Friday, December 11, 2020

Asia Times: Brent surges past $50 on robust demand from Asia; ECB exceeds expectations in extension and expansion

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

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Market Recap: Brent surges past $50 on robust demand from Asia; ECB exceeds expectations in extension and expansion

Stocks in the US ended Thursday mixed as markets kept optimism for fiscal stimulus on hold while being cautious of a spike in jobless claims. The narrative regarding lawmakers and an agreement on fiscal spending remained the same, i.e. positive remarks on the progress of talks between lawmakers with little tangible outcomes of an actual deal. This would mean that investors are likely standing pat on their outlook in the case of another stalemate on stimulus. Market’s will probably continue to price in Georgia's runoff elections as a higher volatility market event as a result. Democrats are in an increasingly difficult position since control over the Senate is still a tossup until the elections in January. This is the likely reason that both parties have shifted their earlier stance to try to get a deal before the January runoff elections.

Jobless benefit claims in the US signals surge, and it may mean a month of negative payroll growth is due for December. Important to note is that the US Department of Labour has included in the notes of the report that figures are only an approximation of insured unemployed workers, after the correction was recommended by the Government Accountability Office in its review of the US government's Covid-19 relief efforts. This just cements the high volatility in claims, which the holiday seasons only exacerbates. Initial claims rose 137,000 to 853,000; expectations were for a smaller increase to 725,000. Non-seasonally adjusted figures showed initial benefit claims rose 229,000, implicitly suggesting that layoffs are likely stemming from increased restrictions across the more populous states and not only seasonal effects. More concerning was the first increase in continuing claims figures since end August, rising 533,000 (non-seasonally adjusted) in the week ended Nov 27th. Considering that there are still unemployed workers exhausting the 26-week limit for unemployment claims, the acceleration suggests that the rate at which unemployed Americans are being re-hired is now reversing closer to a halt, or possibly to a net negative figure.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.23% -69.55 29,999.26
S&P500 -0.13% -4.72 3,668.10
Nasdaq +0.54% +66.86 12,405.81
*Source: Bloomberg

Sector performance was largely skewed towards energy firms in the S&P500, probably helped by the uptick in crude oil prices on Thursday. Financials also traded positive, signalling that the rotation towards cyclicals is still in motion albeit at a slower pace. The key for that is when the convergence of valuations between sectors reach overheated level, which still appears to be relatively far for sectors such as financials for stocks within the S&P500. The rebound in tech shares were also key in supporting indices from a deeper decline on Thursday. Small cap indices still managed to outperform major indices excluding the Nasdaq Composite. The Russell 2000 index gained upwards of 1%, while the S&P600 indices inched 0.49% higher. VIX had its second incline in a row, holding on to that 22 level that was last seen two weeks ago. In company news, shares of Airbnb more doubled its IPO price at open at US$146 per share. That puts the company's market cap at around US$101 billion in value, which is more than double that of the Marriott group at around US$42 billion in market cap, which is the largest hotel chain in the world.

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Currency traders switched to risk on positions on Thursday, likely on longer-term speculation that the economy is still due for a recovery in 2021. Commodity-linked currencies advanced the most, with the Australian, New Zealand and Canadian dollars topping the basket of G10 currencies. Sterling continued to fall, adding to losses after British Prime Minister Boris Johnson told businesses in the bloc to prepare for a no-deal Brexit. The remarks from Johnson came a day after talks with European Commission President Ursula von der Leyen ended without a breakthrough, signalling to markets and business owners that a hard Brexit is looking increasingly more possible. Both sides still appear to be hoping for a deal however, since neither party has left negotiation talks. It does seem that from a net payoff point of view that the UK and EU will more likely put in place a barebones deal to reduce the overall trade friction between the two in the short-term. A deal like this will likely help reduce the negative impact of a hard-Brexit by providing what is essentially an extension to the transition period in a practical sense, while at the same time allowing both sides to work on trade agreements post-Brexit.

The European Central Bank (ECB) beat expectations for easing, but the outcome for the euro remained the same, i.e. a reversion to its upward trajectory against the dollar. As signalled by policy makers, the central bank extended both its Pandemic Emergency Purchase Programme (PEPP) and Targeted Long-Term Refinancing Operations (TLTRO III) programs. The PEPP was extended to March 2022 while the TLTRO III was extended to June 2022, far exceeding market expectations for a six-month extension. The ECB also expanded the PEPP by 500 billion euros to 1.85 trillion euros, 100 billion euros more than the 400-billion-euro expansion we had expected. The increase in magnitude is likely to support the additional three-month extension. GDP projections were much in line with expectations, i.e. a downgrade to the near-term outlook for the bloc, while the longer-term outlook remains mostly in line with previous forecasts. Inflation projections were more concerning, highlighting the central bank's concerns on weak demand and pressure from unemployment. While the euro showed some weakness on the announcement of the decision (a decline in EUR/USD of as much as 0.32% in the minutes following the decision), the rebound was as quick thanks to the weaker greenback. The euro was likely also supported by the EU leaders approving the US$2.2 trillion budget and stimulus package after resolving a dispute from Hungary and Poland.

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Safe haven assets were mixed on the day, suggesting that some hedging may be present as traders continue to position against the volatility in equity markets. Gold inched lower while silver closed slightly higher. The Japanese yen remained flat against the dollar but was an underperformer all of its G10 peers aside from sterling. US Treasuries gained across the board, pushing 10-year yields lower by 3bps to 0.91%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.16% -2.98 1,836.57
Silver +0.22% +0.05 24.00
USD/JPY +0.01% +0.01 104.24
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -1.2bps 0.14%
10-Year -3.0bps 0.91%
30-Year -5.7bps 1.63%
*Source: Bloomberg

Oil futures advanced on Thursday as oil traders shrugged off virus concerns on robust demand from Asia. Brent active futures climbed above US$50 a barrel for the first time since the onset of the pandemic. The uptick comes despite the pressure seen in an earlier report on the US' crude oil stockpiles which rose the most since April for the first-time last week. Robust purchasing by China's private refiners, along with multiple tenders by a top Indian oil processor may be helping boost optimism in oil markets. Still, we may see short-term pressure on crude oil futures in the coming weeks as demand in the western hemisphere remains impacted by the spread of Covid-19. However, the overall picture for oil futures likely remain, i.e. a gradual recovery in crude oil prices in the longer-term as demand in the EU and US comes back online and joins that of in Asia.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.84% +1.39 50.25
WTI +2.77% +1.26 46.78
*Source: Bloomberg

Stocks in the Asian region were also trading mixed on Friday morning, as investors in the region - like those of in US - were likely deliberating the prospects for a stimulus deal in the US. The Nikkei and ASX200 were trading lower while KOSPI surged in the earlier hours of Friday's trading session. Futures tracking major indices in the US were mixed as well, with a tilt away from the tech heavy Nasdaq 100 as of 9.31am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.61% -161.27 26,594.97 9:21:10 AM
KOSPI +1.06% +29.43 2,775.89 9:41:10 AM
ASX200 -0.32% -21.52 6,661.60 9:40:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.10% +29.00 29,941.00 9:31:11 AM
US Futures +0.01% +0.25 3,661.00 9:31:11 AM
Nasdaq 100 Futures -0.16% -19.50 12,380.00 9:31:11 AM
*Source: Bloomberg

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

  • US Dec Consumer Sentiment Survey (U. of Mich) (P) (11pm)