Thursday, November 12, 2020

Asia Times: Big Tech pushes S&P500 to 10-week high as Covid-19 concerns in the US start to resurface

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  • Euro
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  • Reserve Bank of New Zealand

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Market Recap: Big Tech pushes S&P500 to 10-week high as Covid-19 concerns in the US start to resurface

US equities reverse course on Wednesday, marking a normalisation of the two-day convergence in cross-sector valuations. Virus concerns appears to be gaining traction in financial markets as good news start to ease. US hospitalisations mounting amid the winter season and is starting to be priced in by market participants as a real downside risk to the economic recovery in the US in the short-term since it will likely force several states to move into stricter lockdown measures. New York has already announced heightened measures on Wednesday following the state's positive testing rate approaching the safety threshold of 3%. Bars and restaurants in the state with state liquor licenses will now be required to close at 10pm, as will gyms. Indoor gatherings will also be limited to 10 people. While states are most definitely trying to avoid a full lockdown in hopes to prevent a deeper dent to local economies, climbing cases in the US appear to only be at the initial phase with more states outside of the midwestern region of the US starting to experience an accelerating pace of new daily Covid-19 cases.

Headlines on US politics may also have been a factor for the increased drive to safety in equity markets on Wednesday. Georgia has announced that it will do an audit for the presidential results by hand. This does come with the added risk that Joe Biden could lose his marginal lead of 14,000 votes there, but state officials have signalled that changes to the outcome appears to be unlikely. More concerning should be the lack of confirmation on control of the Senate thanks to the double runoff elections in Georgia which will only occur early January. However, this should already have been mostly priced into the market before yesterday since it was already estimated to be a 48-50 split between Democrats and Republicans for the remaining states. Democrats must now win both Georgia seats to gain majority in the Senate, but in our view is more likely to be a close race that will be hard to call ahead of time since the traditionally Republican leaning state of Georgia voted only marginally in favour of Biden. Additionally, markets may also start to price in the expected marginal majority control in the Senate.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.08% -23.29 29,397.63
S&P500 +0.77% +27.13 3,572.66
Nasdaq +2.01% +232.57 11,786.43
*Source: Bloomberg

Big Tech buoys indices, cyclicals give up gains on Wednesday. Tech led the S&P500 in gains on Wednesday, likely due to virus concerns and mean reversion following the strong selloff seen for two consecutive days. Cyclical sectors such as industrials and materials were the laggards. More specifically, the airlines, consumer finance and energy equipment and services industries suffered the most on Wednesday, a signal that financial markets were growing increasingly more concerned on Covid-19 risks. That being said, while we do believe cyclicals are more likely to suffer more downside in the short-term due to political and Covid-19 related headwinds, valuations for those sectors still remain well below both tech and overall S&P500 valuations. As a result, our long-term outlook continues to be in favour of cyclicals since valuations are more likely to converge.

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Elsewhere, the dollar returned to favour as it gains against its G10 peers aside from the New Zealand dollar. Still, volatility in the foreign exchange market appears to have eased. Sterling and the euro both fell against the dollar but remained muted against each other thanks to reports citing unofficial sources that post-Brexit trade negotiations are set to be postponed past the November 15th deadline in Brussels next week. While markets were likely concerned on the progress of talks, the postponement was also a positive signal that both sides still want a deal. Still, while our outlook for the sterling is for it to benefit from a possible trade deal in the short-term, delays in ratifying a deal is becoming an increasingly larger downside risk to the UK economy in the medium-term due to uncertainty and subsequently smaller timeframe for British businesses to react to details of the trade deal. Chairman of the Association of Freight Software Suppliers Steven Bartlett confirmed this yesterday, as he brought up concerns about the Northern Ireland-Great Britain trade in a post-Brexit environment given that the UK government has yet to lay out contingency plans in case the UK's Customs Declaration System is unable to make changes in time to be fully operational in time for January 1st.

