Thursday, October 15, 2020

Asia Times: GBP/USD surges on hopes for Brexit talks to continue post EU summit; Stocks dip as Mnuchin dampens stimulus hopes

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  • Gold
  • Euro
  • Pound
  • Stocks
  • Oil
  • US earnings' season

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Market Recap: GBP/USD surges on hopes for Brexit talks to continue post EU summit; Stocks dip as Mnuchin dampens stimulus hopes

US equities fell on Wednesday as any residual hopes for additional stimulus measures before the US November presidential elections were dashed by comments from US Treasury Secretary Steven Mnuchin. The negative comments from Mnuchin came during a speech on Wednesday, suggesting that getting an agreement on details before the election would be difficult given the current progress of discussions. The remarks from Mnuchin also highlighted a closer alignment to earlier comments from Senate Majority Leader Mitchell McConnell, who had signalled that difference between lawmakers remained wide. Despite the more explicit comments from Mnuchin, markets retreated only slightly in comparison to gains seen over the past week, suggesting that markets are continuing to price in additional fiscal stimulus with a smaller sensitivity to the timing of it. While downbeat comments from Mnuchin on the prospects of a deal before the elections in November impacted markets, weak economic outlooks from major US bank executives may also have weighed on markets during earning calls over the past few days.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.58% -165.81 28,514.00
S&P500 -0.66% -23.26 3,488.67
Nasdaq -0.80% -95.17 11,768.73
*Source: Bloomberg

Large tech companies weighed the most on the S&P500 when considering their weightage in the index, but banks fell the most in percentage terms. S&P500 sectors were broadly mixed, with gains mainly coming from the industrials, materials and energy sectors. More specifically, only the transportation, capital goods and technology hardware and equipment groups rose in the S&P500, i.e. stocks related to infrastructure managed to eke out gains. This signals that markets may be pricing in a greater likelihood of a Democrat sweep, as infrastructure stocks is most likely to benefit from that factor due to the party's propensity for spending.

Wells Fargo shares tumble on worse-than-expected earnings as the company sets aside close to US$1 billion in expenses for customer remediation and US$718 million in restructuring costs. The most concerning from the bank was that it remains under a Federal Reserve restriction that limits its assets to US$1.95 trillion, their end of 2017 level. This restriction constrains Wells Fargo in reacting to the current economic environment and limits its room for growth in volume for loans, which impacts its bottom line due to the low interest rate environment. The latest earnings report from Wells Fargo suggests that cost cutting is likely to be the theme for the company moving forward, as it will probably be the only option for the bank to maintain profitability. Bank of America came close to Wells Fargo’s share performance, with its stock slipping more than 5% as the company underperforms expectations for trading revenue. It did beat analysts’ estimates for quarterly earnings and revenue however. In contrast, Goldman beat estimates for its fixed income and investment banking segment but fell short for equities trading revenue. Its shares closed the day flat but outperformed most of its other peers.

Loan loss provisions from major US banks widely beat analysts’ estimates, but more concerning was the tone of banking executives. Remarks from CEOs across major banks were similar, i.e. economic uncertainty remains as defaults on certain loans are only expected to really surface only next year. Executives noted that while the current economic environment has materially improved, the high levels of risk suggests that estimates are still likely subject to volatility as well. This likely dampened sentiment in the market as it suggests that the full impact of the pandemic has yet to be seen, especially as the economy continues to face downward pressure due to restrictions in movement and high levels of uncertainty.

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The greenback fell on the day, but reduced risk aversion doesn't appear to be the driver for the day. Most G10 currencies gained against the greenback, but commodity-linked currencies were at the bottom of the table, likely as the more explicit remarks from Mnuchin on another delay in stimulus measures in the US weighed on the global economy's outlook.

Sterling led gains among the basket of G10 currencies after the UK signalled that it will continue Brexit negotiations with the EU after British Prime Minister Boris Johnson's October 15th deadline. Sterling fell sharply in intraday trading on Wednesday after a report from Bloomberg suggested that a draft conclusion for the EU summit this week signalled EU leaders willingness for a no-deal Brexit. The currency later rebounded on another Bloomberg report that said the UK would extend its efforts in reaching an agreement with the EU even beyond the October 15th deadline set by Johnson, citing its source as a person close to the negotiations. This does appear to be the case as Johnson may extend his own deadline after conclusions set forth by EU leaders at the end of their summit tomorrow. Expect volatility to continue as a result, with our outlook for sterling to be tilted towards the upside in the short-term as Johnson looks likely to confirm an extension of talks. But traders should be mindful of the large potential downside risk if talks really do break down.

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Safe haven assets were mostly mixed to flat on Wednesday. Gold and silver inched a touch higher, while the yen outperformed both the dollar and the euro. US Treasuries were flat as well, with benchmark 10-year yields climbing only 0.2bps higher at 0.73%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.54% +10.16 1,901.52
Silver +0.53% +0.13 24.27
USD/JPY -0.29% -0.31 105.17
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.0bps 0.14%
10-Year -0.2bps 0.73%
30-Year -0.5bps 1.51%
*Source: Bloomberg

Oil futures rose on positive news for both crude supply and demand. A Bloomberg report citing delegates that OPEC+ had a compliance level of 102%, underproducing its output target during September helped boost oil prices. On the demand side, the industry funded American Petroleum Institute's weekly report showed declines in US crude stockpiles, as well as gasoline and distillate inventories. But while drawdowns in gas and distillate inventories can be signals for an increase in demand, last week's figures were likely distorted by the impact of Hurricane Delta which saw approximately 92% of crude oil production in the US Gulf Coast shut, in addition to refineries. Investors will likely be looking more closely at today's official report from the US Energy Information Administration (EIA) for implied demand data as a result.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.05% +0.87 43.32
WTI +2.09% +0.84 41.04
*Source: Bloomberg

In Asia, stocks were mixed but mostly tilted towards the downside as markets in the region track losses in the US. The Nikkei and KOSPI were both trading lower while the ASX200 managed to climb higher on the back of a weaker Aussie after comments from Reserve Bank of Australia (RBA) Governor Philip Lowe. Lowe had made some dovish comments during a speech early on Thursday, suggesting that there may still be room for a rate cut from the RBA. Futures tracking major indices in the US were all trading lower as of 9.34am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.38% -88.33 23,538.40 9:24:35 AM
KOSPI -0.91% -21.46 2,359.02 9:44:30 AM
ASX200 +0.64% +39.63 6,218.80 9:44:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.20% -57.00 28,357.00 9:34:32 AM
US Futures -0.23% -8.00 3,473.00 9:34:34 AM
Nasdaq 100 Futures -0.50% -60.00 11,914.25 9:34:31 AM
*Source: Bloomberg

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

  • US Oct Empire State Manufacturing Index (New York Fed) (8.30pm)
  • US Oct 9th Initial Jobless Claims (8.30pm)
  • US Oct 2nd Continuing Jobless Claims (8.30pm)
  • US Oct 9th Crude Oil Stocks Change (EIA) (11pm)

Companies reporting earnings in the day ahead include (all timings in GMT +8):

  • Morgan Stanley (7.30pm)