Wednesday, December 16, 2020

Asia Times: Hopes for fiscal spending sends equities surging after Pelosi and McConnell agree to meet for in-person discussions

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Market Recap: Hopes for fiscal spending sends equities surging after Pelosi and McConnell agree to meet for in-person discussions

US equities surged on Tuesday as hopes for a new fiscal aid deal returned to the market after House Speaker Nancy Pelosi and Senate Republican Mitch McConnell said they would finally meet in person with Treasury Secretary Steven Mnuchin to discuss the new two-part bill proposal. It is still however, unclear whether there will be enough support for the new two-part bill that features one US$748 billion bill that includes aid for small businesses, additional unemployment insurance, aid for transportation including airlines and funding for education. The second bill will cover the liability protections and US$160 billion in state and local aid that lawmakers have been unable to come to an agreement on. Vaccine news may have buoyed stocks in the US as well, after Moderna's vaccine made positive progress towards emergency authorisation use from the US Food and Drug Administration (FDA) later this week. The DJIA, S&P500 and Nasdaq all advanced upwards of 1%.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.13% +337.76 30,199.31
S&P500 +1.29% +47.13 3,694.62
Nasdaq +1.25% +155.02 12,595.06
*Source: Bloomberg

The S&P500 ended the day broadly higher, with a mix of cyclical and defensive stocks outperforming the index. Still, performance in the day still looks favourable towards cyclical stocks as those sectors continues to gain at a faster pace than more defensive sectors such as tech. Small cap indices surged and outperformed major US indices, confirming the risk-on sentiment on Tuesday. VIX dipped more than 7% during the day to return to trade below 23.00.

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The dollar extended losses on Tuesday ahead of a Fed monetary policy meeting as the overall weak dollar outlook continues. The greenback fell against each of its G10 peers. Commodity-linked currencies appeared to perform the best in the basket, but a continuously strong Japanese yen signals that there could be some fear of an overheated equities market.

Tomorrow's FOMC decision on monetary policy (Dec 17th, 3am GMT +8) is expected to result in no changes despite the spike in Covid-19 cases. This is due to already loose policy tools in the central bank's arsenal and economic data only showing a marginal pullback. Most concerning will likely be the US labour market, which the Fed is sure to put emphasis on as a downside risk. We expect the Fed to reiterate its willingness to do more, sending dovish signals to the market considering the renewed risk of Covid-19-induced lockdown measures. Language surrounding its guidance for asset purchases may also be tweaked to be more related to qualitative economic conditions, which should be viewed as a form of a more cautious stance on tightening too early, similar to the effects of its switch to average inflation rate targeting. The likely impact on the dollar should be tilted to the downside as a result, although we do not expect any strong swings in the currency due to its release.

Sterling jumped on more speculation that a post-Brexit trade deal between the UK and EU is getting close. Multiple officials, including German Ambassador Michael Clauss, Irish Taoiseach Michael Martin and Irish Minister for Foreign Affairs and Minister for Defence Simon Coveney made remarks that suggested of progress in Brexit trade talks. This marks the second straight trading session of gains in sterling.

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Safe haven assets were mixed on Tuesday but appears to be tilted towards a reduction in risk aversion. Gold and silver both gained but is more likely due to the relatively more positive correlation to risk assets amid the crisis and weaker dollar as opposed to a jump in risk aversion. The Japanese yen gained against both the euro and dollar, suggesting that hedging may be present in the market possibly due to speculation that equity markets are starting to display overheating properties. Strategists at the Bank of American Merrill Lynch said that money managers overseeing US$534 billion in total are seeing cash levels down to 4%, the first time since May 2013, signalling that optimism for equities and commodities are likely dominating sentiment. This dip in cash positions may be the driver for broad market hedges against equities and the declining dollar as a result. US Treasuries mostly fell across the board, with benchmark 10-year yields rising 1.5bps to 0.91%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.44% +26.29 1,853.64
Silver +2.75% +0.66 24.49
USD/JPY -0.37% -0.38 103.67
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.11%
10-Year +1.5bps 0.91%
30-Year +2.1bps 1.65%
*Source: Bloomberg

Risk appetite continued to grow in crude oil markets, sending both Brent and WTI futures contracts higher on Tuesday. The appearance of positive progress among US lawmakers regarding a fiscal spending bill likely drove optimism in oil markets during the day. Vaccine news on Moderna's dose closing on the FDA’s emergency use approval probably had a similar effect. Still, gains in crude were capped by the non-official weekly report on crude oil stockpiles in the US from the American Petroleum Institute showing an increase in both US crude oil and distillate inventories. The International Energy Agency's (IEA) downward revision to its demand forecast for 2021 likely also hampered some of the gains in crude oil markets. The report from the IEA also showed that the agency does not expect the crude oil supply glut from the pandemic to be cleared until the end of 2021. This is likely due to the expected time between deploying the vaccine and for vaccines to reach widespread availability, implicitly suggesting that crude oil demand may still have an extended period before reaching pre-pandemic levels. We will be closely watching the official weekly US crude oil stocks report from the Energy Information Administration (EIA) later today, after a large build up across crude oil, gasoline, and distillate inventories in the previous week.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.93% +0.47 50.76
WTI +1.34% +0.63 47.62
*Source: Bloomberg

Major Asian indices were trading higher in the earlier hours of Wednesday's trading day, tracking the performance of US equities. Equities in the region should continue to benefit from cross geographical rotations, like that seen in the rotation towards cyclicals and small caps in the US. The Nikkei, KOSPI and ASX200 were trading higher on Wednesday morning. Futures tracking major indices in the US were flat with a slight downward bias as of 9.21am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.29% +76.85 26,764.69 9:11:45 AM
KOSPI +0.27% +7.38 2,764.20 9:31:40 AM
ASX200 +1.20% +80.66 6,712.00 9:31:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.08% -25.00 30,089.00 9:21:41 AM
US Futures -0.09% -3.25 3,683.75 9:21:46 AM
Nasdaq 100 Futures -0.03% -4.00 12,592.00 9:21:46 AM
*Source: Bloomberg

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

  • UK Nov Inflation Rate (RPI/CPI) (3pm)
  • Germany Dec Manufacturing/Service PMI (Markit) (P) (4.30pm)
  • UK Dec Manufacturing/Services PMI (Markit) (P) (5.30pm)
  • US Nov Retail Sales (9.30pm)
  • US Dec Manufacturing/Services PMI (Markit) (P) (10.45pm)
  • US Dec 11th Crude Oil Stocks Change (EIA) (11.30pm)
  • Fed Monetary Policy Decision/Statement (3am +1)
  • Fed Chair Powell Post-Meeting Press Conference (3.30am +1)