Monday, December 7, 2020

Asia Times: Stocks reach new highs as investors interpret weak US employment data as fiscal aid sooner than later

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  • Euro
  • Stocks
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Market Recap: Stocks reach new highs as investors interpret weak US employment data as fiscal aid sooner than later

US equities reached fresh highs last Friday, as investors largely ignored weak labour market data in favour of stimulus hopes. The Bureau of Labour's employment report on Friday showed the US economy adding only 245,000 payrolls in November, far short of the 460,000 jobs growth economists expected for the month. However, instead of pessimism, financial markets looked past the dataset and instead focused on the weak labour market data as an incentive for an agreement on fiscal spending to come sooner than expected. A press conference from House Speaker Nancy Pelosi remarking that there is momentum building in Congress with regards to the US$908 billion proposal put forth earlier in the week by a bipartisan group of lawmakers likely helped drive this thought into financial markets as well, pushing all major indices in the US including the small cap Russell 2000 to new highs on Friday.

Most of the weakness in November's jobs growth was in private sector services, suggesting that impact from renewed restrictions may have already started to weigh on employment during the month - something which we expected to only be reflected in the dataset scheduled for December. This was surprising since stricter restrictions in multiple states only materialised in the weeks after the survey week for November's dataset, signalling that a slowdown in hiring could have been quicker than earlier anticipated and reflective of the lack of fiscal stimulus to support the economy. Concerning parts of the report included increasing permanent unemployment (workers reporting themselves unemployed but not on temporarily layoff rose 214,000 to 4.7 million or about 2.8 million above pre-pandemic levels), a dip in employment in local government education as schools remain shut, a sharp deceleration in employment in leisure and hospitality (A: 31,000 vs P: 270,000) and a pickup in transportation and warehousing (A: 145,000 vs P: 62,000) coupled with a decline in retail hiring (A: -35,000 vs P:95,000) as spending continues to accelerate towards e-commerce.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.83% +248.74 30,218.26
S&P500 +0.88% +32.40 3,699.12
Nasdaq +0.70% +87.05 12,464.23
*Source: Bloomberg

Energy continues to lead the rally in the S&P500, rising more than 5% on Friday to close the week 4.47% higher. The recurring theme seen in past weeks continues in the market, i.e. a rotation towards cyclicals and value as investors optimism gets propped up by renewed hopes for a new round of fiscal spending following weeks of gains on vaccine news. Impressively, gains in major small cap indices have accelerated, with year-to-date price performance for the Russell 2000 and S&P600 at 13.42% and 6.29% respectively. This puts both indices above year-to-date gains of the DJIA (+5.89%), and the Russell 2000 within reach of the S&P500 (+14.50%). While we still lean towards cyclicals and values to outperform growth in a post-vaccine rally, we remain cautious on the rising bankruptcies in smaller-sized firms. This implicitly suggests that portfolio diversification and downside protection are two strategies that investors may benefit from in the medium-to-short-term.

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Major indices may have gained for the fourth week out of the last five, but the rally appears to be slowing. Major indices across the world advanced during the past week, apart from the Dax, HSI and STI. The Dax was likely pressured by stricter lockdowns being enforced in parts of the country along with the extension of the countrywide partial lockdown until January 10th. Hong Kong is also dealing with a new wave of infections that likely weighed on the index. Important to note is that the overall picture in quarter-to-date and year-to-date returns is still favouring a catchup of valuations in cross-regional assets, i.e. a rotation towards equities outside of the US as stocks in the EU, UK, Australia, Hong Kong and Singapore remain well below performances of their counterparts in the US.

