Wednesday, December 9, 2020

Asia Times: Brexit negotiations may hinge on a political compromise tonight; investors remain cautiously optimistic on US stimulus

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  • Gold
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  • Pound
  • Stocks
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Market Recap: Brexit negotiations may hinge on a political compromise tonight; investors remain cautiously optimistic on US stimulus

Wall Street stocks advanced on Tuesday as stimulus hopes regain some traction. Investors still displayed some scepticism on progress for talks surrounding fiscal spending as growth stocks outperformed the major indices for the second day in a row. During the day, Senate Majority Leader Mitch McConnell had suggested that Democrats set aside demands for state government aid in exchange for him dropping business liability protections for negotiations to move along. This may have been perceived as a positive for talks as the republican leader may be viewed as taking a step back on his earlier demands, but markets were likely still concerned on whether Democrats would take up the offer. There was also remarks from House Speaker Nancy Pelosi playing up the possibility of a larger stimulus package in 2021 in addition to the current proposal when President-elect Joe Biden takes office, which could have lifted the broad market on Tuesday. After US markets closed, Treasury Secretary Steven Mnuchin had said that he presented Pelosi with a new US$916 billion relief spending proposal which appears to be backed by President Donald Trump and Republican congressional leaders in the latest sign of political compromise. Mnuchin's proposal features both state government aid and liability protections that Democrats and Republicans have been at odds on. The plan will also have stimulus pay-outs of US$600 per qualifying adult with another US$600 per child. The key will be whether Democrats will be satisfied with certain aspects of the original bipartisan US$908 billion proposal being repurposed into stimulus pay-outs and business liability protection, as Senate Minority Leader Chuck Schumer has already said that stimulus pay-out should be an addition to the US$908 billion proposal instead of replacing other elements of it.

On vaccine news, the Pfizer-BioNTech vaccine is looking set on a path for emergency use approval after the US Food and Drug Administration (FDA) said that it was safe and effective. December 10th in the US will be the key date to take note of as the FDA will review the vaccine with a panel of outside experts before approving its emergency use authorisation. AstraZeneca and the University of Oxford's vaccine candidate appears to be facing more minor setbacks as a peer-reviewed study showed that while the vaccine was found to be safe and effective, more data will be needed to determine its effectiveness in people over the age of 55. This was likely due to older adults being recruited to trials later than younger ones. Still, Lead investigator in the Oxford trial Andrew Pollard remarked that early evidence on the immune response shows similar levels of protection across ages. Another concern that investors may want to take note of is the effectiveness of vaccines in preventing the transmission of the virus as opposed to just stopping infections. This may be a factor in the short-term as vaccines may introduce unwarranted complacency at early stages of distributions in countries since it will still take time for manufacturing and distribution to reach the entire population of countries.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.35% +104.09 30,173.88
S&P500 +0.28% +10.29 3,702.25
Nasdaq +0.50% +62.82 12,582.77
*Source: Bloomberg

Sectors in the S&P500 were mostly mixed on the day with energy stocks leading gains but the highlight was in small cap indices. Within the S&P500, underperformers appeared to be mostly more defensive sectors such as utilities and communications. Financials also underperformed the overall index. The Russell 2000 and S&P600 both outperformed other major indices in the US as markets appear to continue to flock to smaller cap stocks. Interestingly, most of Asia and EU are still trading down week-to-date. VIX dipped 2.91% on Tuesday back to last Friday's levels after an uptick on Monday. In company news, Tesla had announced a share issue to raise as much as US$5 billion in an "at-the-market" offering program according to a regulatory filing on Tuesday. While the company's shares dipped as much 3.6% in pre-market trading, it still managed to eke out gains of 1.27% by the end of the trading session despite the explicit sentiment from the company on its own stock value. This marks the third time the company has issued shares as its prices surged more than 600% this year, and the first after Michael Burry was vocal on his short position on the automaker while at the same time advising Tesla CEO Elon Musk to take advantage of the surge in valuations in its company to raise capital. The next key date for Tesla will be the day it will be added to the S&P500 index on December 21st.

