yen remained the bottom two performers among G10 currencies. Leading gains were commodity-linked currencies. Sterling managed to strengthen on the back of a weaker dollar and on perceived improvements in Brexit negotiations after British Prime Minister Boris Johnson met with French Prime Minister Emmanuel Macron. It was reported that Johnson told Macron that the UK government were exploring every avenue to get a deal with the EU, while continuing to reiterate his willingness on a hard Brexit if needed. Negotiations between UK and EU officials is set to resume on Monday, as talks intensify ahead of Johnson's self-imposed deadline for a trade deal on October 15th, during the summit of EU leaders this week.

10122020c

Safe haven assets traded higher on Friday, but it appears to be mostly due to a weaker dollar as opposed to increased risk aversion. Gold surged along with silver as metals regained their footing, possibly as the market was repricing in the impact of additional stimulus measures in the US. While gold has managed to recover to trade back above 1,900's level, investors are likely to still be bullish on the precious metal, especially since fiscal stimulus measures will probably eventually be passed regardless of who wins the presidential elections. With markets starting to price in a Democrat sweep, gold may have even more room to strengthen thanks to the Democrats' propensity of increased spending. The Japanese yen advanced against the dollar but fell against the euro. US Treasuries were mixed, with two-year treasuries close to flat while longer-termed ones rose. Benchmark 10-year yields declined 1.1bps to 0.77%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.93% +36.58 1,930.40
Silver +5.52% +1.32 25.15
USD/JPY -0.39% -0.41 105.62
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.15%
10-Year -1.1bps 0.77%
30-Year -1.5bps 1.57%
*Source: Bloomberg

Oil futures dipped on Friday, following news that signalled crude oil markets is likely to face increased supply yet again. Libya was reportedly restarting its largest oil field, with Bloomberg citing a person with knowledge of the situation suggesting that the Sharara field will pump 40,000 barrels a day before reaching its capacity of 300,000 barrels in 10 days. Oil producers in the US Gulf Coast were also restarting production, following the landfall of Hurricane Delta in the area which saw 92% of oil production shut-in. In addition to that, oil workers in Norway halted their strike after settling with oil producers on Friday, restoring production at six fields that were shut-in for the entirety of last week, equivalent to an estimated 130,000 barrels a day worth of crude oil production. The settlement will also avert the shut-down the Norway's largest oil field, the 400,000 barrels a day Johan Sverdrup facility, which oil traders may have positioned for ahead of time. Stimulus optimism may have prevented a further drawdown of prices.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.13% -0.49 42.85
WTI -1.43% -0.59 40.60
*Source: Bloomberg

Stocks in Asia were trading mixed on Monday morning with a slight skew towards the downside as traders may be cautious on stimulus negotiations in the US and rising Covid-19 cases in the EU. While US equities gained on Friday, Pelosi and Trump blaming each other on the impasse between US lawmakers on a stimulus package may have rattled some market participants. Furthermore, Trump being cleared by his doctor of being a transmission risk for the coronavirus could also slightly dampen chances of a Democrat sweep, introducing some additional uncertainty to the market. The Nikkei and ASX200 were trading lower in the earlier hours of the trading day while the KOSPI was trading slightly higher. Futures tracking major indices in the US favoured the tech sector, while DJIA and S&P500 e-mini futures were trading lower as of 9.12am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.40% -94.44 23,525.25 9:02:25 AM
KOSPI +0.25% +5.98 2,397.94 9:22:20 AM
ASX200 -0.03% -2.07 6,100.10 9:22:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.19% -54.00 28,464.00 9:12:21 AM
US Futures -0.15% -5.25 3,468.00 9:12:25 AM
Nasdaq 100 Futures +0.07% +7.50 11,732.25 9:12:26 AM
*Source: Bloomberg

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

  • Start of IMF's 2020 Annual Meeting
  • Japan Sep Machine Tool Orders (P) (2pm)