Wednesday, October 21, 2020

Asia Times: Stimulus headlines provides volatility in the short-term, driving equities higher on the day as optimism fuels gains

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Market Recap: Stimulus headlines provides volatility in the short-term, driving equities higher on the day as optimism fuels gains

Stimulus news continues to make headlines as positive signals from US lawmakers sent stocks higher on Tuesday as investors grew increasingly optimistic for a fiscal aid package as early as this week. Statements from US President Donald Trump that he expects Senate Majority Leader Mitch McConnell to be on board with a stimulus deal between the White House and Democrats, along with House Speaker Nancy Pelosi's positive remarks on progress in negotiations were the likely drivers of stock market movements during the day. While McConnell said on Tuesday that he would put the bill - if agreed upon by both Democrats and the White House - to a vote in the Senate, the challenge to get broad support from Republican senators remains. Most recently, Senator Mitt Romney has expressed that he would not support spending of above US$1.8 trillion, as the divide between US lawmakers remains. While stimulus made headlines, the added volatility resulting from the upcoming US presidential elections was a likely contributor to movements in the stock market as well. We view the added volatility to only be in the short-term however, as the prospects for additional fiscal aid still remains strong after the elections, especially if it results in a "blue wave", which the market appears to be increasingly pricing in (RealClearPolitics betting markets aggregation places a Biden win at 61.8% versus Trump at 38.5%, while FiveThirtyEight's model of electoral votes predicts an 87% chance for a Biden win versus 13% for a Trump victory).

Indexes Daily Change (%) Net Change Closing Price
Dow +0.40% +113.37 28,308.79
S&P500 +0.47% +16.20 3,443.12
Nasdaq +0.33% +37.61 11,516.49
*Source: Bloomberg

Sectors in the S&P500 closed broadly higher, as more cyclical sectors led percentage gains in the index. Energy stocks recovered some of its losses from earlier in the week thanks to optimism for a stimulus package to lift energy demand. Safer sectors were at the tail end of the spectrum, with consumer staples ending the day in the red. As for companies, Google is facing antitrust accusations by the US Department of Justice (DOJ). The law suit claims that the company is the "unchallenged gateway" to the internet and engaged in a variety of anticompetitive practices to maintain and extend its monopoly. The suit from the DOJ looks likely to be only the first of more incoming antitrust complaints from various states such as Texas, Colorado and Iowa who have noted to be also investigating Google's search practices. Despite this, shares still closed the day 1.39% higher as investors remained bullish on Google's chances of defending itself against the allegations.

Shares of Netflix fell more than 5% in afterhours trading after the streaming giant continued to signal that the pandemic-driven surge in its subscriber count from earlier in the year is starting to fade. The company's new subscriber count fell short of analysts’ estimates in both the reported quarter (2.2 million vs 3.32 million expected) and its forecast for the current quarter (6 million vs 6.54 million expected). The result of the company's earnings call was suggestive that its reaching maturity, with little room for growth in subscriber count moving forward as it suffers its worse third-quarter subscriber gains since 2015. While Netflix has managed to benefit from stay-at-home orders, that advantage has also started to wane as a greater number of the population in Asia and EU had returned to some semblance of pre-pandemic life. In addition, the return of sports broadcasts and forced acceleration of production giants such as HBO and Disney in engaging in digital stream likely ate away some of that subscriber count that it managed to gain during the period. That said, the company's positioning is still strong when compared to its rivals in the same space. For reference, Netflix currently has more than 190 million subscribers, in comparison to that of Disney-owned streaming services, Disney+ and Hulu, at upwards of 90 million (previous quarter figures). While digital streaming services are unlikely to be mutually exclusive services for consumers, new competitors with large libraries of content and investiture (such as Disney) are still likely to chip away at Netflix's positioning in the space which may push the company to diversify into a separate business, possibly into the viewing space (theatres) or other complimentary products.

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G10 currencies were mostly higher against the dollar for the second day in a row. Positive stimulus headlines likely helped add to the downward pressure on the dollar as well. The Australian dollar were part of the few major currencies that fell against the greenback, thanks to a selloff sparked by the Reserve Bank of Australia's (RBA) reinforced dovish tone in its meeting minutes for October as speculation grew for the central bank to ease as soon as November. RBA Assistant Governor Christopher Kent's dovish tone during his speech on Tuesday likely also applied pressure on the Aussie during the day. Similarly, the New Zealand dollar weakened on Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr's remarks that reiterated the RBNZ's bias towards – and consequently the market speculation for - another easing cycle.

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Gold and silver gains in tandem with stocks on Tuesday, while other safe haven assets' decline signalled a reduction of risk aversion for the second day this week. The Japanese yen inched lower against the dollar and dipped against the euro. US Treasuries were mostly lower, although 2-year treasuries were close to flat with a slight upward bias. Benchmark 10-year yields ended the day 1.7bps higher at 0.79% as a result. However, VIX continued to inch higher while the VXN dipped more than 2%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.15% +2.87 1,906.95
Silver +1.04% +0.25 24.64
USD/JPY +0.07% +0.07 105.50
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.14%
10-Year +1.7bps 0.79%
30-Year +3.2bps 1.59%
*Source: Bloomberg

Oil futures climbed on the back of stimulus news as oil market participants became more hopeful for energy demand. The optimism on the stimulus front likely added to somewhat positive sentiment around the OPEC+'s scheduled easing of output limits that are scheduled for January. While OPEC+ did not explicitly suggest that it was considering postponing it, no news may likely be good news in this instance as it provided some signal that there is at least some consideration being made towards that direction. Aside from the optimism, the weekly report from the American Petroleum Institute showed US crude oil stockpiles gained more than 500,000 barrels last week. The official report from the US Energy Information Administration (EIA) is likely to be closely watched for a possible rise as well, since it would mark a disappointing figure from estimates for a 1.38 million dip in inventories during the period.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.27% +0.54 43.16
WTI +1.56% +0.64 41.70
*Source: Bloomberg

Stocks in Asia were tracking US gains on Wednesday morning thanks to the spill over in optimism. The Nikkei, KOSPI and ASX200 were each trading higher in the earlier hours of Wednesday's trading day. Futures tracking major indices in the US were trading positive as of 9.05am (GMT +8), likely thanks to remarks from Pelosi and White House Chief of Staff Mark Meadows that there was progress on stimulus talks and that they would continue discussions with plans to attempt to form a deal by the weekend.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.34% +80.48 23,647.52 8:55:50 AM
KOSPI +0.28% +6.53 2,364.94 9:15:50 AM
ASX200 +0.10% +6.42 6,191.00 9:15:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.38% +108.00 28,290.00 9:05:48 AM
US Futures +0.45% +15.50 3,447.75 9:05:50 AM
Nasdaq 100 Futures +0.54% +63.00 11,723.75 9:05:50 AM
*Source: Bloomberg

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

  •   UK Sep Inflation Rate (CPI/RPI) (2pm)
  •   US Oct 16th Mortgage Applications (MBA) (7pm)
  •   Canada Sep Inflation Rate (CPI) (BoC) (8.30pm)
  •   US Oct 16th Crude Oil Stocks Change (EIA) (10.30pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Abbott Laboratories (9pm)
  • Chipotle Mexican grill Inc (4.30am +1)
  • Tesla Inc (5.30am +1)