Thursday, October 29, 2020

Asia Times: VIX spikes to highest since June while crude oil futures plunge more than 5% on lockdown concerns

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


Market Recap: VIX spikes to highest since June while crude oil futures plunge more than 5% on lockdown concerns

US equities plunge as it appears that Covid-19 concerns came into full force on stock prices yesterday as countries in the EU enforced stricter lockdown measures. Germany announced that it would shut down bars and restaurants for a month, as did France. French president Emmanuel Macron also said that non-essential retailers would be closed starting Friday. Investors could be concerned that the US is on a similar trajectory as the EU, forcing a string of outflows across equity markets as well as derivatives with equities as underlying assets. The S&P500 dived more than 3% as a result, the largest drop in the last four months. The VIX soared 20% to close a touch above 40, the highest level since June in the clearest signal yet that volatility had spiked since Monday.

Indexes Daily Change (%) Net Change Closing Price
Dow -3.43% -943.24 26,519.95
S&P500 -3.53% -119.65 3,271.03
Nasdaq -3.73% -426.48 11,004.87
*Source: Bloomberg

Stocks across the US equity market was broadly down on Wednesday. Only 15 stocks in the S&P500 managed to make gains during the day. Tech shed the most weight on Wednesday, leading to a stronger underperformance in more tech-centric indices such as the S&P500 and the Nasdaq relative to other indices. The reason for the slump was a strong pullback seen in large tech companies which contribute to a large portion of weightage in market-cap weighted indices. Microsoft was a prominent one, along with Nvidia, Facebook and Google who were close to the bottom of the table in the S&P500 tech sector index. On a more forward-looking note, the advancement in VIX over the past week may be indicative of more downside risk in the short-term, especially with the full force of volatility from the US presidential elections next week coming into effect. VIX trading higher than that in September while the S&P has yet to reach the slump to that of the extent in September is also suggestive that more downside may be here to come. Technical wise, the S&P500 also broke the 100-day moving average for the first time since February, a key level that some traders may have been looking for.

Shares of Microsoft plunged more than 4% after its more conservative forecast for the current quarter outweighed better-than-expected revenue and earnings from the previous quarter. The tech giant's first quarter revenue climbed 12%, the 13th straight quarter of double-digit revenue growth, while earnings per share came in at US$1.82/share to beat analysts’ estimates for US$1.54/share. Its forecasts for sales in both its Intelligent Cloud unit and More Personal Computing division fell slightly below the average analyst estimate, likely resulting in some downbeat sentiment on the company especially as we see markets react strongly to companies who fail to meet estimates in the current quarter. More interesting was Microsoft's divergence in sentiment on business capital spending on digital transformation. The company said that it had seen strong customer interest in its commercial products, where bookings rose 23%. CFO Amy Hood had also indicated that companies across industries are continuing to push for digital transformation, contrasting remarks from Intel and SAP executives that spending on tech may have eased. Outside of enterprise divisions, Microsoft's gaming division is also set to release its new Xbox console in November. The company is focusing on affordability options in the current launch, likely to take advantage of the lower mobility environment despite high unemployment. In our view, the combination of Microsoft's offerings remains strong and was evident in last quarter's results. The company is also likely to be better positioned to weather the current uncertainty surrounding the current economic outlook, which may be indicative of a possible long-term opportunity for some tech positioning if investors' portfolios are underweight in that sector.


The dollar led gains on the day, as a strong downturn in commodity-related currencies fuelled the bull run for the dollar. The Japanese yen was the only G10 currency to make gains against the dollar, a strong indication of the risk aversion from the selloff in the equities market. The Norwegian krone fell the most among G10 currencies, after a 5% dive in crude oil prices weighed heavily on the oil-correlated currency.

The Canadian dollar slipped after the Bank of Canada (BoC) adjusted its quantitative easing program to become more stimulus providing as opposed to being stabilisation driven. Outside of asset purchases, the central bank did little to surprise as it stood pat on interest rates with a dovish tone on the economic outlook while revising its growth forecasts for the Canadian economy upwards to reflect the better-than-expected economic data. What caught traders off guard was the scaling back of asset purchases of government bonds to a minimum of C$4 billion a week from the current C$5 billion a week while shifting purchases to longer-termed securities. In theory this appears to be true, since longer-term interest rates are more applicable to households and businesses. Traders may have factored this into prices, which caused the Canadian dollar to fall against the dollar on the release of the statement.

