Thursday, December 17, 2020

Asia Times Markets move cautiously higher on speculation for fiscal aid by the weekend; BoE faces a difficult decision

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil
  • Federal Reserve

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Market Recap: Markets move cautiously higher on speculation for fiscal aid by the weekend; BoE faces a difficult decision

Stocks in the US mostly climbed higher on the back of US fiscal aid hopes on Wednesday. Weaker-than-expected retail sales data for November may have applied downward pressure on stocks early on in the trading day, but that was quickly reversed after Senate Majority Leader Mitch McConnell remarked that there was "good progress" on stimulus negotiations. It appears that lawmakers expect to be able to have a deal by the end of the week and are prepared to meet on the weekend in order the pass the bill. Markets likely took this as a positive signal for equities. A report from Bloomberg citing sources familiar with the talks said that stimulus pay-outs are now expected to be included in the new bill. State and local government aid will still be excluded, along with liability protections, but help for state and local governments will be coming via a different avenue such as possible funding for vaccine distribution or schools.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.15% -44.77 30,154.54
S&P500 +0.18% +6.55 3,701.17
Nasdaq +0.50% +63.13 12,658.19
*Source: Bloomberg

Sectors in the S&P500 showed a less-than-rosy picture of risk appetite in the market on Wednesday. S&P500 sectors were mixed across the board, with both defensive and cyclical sectors outperforming the index. Caution was the likely factor, as investors weigh between the short-term negative impact of the surge in Covid-19 cases that is starting to materialise and the long-term effects of the vaccine when reached widespread distribution. Retail sales data likely sparked the concern, after dropping 1.1% during November, much more than the expected 0.3% decline forecasted by economists. Breaking down the report, stay-at-home categories such as sales at grocery stores were the only bright spots in spending for November. Concerning was the marginal gain in non-store retailers (0.2%), underpinning that the dip in online spending may be a bigger signal for economic fragility. December's data will now be closely watched as investors will look at non-store retail spending to see if November's marginal gain was only due to a de-emphasis of the Black Friday sales thanks to consumers avoiding in-store traffic. Small cap indices also pulled back to underperform major indices.

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The dollar extended losses on Wednesday as the Fed remained dovish on monetary policy. Rising optimism on fiscal spending in the US as soon as this week likely also added to the downward pressure on the dollar. The Fed increased its dovish view of the current situation in its last monetary policy meeting for 2020, refining its guidance for asset purchases to maintain its current pace for a considerable period until "substantial further progress" is made on unemployment and inflation. The statement was however still somewhat vague, signalling that the Fed may be keeping more ammo for 2021 as risks are just starting to materialise in the economy while a fiscal stimulus bill seems to be underway. Rates were left unchanged, as were the central bank's economic and inflation assessment. The dot plot now shows the single official that saw a hike in 2022 partially walking back on his expectations, and now only expects a smaller increase to rates. Five policy makers now see a rate hike in 2023, up from four. There were a mix of updates to the central bank's summery of economic projection, mainly in which was an upward revision to GDP figures for both 2020 and 2021. Fed Chair Jerome Powell's post-meeting speech was mostly in line with previous meetings and helped to diminish any sentiment that the central bank was leaning hawkish.

The Bank of England (BoE) is set to decide on monetary policy later today, but with Brexit still in limbo it looks like policy makers will emphasis on a path to more easing in the event of a hard-Brexit. Sterling continued to advance on Wednesday although it appears that that was driven mostly by the weaker dollar. In our view the most likely view for the BoE is to keep policy unchanged while sending strong guidance on the event of a no-deal Brexit. Easing is unlikely, especially with the situation in trade talks so fluid at the moment. This also does mean that the central bank will probably prefer to err on the side of caution instead of giving market participants any hawkish signals. Sterling as a result, may see some downward pressure from on the BoE’s decision, although we do not expect a large swing or lasting impact in the currency.

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Safe haven assets were mixed yet again on Wednesday as markets continue to move forward with cautious optimism. Gold and silver gained with the gold-silver cross making new lows since late September. The Japanese yen gained against the dollar but was one of the worst performing currencies among its G10 peers. US Treasuries were close to flat with a slight downward bias. Benchmark 10-year yields inched on 0.8bps to 0.92% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.60% +11.16 1,864.80
Silver +3.40% +0.83 25.33
USD/JPY -0.19% -0.20 103.47
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.11%
10-Year +0.8bps 0.92%
30-Year +0.5bps 1.66%
*Source: Bloomberg

Crude oil futures advanced on Wednesday after the Energy Information Administration's (EIA) weekly report showed a surprise drawdown in US crude oil supplies last week. The report from EIA showed US crude oil supplies falling more than three million barrels last week, contrasting the earlier report from the American Petroleum Institute that signalled a possible increase in supplies. Gasoline demand still appears to be weak however, with supplies in the US reaching its highest since August. Distillate inventory rose but appeared to be only a marginal 200,000 barrels.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.63% +0.32 51.08
WTI +0.42% +0.20 47.82
*Source: Bloomberg

Asian indices were trading mixed on Thursday morning, likely as traders in the region takes a more back-seat approach to the stimulus news. The Nikkei and ASX200 were both trading higher in the earlier hours of Thursday's trading session while there was some weakness in the KOSPI. Futures tracking major indices in the US were only marginally higher as of 9.18am (MT +8), highlighting that caution is likely still dominant in equities market this morning.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.06% +15.61 26,773.01 9:08:45 AM
KOSPI -0.57% -15.74 2,756.05 9:28:40 AM
ASX200 +0.70% +47.37 6,726.60 9:28:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.10% +31.00 30,105.00 9:18:45 AM
US Futures +0.08% +3.00 3,696.75 9:18:48 AM
Nasdaq 100 Futures +0.09% +11.25 12,682.00 9:18:46 AM
*Source: Bloomberg

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

  • SNB Monetary Policy Decision/Statement (4.30pm)
  • BoE Monetary Policy Decision/Statement (8pm)
  • US Dec 11th/Dec 4th Initial/Continuing Jobless Claims (9.30pm)