Monday, November 16, 2020

Asia Times: Asian stocks surge on news of the RCEP agreement; Biden’s advisors signal low likelihood for nationwide lockdown

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  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
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Market Recap: Asian stocks surge on news of the RCEP agreement; Biden’s advisors signal low likelihood for nationwide lockdown

Stocks in the US regained momentum last Friday as cyclical sectors led gains during the day to push the S&P500 to close at a record high as upbeat earnings helped to offset pressure from weak consumer sentiment. Better-than-expected earnings from Cisco, Walt Disney and Applied Materials likely helped boost investor sentiment that there is at least some turn around in the outlook for firms that have been impacted by the pandemic. Market positioning likely also put upward pressure on stocks after the strong gains in cyclicals earlier in the week attracted more contrarian trades against Big Tech and stay-at-home stocks in anticipation for a post-vaccine economic environment.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.37% +399.64 29,479.81
S&P500 +1.36% +48.14 3,585.15
Nasdaq +1.02% +119.70 11,829.29
*Source: Bloomberg

S&P500 broadly gained on Friday, with tech underperforming while energy stocks soared. Other industries that outperformed besides oil & gas were hotel and resorts, airlines and casinos, reflective of a possible growing risk appetite during the day. The reversal from Thursday's losses contrasted ongoing concerns regarding the third wave of Covid-19 infections in the US, which have continued to add infections at record rates over the weekend.

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European and Asian indices led developed markets in gains over the week in another sign of the flood to value and cyclical sectors after news of positive vaccine developments from Pfizer. The tech heavy Nasdaq fell along with the CSI300 to lag other global indices. European indices managed to top the table as it was boosted by the 1.8 trillion-euro long-term stimulus plan that EU leaders agreed on. Investors should however note that the spending plan must still be approved by the European Parliament, an inherent downside risk that we view to be minimal since it is more likely that the surge in Covid-19 cases in the EU will likely align the divisive EU Parliament. This week is likely to start strong, with news from Joe Biden's senior advisors that they do not support a nationwide lockdown but instead will lean towards a more targeted approach. The agreement on the Regional Comprehensive Economic Partnership (RCEP) - a trade deal between 15 countries in the Asia Pacific, is likely to boost stock valuations in Asia as well. While its long-term impact will depend on the final details of trade cuts and trade openness relative to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which US President Donald Trump withdrew the US from in 2017. Biden will likely be closely watched regarding his administration's stance on the trade deal with APAC next year, assuming that projections hold and he assumes office. 

Indexes Weekly Change (%) Net Change Closing Price
Dow +4.08% +1,156.41 29,479.81
S&P500 +2.16% +75.71 3,585.15
Nasdaq -0.55% -65.94 11,829.29
FTSE100 +6.88% +406.37 6,316.39
Dax +4.78% +596.70 13,076.72
Stoxx +7.12% +228.02 3,432.07
Nikkei +4.36% +1,060.64 25,385.87
CSI300 -0.59% -28.87 4,856.85
KOSPI +3.20% +77.37 2,493.87
ASX200 +3.47% +215.04 6,405.22
HSI +1.73% +443.89 26,156.86
STI +5.15% +132.71 2,711.39
*Source: Bloomberg

Risk appetite strongly grew on Friday in the foreign exchange market as well, as G10 currencies gained against the dollar. Some risk aversion may have been present as well, with the Japanese yen and Swiss franc outperforming most other G10 currencies aside from sterling and the Australian dollar. Sterling gained the most among major currencies, possibly boosted by speculation that the UK and EU will manage to come to an agreement on Brexit in the coming week as negotiations approach another informal deadline on November 19th when EU leaders meet for a summit. The currency appears to also have been supported after Johnson's top aide Dominic Cummings - regarded as the mastermind behind the 2016 Brexit vote - resigned from Downing Street on Friday, as Cummings' departure was viewed to be a signal of a possible easing stance on Brexit. That being said, British Environment Secretary George Eustice signalled on Sunday during an appearance on Sky News that the Brexit negotiations could go on beyond this week if two sides were close to an agreement. The vague approach from the UK continues to indicate that both sides are likely still hoping for a trade relationship beyond 2020, especially since certain parts of both economies that are already closely intertwined is likely to suffer at a time when the pandemic has damaged both economies to a large extent.

