Thursday, November 5, 2020

Asia Times:Investors flock to safety in Big Tech; Biden eyes Nevada or Georgia to clinch a victory

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil
  • Bank of England
  • Elections

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Stocks in the US surged on the back of uncertainty as the race for presidency and the Senate remained razor thin contrary to polls and expectations, forcing investors to return to the tried and true tech-for-safety play. Declaration of a victory by US President Donald Trump before the end of counting in several key states also likely rattled the market as Trump clearly signalled that he would be taking legal action in several key states to contest the count of mail-in ballots that arrived after polling day. Investors likely also priced in the reduced likelihood for a Democrat controlled Senate, which at this point looks likely to be true in our view as Democrats needs at least 2 out of the four remaining seats (excluding the Georgia seat that is set for a runoff election in January) to have a chance for control of the Senate in January when the second seat in Georgia is set for a runoff election.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.34% +367.63 27,847.66
S&P500 +2.20% +74.28 3,443.44
Nasdaq +3.85% +430.21 11,590.78
*Source: Bloomberg

The battle for the presidency remains close, but odds seems to favour Biden. Michigan and Wisconsin have flipped overnight to be give Biden a victory in those states. This puts the former vice president in a 264-214 lead over Trump and implicitly means that he will need a victory in any of the remaining states aside from Alaska for a win. States to look out for include Nevada, Pennsylvania and Georgia, two of which favour Trump but with remaining votes that favour Democrat leaning counties (Georgia and Pennsylvania). In our view, the race is still too close to be called and may come down to a single state, but we do believe that Biden is set up for a win, in either Georgia or Nevada based on projections for the remaining counts in the majority of counties.

Nevada remains close with a possibility for Biden to extend his lead by about 8,000 votes based on projections for remaining votes

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The battle for Georgia remains razor thin with a possible Biden victory with a narrow margin of about two to three thousand votes

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S&P500 sectors were strongly skewed against cyclical stocks as investors flocked to lower risk sectors based on the lower likelihood for a Democrat sweep. The key concern is likely on a fiscal stimulus bill, as a Republican controlled Senate may result in delayed stimulus measures due to differing views on the magnitude of spending. However, Senator Mitch McConnell advocated the need for stimulus spending after being re-elected for his seat in the Senate, signalling that Senate Republicans may start to be more open to a larger spending bill after the elections conclude. Outside of the S&P500, small cap indices underperformed the broad market while the Nasdaq 100 surged 4% to outperform all other major indices on Wednesday for the first time in the last four trading sessions. FAANG stocks each advanced more than 4% aside from Netflix.

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Elsewhere, the dollar fell against almost all other G10 currencies as the it reversed course towards the end of Wednesday in Asia. Commodity-linked currencies still managed to edge higher but was much more muted in trading in comparison to that of Tuesday, signalling that traders were likely less sure of a Biden win but were still confident that fiscal stimulus will eventually be passed in the US.

Sterling dipped ahead of a monetary policy decision from the Bank of England (BoE) as markets priced in stalled Brexit talks along with the high likelihood of an easing cycle from the central bank. Chief negotiators from the UK and EU both remarked that while progress has been made in negotiations divergences remain on core issues after two weeks of intensive talks, putting downward pressure on sterling as most other G10 currencies reversed losses during Wednesday. With renewed lockdown and early optimism from the BoE during its last monetary policy meeting, we expect the Covid-19 virus in the UK to be the biggest driver for the central bank to expand its asset purchases today, possibly by 100 billion pounds to add about 22 weeks to its quantitative easing program in weekly purchases at a pace of approximately 4.4 billion pounds a week. Negative interest rates in our view is unlikely to materialise, but will probably be used as a tool by policy makers to floor expectations in the market. While the market expects this, we do see some downside in sterling in the short-term on the decision of the central bank. This downside in the medium-term may however be limited by expectations for a weaker dollar, while in the long-term we expect the overall movement in Cable to be downward trending due to the economic outlook for the UK post-Brexit.

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Safe haven assets were mixed on the back of a potential Republican Senate and uncertainty on the presidential election outcome in the US. Gold and silver fell. The Japanese yen was fairly muted against the dollar but fell against the euro. US Treasuries surged as low risk assets returned to demand in the US. Benchmark 10-year yields plunged 13.6bps to 0.76%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.33% -6.25 1,902.92
Silver -1.34% -0.32 23.90
USD/JPY +0.03% +0.03 104.52
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -2.2bps 0.14%
10-Year -13.6bps 0.76%
30-Year -13.9bps 1.54%
*Source: Bloomberg

Oil futures advanced on Wednesday after the Energy Information Administration's (EIA) weekly report showed US crude oil stockpiles tumbling to the lowest since April last week. The report also showed diesel inventories drawing down for the seventh straight week, likely a welcomed sign by traders that the economic recovery continues to be progressing. The lack of a Democratic sweep, while a net negative impact for energy demand due to a potentially smaller fiscal stimulus bill from the US did little to curb gains in oil futures. This may have been due to traders re-pricing in the lower likelihood of a quicker shift towards clean energy policies that could potentially negatively impact crude oil demand in future in the event of a Democrat sweep.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +3.83% +1.52 41.23
WTI +3.96% +1.49 39.15
*Source: Bloomberg

Stocks in Asia were trading higher on Thursday morning, tracking gains in the US and re-pricing in the prospects of a Biden victory and Republican controlled Senate. Our view is that markets will likely price in fiscal spending whether large or small to be passed quicker now that elections are over due to the rising Covid-19 cases in the US. While McConnell had indicated his interest in trying to pass a bill before the end of the year, it is more likely to happen early 2021 instead. The Nikkei, KOSPI and ASX200 were each trading close to 1% higher in the early hours of Thursday's trading session. Futures tracking major indices in the US were trading higher as well, likely buoyed by increased certainty of who will win the presidential elections as more results from key states come in.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.95% +226.88 23,922.11 9:02:50 AM
KOSPI +1.51% +36.07 2,393.39 9:22:50 AM
ASX200 +1.04% +63.57 6,125.70 9:22:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.04% +11.00 27,746.00 9:12:50 AM
US Futures +0.20% +6.75 3,441.75 9:12:54 AM
Nasdaq 100 Futures +0.57% +67.00 11,830.00 9:12:54 AM
*Source: Bloomberg

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

  • Germany Sep Factory Orders (3pm)
  • Eurozone Sep Retail Sales (6pm)
  • BoE Monetary Policy Decision/Statement (3pm)
  • BoE Governor Andrew Bailey Post Meeting Press Conference (3.30pm)
  • US Oct 31st/Oct 23rd Initial/Continuing Jobless Claims (9.30pm)
  • Fed Monetary Policy Decision/Statement (3am +1)
  • Fed Chair Jerome Powell’s Post Meeting Press Conference (3.30am +1)

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

  • General Motors (8.30pm)
  • Uber (5.30am +1)
  • Virgin Galactic (6am +1)