Friday, October 16, 2020

Asia Times: Major US indices fall while small caps gain in a possible signal for bullish sentiment for stimulus and vaccines

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Market Recap: Major US indices fall while small caps gain in a possible signal for bullish sentiment for stimulus and vaccines

Stocks around the globe fell on Thursday, and US equities were no exception as mostly negative news flowed throughout the day. Initial jobless claims had an unexpected uptick, signalling a potential new wave of layoffs in the US. However, important to note is that the headline initial claims data continues to be distorted by California's applications systems overhaul. The state has resumed accepting applications last week after two weeks of stoppage due to the overhaul but the official data set has yet to update the latest numbers, and still uses data for the week ended September 19th as a placeholder. Continuing claims in contrast came in better-than-expected as the metric starts to decline at a quicker rate. However, this is most likely more related to more Americans reaching their 26th week of employment claims, the limit that most states impose as a ceiling for unemployment benefits. Claims under the Pandemic Emergency Unemployment Compensation program (provides as much as 13 weeks of additional jobless benefits) jumped by 818,000 for the week ended September 26th while a decline of 91,000 was seen for claims under the Pandemic Unemployment Assistance program (for self-employed, freelancers and part-timers). Overall, the claims data highlighted the downward pressure on the labour market in the US, which should be concerning to central bankers and US lawmakers.

Stocks were also likely negatively impacted by the growing numbers of Covid-19 cases. Across the globe, more and more lockdown restrictions are being introduced to help stop the spread of the virus. Households in London will be restricted from mixing indoors from this weekend, along with the British government discouraging the use of public transportation as much as possible. Paris will move into curfew starting tomorrow. Staff members of Kamala Harris (Democrat vice presidential candidate) was tested positive, prompting Harris and her husband to self-isolate. Cases in the Midwest of the US and EU continue to accelerate.

On the stimulus front, US President Donald Trump's remarks that suggested the White House could up their proposal to above US$1.8 trillion in an attempt to close in on the difference with Democrats may have helped alleviate the selloff in the market. But the market has likely become increasingly desensitised to these upbeat remarks, as it is evident that the divide between House Democrats and Senate Republicans remain the major hurdle for any stimulus measures to be passed into law. Comments from Senate Majority Leader Mitch McConnell mostly confirms this as well, signalling that Republicans are increasingly unlikely to be supportive of fiscal spending that is above the current level which they already perceive as high.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.07% -19.80 28,494.20
S&P500 -0.15% -5.33 3,483.34
Nasdaq -0.47% -54.86 11,713.87
*Source: Bloomberg

S&P500 sectors were mixed across the board. Energy and financials led gains as investors appeared to have been more welcoming of additional risk. If we take a closer look at the market, small cap indices gained on Thursday, contrasting growth stocks as well. This suggests that investors may actually be increasing rotations away from growth in anticipation for stimulus measures post-elections, as well as more positive vaccine news over the next few months as multiple drug makers conclude their phase three trials.

Morgan Stanley topped earnings estimates, boosted by the strong performance from its fixed income trading desk. The bank's trading desk performance was mostly in line with earlier earnings reports from JPMorgan, Goldman Sachs and Citigroup as trading revenue was boosted by increased volatility during the period. Similar to Goldman, Morgan Stanley has benefitted from its low exposure to consumer credit and instead reaping the full advantages of its large exposure to investment banking. Equity-underwriting fees more than double from last year, driven by activity in the IPO market, with CFO Jonathan Pruzen remaining bullish on that segment. Its shares closed 1.34% higher on Thursday, boosting that of most other major US banks as well.

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Demand for the dollar's safe haven properties likely dominated performance in the currency market on Thursday. Every other G10 currency fell against the greenback, with the Swiss franc and Japanese yen falling the least. In contrast, commodity-linked currencies were at the bottom of the G10 basket in daily performance. Sterling found itself close to the bottom of the table as traders price in the growing risk of a no-deal Brexit come British Prime Minister Boris Johnson's decision that is expected later today. The perception of growing risk was due to EU leaders warning Boris Johnson that he must make a concession just hours before Johnson is to decide on whether to walk away or continue negotiations with the EU. That said, it still does appear likely that Johnson will choose to continue negotiations, especially with both EU and UK negotiators ready to continue discussions for at least the next two weeks.

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Safe haven assets were mostly lower on the day, but the overall skew of financial markets was still skewed more towards increased risk aversion. Gold and silver inched slightly higher, with the yellow metal staying above 1,900's level. The Japanese yen fell against the dollar but strengthened against the euro. US Treasuries were mostly flat with a slight tilt towards the downside. Benchmark 10-year yields only advanced 0.7bps to 0.73% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.38% +7.19 1,908.71
Silver +0.15% +0.04 24.30
USD/JPY +0.27% +0.28 105.45
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.0bps 0.14%
10-Year +0.7bps 0.73%
30-Year +0.8bps 1.51%
*Source: Bloomberg

Oil futures reversed most of its losses earlier on Thursday, closing near flat after US crude, gasoline and distillate stockpiles fell last week. Crude oil prices started the day lower after Libyan oil production was reported to have reached 500,000 barrels a day, close to half of its 1.2 million barrels per day capacity prior to the shutdown since January. The US Energy Information Administration (EIA) weekly report released later that day helped alleviate some of the concern on crude oil supply after a drawdown in US crude stockpiles. While there was a drawdown in both gasoline and distillate inventories, only implied demand for distillate rose. Distillate's implied demand gained back above pre-Covid-19 levels, a welcomed sign for traders for the recovering economy. Still the high levels of unemployment and rising Covid-19 cases globally is likely to continue to put pressure on crude oil prices in the medium-term, despite the global economic recovery continuing its gradual trajectory. Consequently, our outlook for oil prices remains the same, i.e. a slow and gradual recovery. Traders will be looking to OPEC+'s monthly review on Monday, and will focus on any additional information from the coalition on its outlook for oil markets and subsequently its scheduled tapering of outputs which is set for January.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.37% -0.16 43.16
WTI -0.19% -0.08 40.96
*Source: Bloomberg

Asian equities were mixed on Friday morning with a slight skew towards the downside as investors in the region weigh on rising Covid-19 cases in across the globe. The Nikkei was close to flat while the KOSPI and the ASX200 were trading lower as of 9.32am (GMT +8). The announced travel bubble between Hong Kong and Singapore will likely help boost airline and tourism stocks in those countries as the addition of international travel is likely to help alleviate the pressure on those firms there due to the lack of domestic travel options when compared to the US and EU. Futures tracking major indices in the US were trading higher as of 9.22am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.03% +7.00 23,514.23 9:12:55 AM
KOSPI -0.47% -10.99 2,350.22 9:32:50 AM
ASX200 -0.15% -9.60 6,200.70 9:32:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.21% +61.00 28,447.00 9:22:56 AM
US Futures +0.28% +9.75 3,485.25 9:22:59 AM
Nasdaq 100 Futures +0.33% +39.25 11,913.25 9:22:57 AM
*Source: Bloomberg

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

  • US Sep Retail Sales (8.30pm)
  • US Sep Industrial Production (9.15pm)
  • US Oct Consumer Sentiment Index (U. of Mich) (P) (10pm)