Thursday, November 26, 2020

Asia Times: US markets regresses ahead of Thanksgiving; oil’s rally further complicates OPEC+’s impending decision

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

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Market Recap: US markets regresses ahead of Thanksgiving; oil’s rally further complicates OPEC+’s impending decision

The stock market rally started to normalise on Wednesday as traders in the US likely took profits following some worse-than-expected economic data ahead of the Thanksgiving holiday. Most concerning was the second consecutive spike in initial jobless claims, a sign that layoffs from renewed lockdown restrictions in certain states are starting to weigh on the US economy. Also, a sharper-than-expected decline in income for October highlighted the disparity within the labour market. The 0.7% (P: 0.9%, E: -0.1%) decline in income was likely a result of the end of enhanced benefits that were signed into executive orders by US President Donald Trump that ended in September. This was signalled by a 6.2% decline in government social benefits during the month, which outweighed the overall 0.7% increase in wages and salaries (also the weakest gain since the first lockdown restrictions were eased earlier in the year). Savings remained at elevated levels but continued to fall to 13.60%, indicating that consumer spending is likely to continue to slowdown as well. The lack of stimulus and uncertainty on when a new fiscal spending bill will be passed will probably add to the weight as the impasse in Congress will likely continue at least into January 2021.

Initial jobless claims had gained to 778,000 for the week ended November 21st (P: 748,000, E: 730,000), while continuing claims fell to 6.071 million for the week ended November 14th (P: 6.370 million, E: 6.000 million). While the uptick in initial jobless claims in the previous week was mostly due to the unusual jump in claims in Louisiana, this week's dataset showed a much broader increase across US states, indicating that layoffs may be starting to materialise from renewed lockdown and stay-at-home notices in multiple states including California (which saw a jump in initial benefit claims estimated upwards of 9,000). Continuing claims did continue to decline, but an aggregation of extended benefits from pandemic programs showed that overall continuing claims increased in the week ended November 6th. We had initially forecasted hiring from the holiday season to outpace the pressure from the pandemic, but it does appear that hiring is starting to face larger headwinds than expected. Additionally, layoffs appear to be gaining traction, signalling that more pressure may be seen in the coming weeks if more states shift into stricter lockdowns. Currently, only 18 states have imposed at least some restrictions on certain businesses. Out of that 18, only 7 have enforced stricter rules that may include restrictions of entertainment businesses to close at 10pm for example. Only three states have imposed stay-at-home restrictions as well, one of which includes California.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.58% -173.77 29,872.47
S&P500 -0.16% -5.76 3,629.65
Nasdaq +0.48% +57.61 12,094.40
*Source: Bloomberg

Wednesday saw a reversal in sentiment across sectors in the S&P500. The Dow and S&P500 retraced back lower, which in our view still appears to only be a healthy correction after a strong week of gains. In terms of weekly gains, both major indices are still up three out of the past four weeks, pushing the Dow’s November gains higher than the rally seen in March. S&P500 sectors that saw strong gains over the week lagged the index (i.e. cyclicals), signalling that profit taking in those sectors may have occurred, especially considering that economic data started to show some weakness in the short-term. A decline in the VIX supports that profit taking was more likely with volatility continuing to ease in the market. It also suggests that over-optimism may have played a role in the jump in those sectors after consecutive positive developments from vaccine makers. In contrast, tech and tech-related sectors led gains. Small caps fell in line with the above reasons as well. Notable highlights for the day include Slack's 37.59% jump in stock price after an unofficial report said that Salesforce may acquire the company in a deal that could be announced as soon as next week.

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The dollar still fell against most other G10 currencies on Wednesday. The day was mostly skewed in favour of commodity-linked currencies again, but gains decelerated in comparison to Tuesday likely on the back of the mixed economic data. Aside from jobless benefit claims and personal spending, durable goods orders for October advanced more-than-expected in a broader based increased in capital spending. The FOMC's meeting minutes suggested that we could see a potential change in the Fed's quantitative easing program to include longer-termed bond purchases and more explicit forward guidance on asset purchases as soon as December or January, but it did little to move the greenback. Expect some volatility later today for the EUR/USD pair as traders scour the European Central Bank's (ECB) meeting minutes for expectations on what stimulus measures will materialise in its next meeting in December.

Sterling fell initially as Chancellor of the Exchequer Rishi Sunak presented a hawkish leaning take on spending but was later buoyed by the weak greenback in the day. While Sunak had presented additional fiscal support for the British economy in light of the pandemic, his spending review also highlighted that decreased spending is likely in the post-pandemic in order to control the expected budget deficit in the coming years. Longer-term investors should as a result take note of the next Budget statement from the UK on more details for Sunak's plans on reducing the deficit as a result, which could materialise in the form of an increase in taxes for the later part of 2021.

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Safe haven assets were mostly lower on Wednesday, as risk aversion continues to remain at low levels in financial markets. Gold stayed flat, supported by the weaker dollar. The Japanese yen fell against both the greenback and euro. US Treasuries mostly declined apart from two-year treasuries. Benchmark 10-year yields remained flat, inching only 0.2bps at 0.88%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.00% -0.03 1,807.56
Silver +0.38% +0.09 23.36
USD/JPY +0.02% +0.02 104.46
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.16%
10-Year +0.2bps 0.88%
30-Year +1.8bps 1.62%
*Source: Bloomberg

Oil futures proceeded to make new highs since March after a surprise decline in US crude oil stockpiles. The Energy Information Administration's (EIA) weekly report showed crude oil stockpiles falling 750,000 barrels during the week ended November 20th. A drawdown in distillate inventories and crude oil supplies in Cushing, Oklahoma helped drive gains in futures. A two-million-barrel increase in gasoline stockpiles suggested that stay-at-home orders and other lockdown restrictions in the US continued to weigh on mobility. Other developments in crude oil markets remain the same, i.e. complications are arising for the upcoming OPEC+ meeting that is set for next week to decide on scheduled production hikes for January. The market has likely already priced in a higher likelihood of delays, which could mean there is some room for downside risk in the short-term should the bloc decide otherwise since both supply and demand for crude oil is starting to skew towards a stronger outlook.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.57% +0.75 48.61
WTI +1.78% +0.80 45.71
*Source: Bloomberg

Asian stocks were trading mixed on Thursday morning. Expect mostly muted trading as investors and traders in the US break for Thanksgiving. The Nikkei and KOSPI were trading higher in the earlier hours of Thursday's trading day, while the ASX200 was under some pressure. Futures tracking major indices in the US were trading mostly positive as of 9.30am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.29% +76.81 26,373.56 9:20:30 AM
KOSPI +0.41% +10.64 2,612.18 9:40:30 AM
ASX200 -0.24% -16.13 6,667.20 9:40:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.15% +46.00 29,874.00 9:30:30 AM
US Futures +0.18% +6.50 3,633.75 9:30:30 AM
Nasdaq 100 Futures +0.26% +31.50 12,183.75 9:30:28 AM
*Source: Bloomberg

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

  • Germany Dec Consumer Confidence Survey (Gfk) (3pm)
  • ECB Oct Meeting Minutes (8.30pm)