Monday, October 26, 2020

Asia Times: Investors less affected by stimulus headlines; traders reportedly taking contrarian positions in Treasuries

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  • Pound
  • Stocks
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Market Recap: Investors less affected by stimulus headlines; traders reportedly taking contrarian positions in Treasuries

US equities ended Friday mixed as trading thinned out ahead of the US general elections and as investors seemed relatively less affected by stimulus headlines. The Dow dipped while other major indices gained but most of the damage came from Intel's 10.58% plunge during the day after reporting a sharp decline in its data centre segment revenue for the quarter. Headlines of the day were mainly stimulus related, but likely did little to surprise market participants. House Speaker Nancy Pelosi as well as US President Donald Trump and Treasury secretary Steven Mnuchin shifted the blame of delays between each other. More importantly was that Mnuchin signalled that Republicans and Democrats remain far apart on key issues. As before, we expect the likelihood of a deal before the elections to be slim, as most market participants should expect by now as well, judging from the market's performance over the day.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.10% -28.09 28,335.57
S&P500 +0.34% +11.90 3,465.39
Nasdaq +0.37% +42.27 11,548.28
*Source: Bloomberg

S&P500 sector performance on Friday signalled another day of rotations into non-tech or value stocks as the technology sector underperformed the index. That said, the overall losses in the tech sector was mainly due to Intel's share dip on the day. Energy stocks retreated as well, and was likely a result of a combination of a decline in crude oil prices and the lack of progress on fiscal measures in the US due to energy demand's higher sensitivity to stimulus measures. Outside of S&P500's sector performance, the overall broad market appeared to be taking on greater risk with smaller cap indices outperforming large caps for the second day in a row, while the tech-heavy Nasdaq 100 underperforms. VIX and VXN's retreat indicates the same as well.

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Weekly performance wasn't as rosy for the US. Major indices in the US declined over the week, outperforming only that in the EMEA region. The FTSE, Germany Dax and Euro Stoxx all dipped over the week, likely pressured by the growing count of Covid-19 cases in the region. Over the weekend, Covid-19 related restrictions strengthened in multiple countries including Spain and Italy. France has also indicated that another shut down is possible. The UK moved several more regions into its Tier 2 restriction level over the week to help stop the spread of the virus. Cases in the US rose as well, with its record of daily Covid-19 cases reaching new highs. In the case of the US elections, this is unlikely to help Trump any more than damage it, evident by Joe Biden's use of the situation in attacking the Trump administration's effectiveness in combating the virus. Asia fared the best over the week, likely thanks to the region's overall effectiveness in preventing the spread of the virus with the exception of India, who is currently still experiencing high positive testing rates despite its recent decline in daily Covid-19 cases.

Indexes Weekly Change (%) Net Change Closing Price
Dow -0.95% -270.74 28,335.57
S&P500 -0.53% -18.42 3,465.39
Nasdaq -1.06% -123.28 11,548.28
FTSE100 -1.00% -59.30 5,860.28
Dax -2.04% -263.24 12,645.75
Stoxx -1.44% -46.61 3,198.86
Nikkei +0.45% +105.96 23,516.59
CSI300 -1.53% -73.19 4,718.49
KOSPI +0.82% +19.28 2,360.81
ASX200 -0.16% -9.75 6,167.05
HSI +2.18% +531.99 24,918.78
STI +0.17% +4.37 2,537.39
*Source: Bloomberg

The dollar fell against every G10 currency with the exception of sterling, as a weak outlook to the UK's outlook outweighed the relative risk-on sentiment in the market. Sterling fell 0.34% against the greenback on Friday, with its drop likely fuelled in part by JPMorgan slashing its forecast for Q4 2020's GDP growth for the country by nearly half. The major US bank now forecasts the British economy to expand only by 2.1% in the current quarter, down from the 3.9% that it had estimated in its previous forecast. The downward revision was mostly due to the declining mobility seen across the country despite certain regions having stricter restrictions, suggesting that economic activity such as retail spending may be suffering across the general population instead of being limited to certain areas. In addition, Markit's flash PMI report for the UK for October indicated a significant slowdown in economic activity (October's Composite PMI for the UK: 52.9 (A), 54.0 (E), 56.5 (P)) despite remaining in expansionary territory. Comments from Markit Chief Business Economic Chris Williamson was also worrying, as he remarked that the reading was supported by increased exports due to overseas customers securing orderings before potential supply distortions resulting from Brexit. But sterling saw a slight uptick on Monday morning after the UK and EU agreed to extend post-Brexit trade talks to October 28th.