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The dollar ended Tuesday higher against most of the currencies in the G10 basket, possibly as markets remain cautious on progress of US fiscal stimulus talks. Sterling extended losses against the greenback as Brexit optimism continues to fade. British Prime Minister Boris Johnson will head to Brussels to hold talks with European Commission President Ursula von der Leyen in the evening in Brussels later today. It seems that both EU and UK officials are pessimistic on the chances of a deal, however. EU Chief Brexit Negotiator Michel Barnier had remarked that the likelihood of a deal was "very slim" according to Sky News. Johnson had expressed hopes for a deal, but also downplayed any possibly optimism by signalling that he would be open to accept a no-deal Brexit as well. Markets will be closely watching news from today's meeting between von der Leyen and Johnson as it will be key with both sides moving forward with talks. If no political compromise is at least signalled, we could see talks break down and the UK prepare for a hard Brexit. We still view this likelihood to be smaller in comparison to at least a barebones deal. This only means that the UK's medium-term outlook for the UK is growing continuously weaker with growing uncertainty for companies in the UK regarding trade with the EU.

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Gold continues its recovery with other safe haven assets ending Tuesday mixed as markets remain cautiously optimistic. Gold and silver both advanced, with the yellow metal trading closer to levels last seen three weeks ago. The gold-silver cross is maintaining its path and continues to trade at the lower end of a range formed at the end of September. The Japanese yen fell against the dollar but inched slightly higher against the euro. US Treasuries were mixed, with shorter-termed treasuries falling while longer-termed ones fell. Benchmark 10-year yields ended the day 0.5bps lower at 0.92%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.42% +7.83 1,870.56
Silver +0.28% +0.07 24.55
USD/JPY +0.11% +0.11 104.16
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.0bps 0.15%
10-Year -0.5bps 0.92%
30-Year -1.7bps 1.66%
*Source: Bloomberg

Oil futures were mixed as well, with investors weighing between demand risks in the short-term from increasing lockdown restrictions in the US and strong demand for crude in Asia. Stimulus optimism likely helped support crude oil prices but was minimal. The unofficial industry-funded weekly report from the American Petroleum Institute reported a build-up in US crude oil stockpiles of 1.14 million barrels. The report showed gasoline and distillate supplies increased in the US last week as well. Prices are likely already factoring in an uptick in gasoline inventories as motorway traffic in populous cities such as New York show a drop off following renewed lockdown restrictions. Traders will be keeping a lookout at the official report from the US Energy Information Administration (EIA) later today as a result, in particular at overall inventories, distillate implied demand and export figures.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.10% +0.05 48.84
WTI -0.35% -0.16 45.60
*Source: Bloomberg

Stocks in Asia were trading higher on Wednesday morning following news of the new stimulus proposal from Mnuchin and a surge in core machine orders in Japan for October. Core machine orders in Japan had surged 17.1% MoM (E: 2.5%, P: -4.4%) and 2.8% (E: -11.2%, P: -11.5%) in October, boosting optimism on the state of the economy. The Nikkei, KOSPI and ASX200 were all trading higher in the earlier hours of Wednesday's trading day. Futures tracking major indices in the US were trading higher as well, with a skew away from the tech-heavy Nasdaq 100 e-mini futures.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.99% +264.37 26,731.45 9:06:10 AM
KOSPI +0.95% +25.89 2,726.82 9:26:10 AM
ASX200 +0.66% +44.47 6,732.20 9:25:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.20% +61.00 30,231.00 9:16:11 AM
US Futures +0.16% +6.00 3,708.00 9:16:10 AM
Nasdaq 100 Futures +0.09% +12.00 12,649.50 9:16:11 AM
*Source: Bloomberg

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

  • China Nov Inflation Rate (CPI) (9.30am)
  • Germany Oct Trade Balance (3pm)
  • US Dec 4th Mortgage Applications (MBA) (8pm)
  • Canada BoC Monetary Policy Decision/Statement (11pm)
  • US Dec 4th Crude Oil Stocks Change (EIA) (11.30pm)