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Safe havens were mixed, with a more skew towards the downside in an overall risk-on day last week. Gold and silver both gained, but in our view was more likely in correlation to risk assets and as investors continue to hedge against the possible magnitude of fiscal spending in the US. The yen strengthened against both the dollar and the euro. US Treasuries fell across the board, with benchmark 10-year yields gaining 1.5bps to 0.90%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.66% +12.37 1,889.20
Silver +1.60% +0.39 24.67
USD/JPY -0.48% -0.50 104.63
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.18%
10-Year +1.5bps 0.90%
30-Year +0.8bps 1.65%
*Source: Bloomberg

Oil futures held above 40 despite dipping on concerns for the rising Covid-19 cases in developed markets. Still, crude oil futures managed to add more than 8% in gains over the past week, after positive vaccine news and a Biden victory helped to boost the outlook for energy demand in 2021. Speculations that OPEC+ may delay its planned production hikes for January after the bloc's research department revised its forecast for energy demand in 2021 downward likely helped to add upward pressure to both the Brent and WTI benchmarks as well during the week as well. Hence, the downtick in crude oil prices on Friday were more likely a normalisation of the strong gains during the week.

Oil futures were trading higher on Monday, lifted by news of the signing of the RCEP and signals that a nationwide lockdown in the US is more unlikely compared to a targeted approach. However, our view is that the short-term impact in oil market is still skewed towards the downside, with Europe already showing motorway traffic down by almost 50% in certain countries. In the long-term, our expectations for crude oil demand remains mostly the same, i.e. a slow and gradual recovery, despite the occasional noise from vaccine developments as concerns on effectiveness, manufacturing and distribution still remains. This week may be more volatile for oil prices as traders closely watch OPEC+’s Joint Ministerial Monitoring Committee (JMMC) meeting this week on November 17th.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -1.72% -0.75 42.78
WTI -2.41% -0.99 40.13
*Source: Bloomberg

Asian stocks were posting strong gains on Monday morning, boosted by the RCEP deal signed over the weekend. While the net impacts still remain to be seen, the agreement is likely to help alleviate the pressure from the pandemic off of economies in the area as a result of greater inter-country relations. Countries outside of China is likely to benefit the most, such as South Korea and Japan as it opens up their respective economies to greater relation to the Chinese economy. The Nikkei, KOSPI and ASX200 were all trading upwards of 1% on Monday morning in Asia. Japan’s Q3 GDP come in better-than-expected on Monday morning, and will likely add to the optimism that Asia's economy is outperforming that of the western hemisphere as most countries in the region continue to manage the spread of Covid-19 infections below recommended levels. Trading on the Australian Stock Exchange (ASX) was paused on Monday morning as the exchange experienced a market data issue. The ASX confirmed a resolution but had yet to restart trading as of 9.30am (GMT +8). Futures tracking major indices in the US were trading higher as of 9.14am (GMT +8), likely buoyed that a nationwide lockdown was unlikely with a Biden administration. Investors may want to be cautious on being overly optimistic however, as many states in the US are experiencing accelerating Covid-19 cases which could still potentially prompt them to enforce restrictions state-wide to alleviate pressure off of the health care system even in the absence of federal intervention.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.44% +371.95 25,757.82 9:04:25 AM
KOSPI +1.48% +37.57 2,531.44 9:24:20 AM
ASX200 +1.22% +79.08 6,484.30 9:24:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.67% +198.00 29,608.00 9:14:12 AM
US Futures +0.69% +24.75 3,606.75 9:14:23 AM
Nasdaq 100 Futures +0.90% +108.75 12,042.25 9:14:09 AM
*Source: Bloomberg

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

  • China Oct Industrial Production (10am)
  • China Oct Retail Sales (10am)
  • Japan Sep Industrial Production (F) (12.30pm)
  • US Nov Empire Manufacturing (9.30pm)

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

  • JD.com (8pm)
  • Baidu (9.15am +1)