Monday, November 2, 2020

Asia Times: Wall Street has worse week since March; declines across major financial assets last week suggests anticipation of volatility

  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • Oil


Market Recap: Wall Street has worse week since March; declines across major financial assets last week suggests anticipation of volatility

US equities fell on Friday, with losses driven both by investors increasing hedges against volatility for the presidential elections this week as well as several high-profile tech companies being unable to live up to expectations in recent earnings reports. In addition to that, investors may also be pricing in an increased likelihood for Joe Biden win and consequently his policies that at this point appears more likely to result in tax hikes. This could be reasoned into the performance of the stock market over the past week, which has favoured non-tech companies that could potentially benefit more from Democrats' propensity of fiscal spending in comparison to tech companies during this current period and offset the negative impact of tax hikes on residual earnings.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.59% -157.51 26,501.60
S&P500 -1.21% -40.15 3,269.96
Nasdaq -2.45% -274.00 10,911.59
*Source: Bloomberg

Sector performance was skewed in favour of cyclicals in the S&P500, but strong negative sentiment was present in the market on Friday. Tech shares led the slide, driven by Apple's stock declining more than 5.60%. All other FAANG + Tesla shares all dropped more than 5% as well, with the exception of Google, who gained more than 3% on the back of better-than-expected ad revenue. More importantly, if we focus in on valuations, the reason for the disparity in stock performance post-earnings could be attributed to converging expectations. While Apple beat estimates for earnings and sales in the previous quarter, a 29% decline in iPhone sales in China put pressure on its shares. However, it is important to note that this was more likely due to customers holding out on purchases in anticipation for the new line of iPhones which was delayed from September to October. Facebook is another example, beating expectations for both earnings and revenue in the previous quarter and Q4 forecasts but still experiencing a 6.31% drop in share price on Friday as investors were more concerned on remarks made by Facebook executives on expected headwinds due to regulatory concerns. If we look at forward price earnings, for Alphabet (Forward P/E as of Oct 1st: 25.76, as of Oct 30th: 29.09), Apple (forward P/E as of Oct 1st 30.40, as of Oct 30th: 27.62) and Facebook (forward P/E as of Oct 1st: 29.86, as of Oct 30th: 27.62), valuations have converged most prominently over the past month with a large move over the past week. This signals that expectations for certain tech stocks has started to normalise as a result of all-time high expectations, while other valuations start to pick up due to more easily being able to meet estimates.


US stocks cap off its worse week since March. Outside of the US, European equities fared the worst, thanks to reintroductions of lockdown restrictions. Investors are likely cautious on the EU's second wave of infections as while it currently does not look to be as large of a negative impact compared to lockdowns earlier this year, downside risk continues to dominate sentiment as the daily pace of new Covid-19 cases continues to accelerate at a quicker rate compared to that of March and April with no signs of slowing yet. Asian indices fell less in comparison, likely due to some of the negative impacts of spiking Covid-19 cases in the US and EU being offset by the spread of the virus being under control in most major markets in Asia. Asia's outperformance becomes more obvious when taking the overall monthly performance in October into consideration, as countries outside of Asia suffered the most during the final weeks of October.

This week is likely to continue to be volatile as we head into the last day before the US Presidential elections. Key concerns for the elections in our view will firstly be the timeframe of a delay to the announcement of the voting results, and secondly which party controls the Senate. With record mail-in votes and concerns on whether there are enough resources for counting of the votes, the risk of a delay to the outcome of elections in our view remains. This would mean uncertainty is likely to continue in the short-term which may drive some demand for safer assets before certainty returns to normal on the announcement of the result. The risk of a non-peaceful transfer of power remains as well, but in our view is likely to be only a small possibility. The Senate will be key to the magnitude of fiscal spending, since both Biden and Trump as well as House Democrats can be assumed to be pro-fiscal spending at this point. The worst-case scenario may be a republican-controlled Senate and a Biden presidency, as a gridlock on the issue of large fiscal stimulus spending is expected to occur due to republican senates being less willing towards large levels of spending.