Indexes Weekly Change (%) Net Change Closing Price
Dow +1.03% +307.89 30,218.26
S&P500 +1.67% +60.77 3,699.12
Nasdaq +2.12% +258.38 12,464.23
Russell 2000 +2.00% +37.18 1,892.45
S&P600 +2.43% +25.77 1,085.44
FTSE100 +2.87% +182.65 6,550.23
Dax -0.28% -36.72 13,298.96
Stoxx +0.33% +11.48 3,539.27
Nikkei +0.40% +106.53 26,751.24
CSI300 +1.71% +85.15 5,065.92
KOSPI +3.72% +98.00 2,731.45
ASX200 +0.50% +33.03 6,634.08
HSI -0.22% -58.76 26,835.92
STI -0.56% -15.93 2,839.89
*Source: Bloomberg

The dollar gained against most other major currencies in the G10 basket on the weak labour market data in the US. The Canadian dollar was the exception, after its own employment data for November released Friday was surprisingly strong. Employment in Canada had risen 62,100 (E: 20,000, P: 83,600) during the month, more than triple of what economists expected, while unemployment rate decreased to 8.5% (E: 9.0%, P: 8.9%).

Brexit negotiations continues this week as another informal deadline approaches. Only weeks remain to the end of the Brexit transition period on December 31st. Reports from Bloomberg citing its source as people with knowledge of the discussion on both sides suggesting that a breakthrough in details regarding one of two major obstacles, fishing waters, signals that officials may be approaching a deal. However, the report was also sure to downplay the prospects of this saying that an EU diplomat's expectations for an agreement within 24 hours remain low. This was reflected in sterling’s dip on Monday morning, as investors question the progress on an agreement. As per previous thoughts, the medium-term impact of an agreement is likely to be outweighed by the delays of an agreement since companies in both blocs will less time to prepare for trade frictions that is likely to happen with or without a deal. We will be looking at details of a post-Brexit trade deal that may address some of these issues in the months following December 31st.

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Safe havens were tilted towards the downside on Friday as investors increase their optimism regarding fiscal stimulus in the US. Gold fell, but this was more likely to be on the back of the stronger dollar. The gold-silver cross continues to close to the bottom of the range formed in late September. The Japanese yen fell against both the dollar and the euro. US Treasuries tumbled across the board, with benchmark 10-year yields climbing 6bps to 0.97%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.12% -2.22 1,838.86
Silver +0.50% +0.12 24.19
USD/JPY +0.32% +0.33 104.17
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.15%
10-Year +6.0bps 0.97%
30-Year +8.2bps 1.73%
*Source: Bloomberg

Oil futures extended gains on Friday following OPEC+'s decision to slash planned production hikes for January to only an increase of 500,000 barrels per day. Production in subsequent months will be decided monthly, as ministers in the bloc find a compromise to prevent another breakdown in the group. Risk for oil pricing moving forward likely is skewed heavily towards compliance among OPEC+ producers, as vaccines and consequently demand is more likely to continue to improve in the short-to-medium-term. Potential fiscal spending in the US will probably also help support oil prices in an optimistic market. Another risk that oil traders may take note of is increasing risk of lockdowns in the US, even though traders in this space has mostly ignored that in favour of optimism regarding tightening of supply in medium-term.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.11% +0.54 49.25
WTI +1.36% +0.62 46.26
*Source: Bloomberg

Asian stocks were mixed on Monday morning as investors in the region weigh between fragility of the global economy as seen from the US' weak employment data and the prospects for a fiscal spending bill in the US. The Nikkei was close to flat and the ASX200 was trading higher, while the KOSPI fell after opening higher in the earlier hours of Monday's trading day. Futures tracking major indices were also close to flat on Monday morning as of 9.13am (GMT +8). This week's key events include a decision on monetary policy from the European Central Bank (ECB) on December 10th at 8.45pm (GMT +8) and the US Food and Drug Administration's (FDA) meeting to review a potential approval for the emergency use of the Pfizer-BioNTech vaccine on Thursday in the US. A European Council Meeting is planned for December 10th to 11th, which investors will likely keep a lookout for a potential Brexit deal.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.01% +3.52 26,754.76 9:03:15 AM
KOSPI -0.05% -1.43 2,730.02 9:23:10 AM
ASX200 +0.68% +45.22 6,679.30 9:23:15 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.03% +10.00 30,208.00 9:13:18 AM
US Futures 0.00% 0.00 3,698.00 9:13:19 AM
Nasdaq 100 Futures +0.15% +18.25 12,544.25 9:13:19 AM
*Source: Bloomberg

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

  • China Nov Trade Balance (10am)
  • Germany Nov Industrial Production (3pm)