Friday, December 18, 2020

Asia Times: US equities continues to make new highs on fiscal hopes; Sterling falls early on Friday after another Brexit dampener

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Bank of England

12182020a

Market Recap: US equities continues to make new highs on fiscal hopes; Sterling falls early on Friday after another Brexit dampener

Markets continued to eye fiscal spending in the US, ignoring concerns stemming from another spike in jobless claims. Both House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell both expressed positive sentiment of the progress on stimulus talks, fanning hopes that a bill could be in place as soon as this weekend. There were reports that started to surface towards the end of the trading session that some Republicans were seeking to include language to explicitly wind down the Fed's emergency lending programs by the end of the year in the stimulus bill. While it is still unclear how many lawmakers supports this inclusion as mandatory other than Senators Pat Toomey of Pennsylvania and Mike Crapo of Idaho, it does carry added possibility for more delays before a fiscal aid bill can be passed.

Labour market clearly facing more pressure, but markets seem to be taking it as an incentive for Congress to speed up negotiations. Initial jobless claims gained to 885,000 for the week ended December 11th. This opposed a decline to 812,000 that economists expected and was higher than even the upward revision to the previous week’s figures at 862,000. Initial jobless claims are now hovering at its highest in the last three months. Continuing claims may have declined more-than-expected to 5.508 million for the week ended December 4th, but aggregated continuing claims figures (includes the Pandemic Emergency Unemployment Claims and Pandemic Unemployment Assistance programs) surged to more than 19.5 million during the week ended November 27th. This may be a signal of weakness in hiring in the broad economy despite the normally busy holiday season, which could potentially indicate that this holiday sales season may be slower-than-expected. Another factor that is driving added claims is stricter lockdown measures across several states as the spread of Covid-19 infections continue to accelerate. This seems especially likely since more populous states such as New York and California only recently started to reintroduce tighter measures.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.49% +148.83 30,303.37
S&P500 +0.58% +21.31 3,722.48
Nasdaq +0.84% +106.56 12,764.75
*Source: Bloomberg

Sectors were broadly up on Thursday, but the real outperformance was in small caps. That said, more defensive sectors were the top performers in the S&P500. Real Estate and Materials led gains, but health care, technology, utilities, and consumer staples stocks were the larger drivers of the broad index. Both the Russell 2000 and S&P600 index topped performance on Thursday among major US indices, both gaining upwards of 1%. VIX declined for the third day in a row and is now trading a touch below 22. Similarly, the VXN index extended losses for the third day in a row.

12182020b

The dollar continued to face losses on Thursday, as optimism for fiscal spending dominated the currency market as well. Safer currencies like the Japanese yen and Swiss franc continued to underperform the rest of its G10 peers despite strengthening against the dollar.

Sterling ended Thursday higher against the dollar on Brexit hopes through the day. The Bank of England (BoE) decided to stand pat on monetary policy as expected, signalling explicitly for a quicker pace of purchases should market function deteriorates. Markets will likely take this as indicative of a first move in the event of a Brexit fallout. The central bank's Monetary Policy Committee also noted that a no-deal Brexit is a key risk that would put the economy in a weaker position. That likely sets up an easing cycle in future, should the transition period end without the trade deal. Outside of that, the central bank extended its Term Funding Scheme with additional incentives for SMEs for an additional six months. Details of the program was left unchanged. Sterling fell slightly post-decision, but that drop was only short-lived as markets reversed its impact in the following hours. More important was downward pressure towards the end of the trading session on Thursday after officials including British Chief Negotiator David Frost, British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen warned that big challenges towards a deal between the two blocs remain, dampening the prospects for a deal on Brexit. This also put enough pressure on sterling to start Friday's trading session about 0.22% lower by 9am (GMT +8).

12182020c

Safe haven assets were tilted towards the downside on Thursday, likely pressured by the optimism in the market. Gold and silver gained, as both metals remain positively correlated to riskier assets. The weaker dollar likely also impacted both metals. The Japanese yen fell against the euro but rose against the greenback. US Treasuries fell across the board, pushing benchmark 10-year yields 1.7 bps higher to 0.93%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +1.11% +20.62 1,885.42
Silver +2.90% +0.73 26.06
USD/JPY -0.35% -0.36 103.11
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.6bps 0.12%
10-Year +1.7bps 0.93%
30-Year +2.5bps 1.68%
*Source: Bloomberg

Oil futures continued to inch higher, thanks to both a weaker dollar and on optimism that Congress will be able to finalise the latest fiscal spending proposal soon. The weaker dollar is likely driving some of the gain in the oil futures as well as it has the added effect of stimulating demand in countries outside of the US. Asian demand continues to be robust and was probably another driver for the optimism seen in crude oil prices. Another bullish sign on demand was in the gasoline and diesel market, with the combined refining margin for both end-products of crude against the WTI benchmark rising past US$11 per barrel on Thursday. That is the highest since July.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.82% +0.42 51.50
WTI +1.13% +0.54 48.36
*Source: Bloomberg

Asian investors weren't as optimistic as investors in the US, with indices in the region showing signs of weakness early during Friday's trading session. The Nikkei and ASX200 were both trading lower while the KOSPI was a touch higher but close to flat in the early hours of Friday's trading session. Futures tracking major indices in the US were tilted to the downside as of 9.25am (GMT +8) on Friday. Both US futures and Asian equities signals that we could see some caution in markets over a possibly event heavy weekend where we may see headlines on both progress on US fiscal spending and Brexit. Entering the end of the year also marks a likely rotation of position by funds, possibly for both window dressing and rebalancing purposes. We expect some added volatility in the S&P500 and Tesla today and Monday as the electric automaker gets included into the index.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.05% -13.99 26,792.68 9:15:35 AM
KOSPI +0.06% +1.75 2,772.18 9:35:30 AM
ASX200 -0.46% -30.77 6,725.90 9:35:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.15% -44.00 30,158.00 9:25:36 AM
US Futures -0.07% -2.75 3,710.00 9:25:28 AM
Nasdaq 100 Futures -0.10% -13.25 12,737.75 9:25:33 AM
*Source: Bloomberg

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

  • BoJ Monetary Policy Statement (11am)
  • BoJ Governor Kuroda's Post-Meeting Press Conference (2pm)
  • Germany Dec Current Assessment/Expectations Survey (IFO) (5pm)