The Bank of Japan (BoJ) will likely keep monetary policy on hold and continue to emphasise on its dovish tone to alleviate downward pressure off of the Japanese yen. Improvements in economic activity since its last meeting is likely to deter the BoJ from urgency in easing in our view. In addition, reflation concerns and unemployment will probably not be the focus of the central bank in its short-term goals. A shift towards funding more medium-to-long-term corporate debt in our opinion is more probable to be the bank's focus for now to lift pressure off of businesses in the country. Despite this, core deflation and rising unemployment will eventually become a concern, which will more likely than not push the central bank to ease further by early 2021. Consequently, our long-term outlook for the yen remains tilted to the downside. As for the short-term, the yen is likely to remain the choice for hedging against political uncertainty in the US. This would mean that upside pressure on the yen (and consequently downward pressure on the dollar yen) is more probable in the short-term, before being relieved by political certainty post-elections.


Safe haven assets were mixed on Wednesday despite the apparent risk aversion seen in equity markets. Gold and silver both slumped. The yen gained against the greenback and euro as well as all of its G10 peers while the Swiss franc was just behind the yen in performance in the G10 basket despite slightly weakening against the dollar. US Treasuries closed flat across the board, with benchmark 10-year yields inching slightly higher by 0.3bps to 0.77%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.61% -30.80 1,877.19
Silver -4.05% -0.99 23.38
USD/JPY -0.10% -0.10 104.32
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.1bps 0.15%
10-Year +0.3bps 0.77%
30-Year +0.1bps 1.55%
*Source: Bloomberg

Crude oil futures plummeted on Wednesday as lockdowns in the EU is expected to send energy demand lower. Brent futures dived to the lowest since June, while WTI triple bottomed at a low that it first formed mid-September. Traders probably had mixed reactions for the weekly report from US Energy Information Demand (EIA), as the report showed US crude oil stockpiles rising 4.32 million barrels last week while gasoline and distillate inventories fell. EIA's measure of distillate demand (four-week average of products supplied) hitting its highest since March probably also contributed to mixed sentiment surrounding the report. More important for oil was the prospects of lockdown restrictions, which at this point seems to be only a matter of time for certain countries. The question for investors and traders is likely then to be on the potential upside for oil prices relative to other assets, since at the current price point it may start to become attractive since the longer-term prospects of oil may be improving as demand starts to show some semblance of recovery despite the risk of additional lockdown restrictions while production rigs in the US shale oil space continue to dwindle down.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -5.05% -2.08 39.12
WTI -5.51% -2.18 37.39
*Source: Bloomberg

Stocks in Asia looks set to track losses in the US, but we don't expect that to an extent seen in the US. While Asian countries' economy are correlated to the US through trade and other segments of the economy, if the reason for the slump in equities is due to Covid-19 then Asian equities should fare better today since the region has mostly managed to curb the spread of the virus to a better extent when compared to the EU and US. Additionally, while lockdown restrictions do impact spending on goods and possible impact exports from Asia, the overvaluation of US stocks in our view is likely to give Asian stocks additional buffer room in light of a selloff. Futures in the US were trading well into the green as of 9.19am (GMT +8), but it remains to be seen if this more positive sentiment can be sustained into the trading later on during Thursday's trading session in the US.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.77% -178.23 23,240.28 9:09:20 AM
KOSPI -1.84% -42.36 2,302.90 9:29:20 AM
ASX200 -1.29% -77.14 5,980.60 9:29:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.91% +242.00 26,651.00 9:19:22 AM
US Futures +0.88% +29.00 3,292.50 9:19:21 AM
Nasdaq 100 Futures +0.76% +85.50 11,218.25 9:19:18 AM
*Source: Bloomberg

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

  • BoJ Monetary Policy Decision/Statement (11am)
  • BoJ Governor Kuroda's Post-Decision Press Conference (2pm)
  • Germany Oct Unemployment Rate/Change (4.55pm)
  • US Q3 GDP (P) (8.30pm)
  • ECB Monetary Policy Decision/Statement (8.45pm)
  • ECB President Lagarde's Post Decision Press Conference (9.30pm)

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

  • Twitter (4am +1)
  • Alphabet (4.30am +1)
  • Starbucks (5am +1)
  • Apple (5am +1)