Friday, October 23, 2020

Asia Times: Investors increase risk appetite on positive stimulus progress, but the Senate still remains the biggest hurdle

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • US earnings' season

10232020b

Market Recap: Investors increase risk appetite on positive stimulus progress, but the Senate still remains the biggest hurdle

Major indices in the US managed to close Thursday higher after another day of volatile trading in the US ahead of the final US presidential election debate today at 9am (GMT +8) in Asia. Stimulus hopes may have helped solidify gains mid-day in major indices after House Speaker Nancy Pelosi signalled that she and Treasury Secretary Steven Mnuchin are closing onto a deal. Still, state government aid still appears to be a sticking point between US lawmakers. Also, the key concern still lies in the Senate, where the majority of Republicans (who has control over the Senate) has shown little signs of willingness to pass a fiscal spending package that is expected to cost close to US$2 trillion. That said, markets appeared to be wary of Pelosi's remarks after swinging between positive and negative stimulus headlines over the week. Yesterday's uptick in equities was more likely a signal of cautious optimism from investors continuing to price in the likelihood of fiscal stimulus after the US elections, as well as the better-than-expected decline in initial jobless claims.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.54% +152.84 28,363.66
S&P500 +0.52% +17.93 3,453.49
Nasdaq +0.19% +21.32 11,506.01
*Source: Bloomberg

S&P500 sector data was mostly skewed towards the upside. Cyclicals led gains, in particular a rebound was seen in energy stocks after oil prices gained on the back of Russia's willingness to delay OPEC+ output hikes scheduled for January. In contrast, the tech sector weighed the most on the index due to the slight dip in mega-cap tech stocks. Small cap indices outperformed all three major indices, while the tech-heavy Nasdaq 100 inched slightly lower, signalling that possible rotations into more value positions may have occurred again yesterday.

Intel shares plunged more than 9% in afterhours trading despite beating overall profit and revenue estimates for the quarter. The main concern however, was the 10% YoY dip in data centre sales, fuelled by a 47% YoY decline in sales from its Data Centre Group's Enterprise & Government segment. Its eroding average selling price (-15% YoY) for its data centre chips was also an indicator that Intel continues to lose its market share to its competitors in that space. While company executives said that the decline in sales was due to a shift in demand for cheaper chips due to the pandemic, the combination of its more expensive product line, the increasing competitiveness of AMD chips, an uptick in demand for computing during this pandemic period, and its dip in sales and gross margins was more implicitly suggestive of a decline in the company's technological competitiveness. CEO Bob Swan also indicated that the company will decide only early next year on whether to push forward with its in-house production of its delayed 7-nanometer chip production or outsource it. Signs point to at least a mixture of both, after multiple delays for both its 10-nanometer and 7-nanometer production processes. In our view, the overall picture Intel's third quarter earnings painted was one with structural issues that the company faces. This would suggest that the current trend of eroding margins is likely to continue as the company enters into a restructuring phase, as evident by its decision to sell off businesses and considerations for outsourcing processes. Rival AMD's shares inched 0.78% higher in afterhours trading as a result of speculation that it will manage to capture more market share from Intel.

10232020b

The dollar rebounded on Thursday, putting downward pressure on most G10 currencies in the forex market. Better-than-expected initial and continuing jobless claims data had weighed on the dollar temporarily, but the overall economic outlook likely influenced the dollar more. Furthermore, a closer look at the full report was more suggestive of a weaker labour market as the bigger-than-expected decline in continuing claims for the week ended October 10th was likely distorted due to Americans exhausting their 26-week state unemployment benefits, signalled by the 509,823 spikes in Pandemic Emergency Unemployment Compensation program for the week ended October 3rd. The more probable driver for the dollar's uptick is the expected increased volatility in the lead up to the US presidential elections and the EU's second wave of Covid-19 infections that is forcing member countries to reintroduce varying forms of lockdown restrictions.

10232020c

Safe haven assets in contrast showed a downtick in overall risk aversion. Gold and silver both fell, marking the second day of negative correlation to equities. The Japanese yen fell against the dollar but strengthened against the euro. US Treasury yields advanced across the board, with benchmark 10-year yields up 3.4bps at 0.86%. Both VIX and VXN also continued to retreat on Thursday.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.05% -20.22 1,904.11
Silver -1.35% -0.34 24.71
USD/JPY +0.26% +0.27 104.86
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.6bps 0.15%
10-Year +3.4bps 0.86%
30-Year +4.0bps 1.68%
*Source: Bloomberg

Oil futures rose on Thursday thanks to stimulus hopes and optimism for a delay to OPEC+'s scheduled January production hikes. Russian President Vladimir Putin's remarks that Russia was ready to cut oil output further if needed, and that Russia was open to pushing back the planned OPEC+ output hikes in January was the strongest positive signal from OPEC+ members yet. That said, oil futures continue to trade within a tight range, as the outlook for the recovery in energy demand remains questionable. With EU member countries introducing curfews, along with the UK looking to heighten lockdown restrictions, it appears that the short-term drivers for oil prices are more likely tilted towards the downside.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.75% +0.73 42.46
WTI +1.52% +0.61 40.64
*Source: Bloomberg

Stocks in Asia were trading lower on Friday morning, as equities in the region were impacted by volatility from the final US presidential debate. The Nikkei, KOSPI and ASX200 were each trading lower in the earlier hours of the trading day. Futures tracking major indices in the US were close to flat with a slight downside bias.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.01% -1.48 23,472.79 9:09:05 AM
KOSPI -0.26% -6.09 2,348.96 9:29:00 AM
ASX200 -0.34% -20.75 6,153.00 9:28:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.06% -17.00 28,251.00 9:19:03 AM
US Futures -0.07% -2.50 3,446.75 9:19:05 AM
Nasdaq 100 Futures -0.03% -3.25 11,646.50 9:19:05 AM
*Source: Bloomberg

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

  • UK Sep Retail Sales (2pm)
  • Germany Oct Manufacturing/Services PMI (Markit) (P) (3.30pm)
  • Eurozone Oct Manufacturing/Services PMI (Markit) (P) (4pm)
  • UK Oct Manufacturing/Services PMI (Markit) (P) (4.30pm)
  • US Oct Manufacturing/Services PMI (Markit) (P) (9.45pm)

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

  • American Express Co (7pm)