The New Zealand dollar gains to a 19-month high on the back of better-than-expected forecasts from the Reserve Bank of New Zealand (RBNZ). The central bank as expected, delivered new monetary easing on Wednesday during its decision, establishing a Funding for Lending Program (FLP) that will be implemented in early December. The program will provide funding for three years at the prevailing official cash rate. While this was mostly priced in to the market, traders were more focused on the upgraded economic forecasts from the central bank which now estimates a 4% drop in GDP for 2020 as compared to its August forecast for -5.8%. Unemployment is also now expected to have an upper limit of 6.4% compared to the previous forecast of 8.1%. These upgrades likely reduced the impact of dovish statements from the central bank regarding the possibility of additional stimulus in the form of negative interest rates an asset purchase expansion and instead gave traders speculative power for the absence of those tools in the short-to-medium term. More likely, is that the central bank will only reduce its cash rate to a bottom limit of 0.10% from its 0.25% if the situation next year deteriorates past its baseline outlook that assumes international borders only open up after 2021. Markets may continue to price this effect in, which may provide a floor to the New Zealand dollar at least in the short-term.

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Safe haven assets were relatively muted on the day, with the US Treasury cash market closed for the Veterans’ Day holiday. Gold inched slightly lower, while silver crept up. Metal traders are likely closely watching for a swing in either metal as the gold/silver cross continues to trade at the bottom of a two-month range with a convergence in the 50 and 100-day moving averages. The Japanese yen fell against the dollar but strengthened against most other G10 currencies in a signal of some hedging against downside risk being present in financial markets.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.62% -11.59 1,865.73
Silver +0.18% +0.04 24.28
USD/JPY +0.12% +0.13 105.43
*Source: Bloomberg

Oil futures remain muted as traders weigh between virus concerns and signals from OPEC+ for a potential delay to planned production hikes in January. Reports from The Covid Tracking Project shows that current hospitalisations grew at an average pace of 1,661 patients in the past week. This puts the current total of Covid-19 hospitalisations to 61,964 in the US, surpassing the highs seen during April of 59,940. The numbers, while not painting the full picture of occupancy rates in US hospitals, still suggests that a large amount of downside risk has yet to materialise since record single day hospitalisations appear to currently be limited to the midwestern region and not the more populous states including New York, Texas or California. As for OPEC+, the bloc still has about less than three weeks until they decide on whether to delay production hikes scheduled for January. The bloc's research department slashed estimates for energy demand yet again on Wednesday, now expecting the volume of crude that the group needs to pump this quarter to be 960,000 barrels a day less than its previous estimate. While members are still pumping 2.1 million barrels a day below the revised amount, it does mean that supply is not depleting as quickly as it needs to be able to confidently hike production in January. Still, the positive news of Pfizer's vaccine - even though unlikely to be material in driving crude oil demand in the first quarter of 2021 due to logistical issues - is still likely to deter some delegates from supporting another delay to increased crude oil production.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.44% +0.19 43.80
WTI +0.22% +0.09 41.45
*Source: Bloomberg

Stocks in Asia were trading close to mute on Thursday morning, as value-buying starts to ease out in the region in similar fashion to the US. The Nikkei was trading higher, likely supported by the weaker yen, while the KOSPI was close to flat and ASX200 trading lower in the earlier hours of Thursday's trading session. Futures tracking major indices in the US were trading slightly lower as of 9.27am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.74% +188.31 25,537.91 9:17:20 AM
KOSPI +0.01% +0.28 2,486.15 9:37:20 AM
ASX200 -0.26% -16.88 6,432.80 9:37:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.03% -8.00 29,303.00 9:27:16 AM
US Futures -0.01% -0.25 3,567.75 9:27:20 AM
Nasdaq 100 Futures -0.08% -9.75 11,876.25 9:27:18 AM
*Source: Bloomberg

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

  • UK Sep Industrial/Manufacturing Production (3pm)
  • UK Q3 GDP (P) (3pm)
  • US Oct Inflation Rate (Core CPI/CPI) (9.30pm)
  • US Nov 6th/Oct 30th Initial/Continuing Jobless Claims (9.30pm)
  • US Nov 6th Crude Oil Stocks Change (EIA) (11.30pm)
  • Fed's Powell, BoE's Bailey, ECB's Lagarde panel at ECB Annual Forum (12.45am +1)

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

  • Applied Materials (5.30am +1)
  • Walt Disney (5.30am +1)