Indexes Weekly Change (%) Weekly Net Change Monthly Change (%) Monthly Net Change Closing Price
Dow -6.47% -1,833.97 -4.73% -1,315.30 26,501.60
S&P500 -5.64% -195.43 -3.28% -110.84 3,269.96
Nasdaq -5.51% -636.69 -3.66% -414.92 10,911.59
FTSE100 -4.83% -283.01 -5.14% -302.18 5,577.27
Dax -8.61% -1,089.27 -9.22% -1,174.29 11,556.48
Stoxx -7.52% -240.65 -7.38% -235.88 2,958.21
Nikkei -2.29% -539.46 -0.90% -207.99 22,977.13
CSI300 -0.49% -23.16 +2.35% +107.93 4,695.33
KOSPI -3.97% -93.66 -2.61% -60.74 2,267.15
ASX200 -3.88% -239.47 +0.93% +54.65 5,927.58
HSI -3.26% -811.36 +2.76% +648.37 24,107.42
STI -4.48% -113.55 -3.08% -76.90 2,423.84
*Source: Bloomberg

Currencies were strongly mixed on Friday. Safer currencies were at the midpoint in gains against the dollar, while the euro fared the worst as investors continued to focus on the European Central Bank's (ECB) more explicit signals for more monetary stimulus to come in December. Traders may have been mixed between better-than-expected economic data in the US for September and rising Covid-19 cases. Consumer spending and income both beat expectations for September, but there were some weaknesses in the data. Personal income rose 0.9% in September but wages and salaries only rose 0.8% compared to the previous of 1.4%. More weakness in income is expected, but if salaries continue to dip less than the decline in jobs, then an imbalanced recovery in the labour market is likely to continue. Spending gained faster than that in August, but a continued decline in both savings and slowdown in income growth suggests that spending continues to be supported by savings that is unlikely to be sustained in the medium-to-long-term. As a result, we expect more weakness in the coming months, especially with the acceleration of Covid-19 cases driving risk of new lockdowns in conjunction with the lack of additional fiscal stimulus from the US government.


Safe haven assets were mixed on Friday as well, but a broader analysis suggests that investors were shifting out of financial assets in anticipation for added volatility over the week. Gold and silver gained. The Japanese yen fell against the dollar but strengthened against the euro. US Treasuries fell across the board, pushing benchmark 10-year yields back above 0.85%. Week-to-date performance across all major financial assets were down, with the exception of the greenback, signalling that outflows were prominent over the past week. In addition, safer assets including the yen and gold outperformed most other assets despite a decline, while riskier assets such as WTI crude oil futures fell the most over the week.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.60% +11.22 1,878.81
Silver +1.71% +0.40 23.66
USD/JPY +0.05% +0.05 104.66
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.6bps 0.15%
10-Year +5.1bps 0.87%
30-Year +5.8bps 1.66%
*Source: Bloomberg

Oil futures fell on Friday as Covid-19 restrictions around the world continue to plague energy demand. Uncertainty due to the upcoming US elections likely also played a part, since oil traders may be concerned about new stricter lockdowns in the US if Biden wins the presidential elections. In our view, the key focus for crude oil futures is where prices bottom out, since the longer-term prospects for oil is still likely tilted to the upside. With a drop back down towards levels last seen in May, it may also become more attractive for oil refiners due to increasing margins as well as oil traders as it becomes more profitable for carry-over trades.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -0.84% -0.32 37.94
WTI -1.05% -0.38 35.79
*Source: Bloomberg

Stocks in Asia looks likely to trade in the green on Monday, likely fuelled by cheap valuations as well as lower sensitivity to volatility from the US presidential elections. The Nikkei and KOSPI were each trading upwards of 1% in the earlier hours of Monday's trading session while the ASX200 was about 0.32% higher as of 9.33am (GMT +8). Futures tracking major indices in the US were trading in the red as of 9.23am (GMT +8), but was close to flat.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.40% +326.23 23,302.57 9:13:15 AM
KOSPI +1.00% +22.86 2,290.01 9:33:10 AM
ASX200 +0.32% +19.32 5,946.90 9:33:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.09% -24.00 26,370.00 9:23:16 AM
US Futures -0.03% -1.00 3,263.75 9:23:16 AM
Nasdaq 100 Futures -0.04% -4.50 11,041.75 9:23:16 AM
*Source: Bloomberg

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

  • China Manufacturing PMI (Caixin) (9.45am)
  • US Oct Manufacturing PMI (ISM) (11pm)

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

  • Marathon Petroleum Corp (10.30pm)
  • PayPal Holdings (6am +1)