Thursday, December 3, 2020

Asia Times: Stocks edge higher on signs of Democrats’ compromise on spending; OPEC+ inches closer to an agreement

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  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil

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Market Recap: Stocks edge higher on signs of Democrats’ compromise on spending; OPEC+ inches closer to an agreement

Wall Street equities mostly eked out gains on Wednesday as Democrats show their support for a US$908 billion bipartisan stimulus proposal presented by a group of lawmakers earlier this week. Both House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer backed the proposal from the bipartisan group, committing to it as a baseline for a new round of stimulus talks with Congress republicans and the White House. This was likely seen as a strong signal for a potential stimulus bill sooner than later with Democrats taking a large step back from its US$2.4 trillion proposal it had backed pre-elections. While Senate Majority Leader Mitch McConnell has not yet commented on Pelosi and Schumer's statements, support from both Republican and Democratic senator suggests that the proposal opens up the possibility of a larger-than-US$500billion deal (a figure that a large number of Republican senators have opposed before the elections) by votes from both Democrat and Republican senators. This implicitly means that we are likely to start seeing more progress on the stimulus front than before and add to market optimism, as the real conflict for a deal is between Senate Republicans and Democrats rather than the White House. Other headlines include the UK’s emergency use approval of Pfizer and BioNTech’s vaccine, which is expected to have 800,000 doses available for use next week.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.20% +59.87 29,883.79
S&P500 +0.18% +6.56 3,669.01
Nasdaq -0.05% -5.74 12,349.37
*Source: Bloomberg

S&P500 sectors were mixed on Wednesday with a stronger skew towards cyclicals thanks to strong gains in shares of energy firms after an unexpected drawdown in US crude oil stockpiles last week. An industry breakdown of performance shows oil & gas, airlines, cruise lines and other travel & leisure-related companies trading at the top of the S&P500. Shares of Salesforce fell the most in the index, plunging 8% on concerns from analysts on the premium paid for the acquisition of Microsoft Teams rival, Slack. The general consensus appears that while it does make strategic sense for Salesforce since it will allow its clients to benefit from the communications software when engaging with customers, and consequently drive a large growth in Slack as well, the premium that Salesforce is paying for the deal in a cash-and-stock deal is likely to concern investors and pose some increased short-term risk on returns. The full use of stock for the acquisition may also have been more preferred with the strong valuation that Salesforce is currently enjoying (current forward price-to-sales is at 9.5x compared to the three year average of 7.3x), especially since software valuations may start to show some downward pressure assuming investors rotate out of tech in favour of cyclicals moving forward. Outside of the S&P500, we note that VIX futures have risen for the second trading session in a row which could be a signal that some hedging is occurring in the options market against a potential drawdown in stock prices in the short-term.

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The greenback continued to dip with the Dollar Index closing in on the 91.00, a level last seen in 2018 which was the range that the index traded in after a year of decline before rebounding through 2019. Stimulus is likely adding on to the pressure of the dollar, as traders speculate on an increased likelihood for a devaluation of the dollar sooner following Democrat leadership signalling their compromise on fiscal spending in the US. Sterling underperformed the G10 basket, after EU Chief Brexit Negotiator Michel Barnier downplayed the likelihood of a deal with the EU saying that a Brexit deal was not guaranteed.

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Safe haven assets were mostly lower as optimism in the market continued to be spurred on by stimulus hopes. Gold and silver continued to edge higher but was likely an impact of the weaker dollar. The Japanese yen fell against all major currencies aside from sterling. US Treasures mostly declined as well, with benchmark 10-year yields gaining 1bp to 0.94%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.88% +16.04 1,831.28
Silver +0.42% +0.10 24.10
USD/JPY +0.09% +0.09 104.42
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.8bps 0.16%
10-Year +1.0bps 0.94%
30-Year +1.7bps 1.69%
*Source: Bloomberg

Oil markets were driven on optimism on multiple fronts including stimulus in the US, a surprise decline in US inventory and progress towards an agreement by OPEC+ ministers. The official report from the US Energy Information Administration (EIA) showed crude oil stockpiles declined 679,000 barrels last week, contrasting that of an earlier industry-funded report released Tuesday. But gasoline and distillate inventories gained, signalling that demand came mostly from exports. The stronger-than-expected exports likely also cemented that demand from Asia is strengthening, confirming that of earlier reports. Reports suggesting that OPEC+ is making headway towards an agreement for capacity in 2021 likely also helped drive markets ahead of its meeting set for today. Expect greater volatility later today as a result as markets await its decision.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.75% +0.83 48.25
WTI +1.64% +0.73 45.28
*Source: Bloomberg

Asian equities were trading muted on Thursday morning as optimism in the region wavers slightly on the sudden optimism of US stimulus. Investors in the region may also be starting to show signs of concerns on the impact of the weaker dollar and its impact on the region thanks to inflation concerns. The KOSPI and ASX200 were both trading a touch higher while the Nikkei was inching lower in the earlier hours of the trading session. Futures tracking major indices in the US were mixed but close to flat as of 9.19am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.18% -47.27 26,753.71 9:09:10 AM
KOSPI +0.35% +9.35 2,685.25 9:29:10 AM
ASX200 +0.19% +12.70 6,602.90 9:29:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.10% -30.00 29,838.00 9:19:11 AM
US Futures -0.06% -2.25 3,665.00 9:19:12 AM
Nasdaq 100 Futures +0.08% +10.25 12,464.50 9:19:10 AM
*Source: Bloomberg

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

  • China Nov Services/Composite PMI (Caixin) (9.45am)
  • US Nov 27th Initial Jobless Claims (9.30pm)
  • US Nov Services PMI (ISM) (11pm)