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Safe haven assets were mostly mixed, with a slight skew towards the upside. Gold and silver inched lower but closed Friday mostly flat. The Japanese yen strengthened against the dollar, but weakened against the euro and most of the other G10 currencies. US Treasuries mostly gained across the board, with benchmark 10-year yields retreating 1.3bps to 0.84%. This is also the first week where 10-year yields have closed above 0.80% since June. This can be explained by the increasing speculation for the "Blue Wave" narrative for the US elections which is being fuelled by the higher likelihood in polls for a Biden victory. In addition, to this, investors may also be pricing in a strong economic recovery in 2021 which can cause a reduction in demand for bonds. However, reports have surfaced that traders are taking up contrarian positions against this sentiment, with trades emerging in the market for options on Treasury futures speculating that the yields will remain capped below 1%. If true, expect some added volatility in the Treasury markets as the move unfolds in the following two weeks.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.11% -2.06 1,902.05
Silver -0.41% -0.10 24.61
USD/JPY -0.14% -0.15 104.71
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.16%
10-Year -1.3bps 0.84%
30-Year -3.5bps 1.64%
*Source: Bloomberg

Crude oil prices dip on growing Covid-19 cases forcing more Covid-19 cases across the EMEA region. The lack of stimulus likely also played a small role in oil's losses on Friday. Libya's state oil producer's comments that the company will reach more than one million barrels per day in production in the next four weeks also weighed on crude oil prices. Still, oil prices have barely moved over the past two months, remaining largely range-bound thanks to the declining outlook for demand for energy products along with the lack of a strong upside catalyst in the short-term. Our expectations for oil remain mostly the same for the week, i.e. additional downside pressure from increasing risk of Covid-19 restrictions which is likely to be limited by the longer-term outlook for energy demand as the global economy continues to gradually recover. In addition, we expect the next catalysts for oil to be after the outcome of the US elections, and in early December when OPEC+ ministers will decide on whether to move forward with planned output hikes in January.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.63% -0.69 41.77
WTI -1.94% -0.79 39.85
*Source: Bloomberg

Stocks in Asia started this week mostly higher, as sentiment in the region continues to skew positive despite the lack of stimulus in the US. This could be suggestive of future expectations further into the time horizon as investors may be looking at a more positive economic outlook over the next few months for the region. The Nikkei, KOSPI and ASX200 were each trading higher in the early hours of Monday's trading session. The Hong Kong Stock Exchange will remain closed today for a holiday and will only reopen tomorrow. Futures tracking major indices in the US were however trading lower as of 9.05am (GMT +8), signalling that there could be some shift towards Asian equities as a result of the current pandemic situation as well.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.12% +28.03 23,544.62 8:55:00 AM
KOSPI +0.18% +4.24 2,365.05 9:15:00 AM
ASX200 +0.37% +22.85 6,189.90 9:14:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.30% -84.00 28,102.00 9:05:01 AM
US Futures -0.34% -11.75 3,440.00 9:05:01 AM
Nasdaq 100 Futures -0.29% -33.25 11,630.25 9:05:01 AM
*Source: Bloomberg

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

  • Germany Oct Business Climate/Expectations (IFO) (5pm)
  • US Sep National Activity Index (Chicago Fed) (8.30pm)
  • US Sep New Home Sales (10pm)
  • US Oct Manufacturing Activity (Dallas Fed) (10.30pm)

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

  • Hyundai Motor