Tuesday, October 27, 2020

Asia Times: Surging Covid-19 cases and rising risk of reintroduction of lockdown restrictions starts to be reflected in equity valuations

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

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Market Recap: Surging Covid-19 cases and rising risk of reintroduction of lockdown restrictions starts to be reflected in equity valuations

US equities tumble as rising concern on the surge in Covid-19 cases around the world finally catches up to stock prices. As for a stimulus bill from US lawmakers, that seems to be less than likely for now after discussions between House Speaker Nancy Pelosi and Treasury Speaker Steven Mnuchin failed to yield progress on Monday. That said, Pelosi is still optimistic that a deal can be made in the next week before election day on November 3rd despite the multiple delays. In addition, she did not address the underlying issues of a deal that has yet to be agreed on, namely state and local government aid and school funding portions of the proposal that lawmakers can't seem to agree on. Furthermore, a potential lack of support and the Senate's scheduled adjournment ahead of the elections makes the chances of a fiscal stimulus bill signed into law before November 3rd slim to none in our view.

Indexes Daily Change (%) Net Change Closing Price
Dow -2.29% -650.19 27,685.38
S&P500 -1.86% -64.42 3,400.97
Nasdaq -1.64% -189.34 11,358.94
*Source: Bloomberg

S&P500 sectors broadly fell, as did the overall stock market. Cyclicals however, had the largest drop, likely as the outlook for equities more sensitive to the economic cycle were damaged by both the lack of progress on the stimulus front, as well as the surge in Covid-19 cases in the US. In terms of percentage gains, energy stocks fell the most thanks to the added effect of a plunge in crude oil prices following news that Libyan crude oil output would reach one million barrels a day in the next four weeks. Smaller cap indices also declined, underperforming major indices while the VIX and VXN each spiked upwards of 10% in an overall risk-off tone from investors. In contrast, stocks that benefitted from stay-at-home restrictions outperformed most major indices.

In other news, US-China tension saw another escalation in tension after China had announced that it would impose unspecified sanctions on Boeing's defence unit, in addition to Lockheed Martin and Raytheon Technologies. The news came after the US State Department's approval of a US$1.8 billion sale of new weapons for Taiwan last week. For Boeing in particular, this comes at a time where the aircraft maker is still suffering the effects of rock-bottom demand for air travel and its 737 Max grounding. Additionally, while only its defence unit was reported to be facing sanctions, its relationship with China will likely remain in question in regards to its commercial unit, which derived about 13% of its revenue from contracts from China in FY2019 despite that proportion falling in recent years. Boeing's shares suffered additional downward pressure as a result, falling close to 4% on Monday to weigh more than -6% on the Dow.

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Similarly, the foreign exchange market saw the dollar regain its footing on Monday. Investors likely flocked to safe haven positions following the rout in the US equity market. The dollar benefitted from this the most, with the Japanese yen not far behind. For economic data, US new home sales for September fell below expectations, declining to grow only 959,000 (E: 1,025,000) after a downward revision to August's figure to 994,000. But the dip appears to mostly be a result of a supply disruptions after new home sales experienced an unusual spike over the last few months.

As for the EU, IFO's business climate survey for Germany showed that companies are less upbeat on the outlook of the European economy. IFO's German business climate survey fell below expectations to 92.7 (E:93.0) for October from 93.4. However, the expectations portion of the survey was more worrying as it signalled the scepticism of company executives on the Eurozone's economic recovery, especially with multiple EU member countries already moving into stricter Covid-19 restrictions. In addition, October’s drop in IFO's business climate and expectations survey was the first decline in six months, adding to the growing number of indicators that an economic recovery in the EU is starting to stall. This may help fuel growing speculation for additional easing from the European Central Bank by the end of the year, which may start to weigh on the euro.

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Safe haven assets spiked higher on Monday as markets saw an uptick in risk aversion. Gold remained flat, while silver dipped. The Japanese yen weakened against the dollar, but gained against most G10 currencies including the euro. US Treasuries rose across the board, pulling 10-year yields back down by 4.2bps to 0.80% as the benchmark's close above 0.80% appears to be only short-lived.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.00% +0.03 1,902.08
Silver -1.33% -0.33 24.28
USD/JPY +0.12% +0.13 104.84
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.6bps 0.15%
10-Year -4.2bps 0.80%
30-Year -5.0bps 1.59%
*Source: Bloomberg

Crude oil futures tumbled on Monday as traders priced in the lack of a stimulus package from the US as well as increasing crude oil supply as Libyan production continues to come back online. In addition, crude oil prices are probably also reflecting a potential dip in demand as Covid-19 cases surge across the US and the EU. As for crude oil supply in the US, Gulf producers have shut in 16% of oil production in the area in preparation for yet another storm. Tropical Storm Zeta is forecasted to hit Louisiana or Mississippi as a Hurricane on Wednesday in the US. The shut-ins may provide some support for crude oil prices, but is unlikely to be an upside catalyst for the commodity as seen from previous storms over the last two months since only temporary disruptions are expected. Range-bound, in our view, is the most apt description for the current outlook of oil. That said, there is growing downside risk to oil prices, which may see a greater-than-expected pullback as crude oil futures looks set up for a possible break out in the short-term.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -3.14% -1.31 40.46
WTI -3.24% -1.29 38.56
*Source: Bloomberg

Stocks in Asia appears to be tracking losses from the US on Tuesday morning, but to a smaller extent as the region likely remains impacted by the surge in Covid-19 cases in the US and EU to a smaller extent in comparison. The Nikkei, KOSPI and the ASX200 were each trading lower in the earlier hours of Tuesday's trading session. Futures tracking major indices in the US were trading positive as well as of 8.47am (GMT +8), signalling that we may see at least some easing of the rout during Monday's trading session in the US. Earnings season comes into full force this week, with earnings reports ranging from mega-cap tech stocks such as Microsoft to aircraft maker Boeing and drug maker Pfizer.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.36% -84.50 23,409.84 8:37:40 AM
KOSPI -0.19% -4.42 2,339.49 8:57:40 AM
ASX200 -1.25% -75.73 6,079.90 8:57:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.27% +74.00 27,655.00 8:47:40 AM
US Futures +0.26% +9.00 3,402.50 8:47:41 AM
Nasdaq 100 Futures +0.28% +32.50 11,524.75 8:47:40 AM
*Source: Bloomberg

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

  • US Sep Durable Goods Orders (8.30pm)
  • US Aug Home Price Index (S&P/FHFA) (9pm)
  • US Oct Consumer Confidence (Conf. Board) (10pm)

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

  • Caterpillar (6.30pm)
  • Corning (8.30pm)
  • 3M (9pm)
  • Pfizer (10pm)
  • AMD (5am +1)
  • Microsoft (5.30am +1)