Monday, December 21, 2020

Asia Times: US lawmakers inches closer to a deal on fiscal aid over the weekend; Brexit misses another deadline

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  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil

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Market Recap: US lawmakers inches closer to a deal on fiscal aid over the weekend; Brexit misses another deadline

The US equity rally eased on Friday after a deal on fiscal spending failed to materialise, likely forcing some investors to liquidate positions ahead of the weekend to hedge some risk that a bill doesn’t happen. This was mostly due to lawmakers in the US continuing to wrangle over the Fed's emergency lending programs and a legislation to give individuals and businesses a lifeline to get through the pandemic, although this seemed to have changed over the weekend. All three major indices were down, but large cap tech appeared to help support the Nasdaq Composite and S&P500 from dipping as much as the DJIA.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.41% -124.32 30,179.05
S&P500 -0.35% -13.07 3,709.41
Nasdaq -0.07% -9.11 12,755.64
*Source: Bloomberg

S&P500 sectors were mixed on Friday with more defensive sectors closing at the higher end within the major index. Again, the major driver appears to be the lack of a stimulus deal, which likely forced investors to focus more attention on the rising Covid-19 cases and the strain it has on the health care system in the US. Materials topped the S&P500, followed by the consumer staples and health care sectors. Industry-level breakdowns show the top five industries in the S&P500 were commercial professional services, food & beverage, materials, software & services, and household & personal products, most of which tilt towards being more defensive in the current environment. Small cap indices underperformed major indices as well while the VIX fell for fourth day in a row, signalling that profit taking may have put pressure on riskier assets while risk aversion did not materially gain. Tesla reached new highs on Friday as the electric automaker got set to be included into the S&P500. Shares of Elon Musk's company added another 3% in the minutes after the closing bell before ending the after-hours trading session more than 2% lower, when the price of inclusion was finalised. We expect some temporary volatility, possibly towards the downside, in Tesla’s shares on Monday as some investors may be more inclined to exit the stock on the higher liquidity thanks to its new addition to the index, and as the stock loses some of that momentum that stemmed from a major market event (i.e. its inclusion into the index).

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Still, Friday's drop wasn't enough to stop yet another strong week in the equities market. Weekly performance continues to be skewed towards small cap indices, although the Nasdaq Composite had equivalent gains to the Russell 2000 over the past week. Other global markets also appeared to advance, although to a smaller extent compared to the US. The FTSE100 continued to be marred by failure to progress on Brexit negotiations. Officials in the UK and EU missed yet another informal deadline over the weekend as lawmakers remained split on key aspects of a deal - including control over fishing waters. Talks are still set to continue, but the deadline on Sunday stemmed from a warning by officials that the EU won't be able to ratify any agreement before the end of the transition period on December 31st this year. That may add to the pressure that UK equities have already been facing. Asian equities mostly gained last week, but the stronger performer was the CSI300. That would be in line with the resurfacing of a tech-driven rally over the past week, possibly due to some short-term risk aversion from market participants on the prospects of cyclical stocks due to the rising Covid-19 cases. We do not view this as a return-to-tech rally yet however, but only a catch up in gains for the sector.

Indexes Weekly Change (%) Net Change Closing Price
Dow +0.44% +132.68 30,179.05
S&P500 +1.25% +45.95 3,709.41
Nasdaq +3.05% +377.77 12,755.64
Russell 2000 +3.05% +58.29 1,969.99
S&P600 +1.99% +21.57 1,108.16
FTSE100 -0.27% -17.57 6,529.18
Dax +3.94% +516.21 13,630.51
Stoxx +1.72% +59.90 3,545.74
Nikkei +0.42% +110.87 26,763.39
CSI300 +2.26% +110.34 4,999.97
KOSPI +0.08% +2.12 2,772.18
ASX200 +0.50% +32.89 6,675.47
HSI -0.03% -7.27 26,498.60
STI +0.97% +27.28 2,848.98
*Source: Bloomberg

Easing optimism for a fiscal stimulus deal also weighed on G10 currencies, allowing the dollar to gain against most of its major peers. The Swedish krona led gains, while the safer Swiss franc was the only other G10 currency to strengthen against the greenback. Still, a flock to safety didn't appear to the largest driver of currency market performance with the yen being the middle-of-the-road in losses in the G10 basket, in line with what we were seeing in US equities on Friday.

Sterling extended losses as sentiment for a Brexit deal looks increasingly bleak. Even if a deal were to be passed through the UK and EU leaders, the UK’s parliament and the EU Parliament, traders and investors will likely by now expect some short-term risk of trade frictions to arise as customs and businesses are unlikely to have enough time to make the relevant structural changes. The currency is also expected to show weakness today (which of this writing is already trading at a 0.86% decline at 9.05am GMT +8) after British Prime Minister Boris Johnson walked back plans to allow the UK a five-day holiday to lockdown restriction for Christmas. The UK will now only allow households to mix on December 25th, while London and southeast England goes into tier four lockdown restrictions, highlighting the urgency of the virus situation in the UK. It appears that Johnson was forced to act following the discovery of a new mutation of the novel coronavirus which seems to spread at a significantly quicker rate than before and is suspected to have driven the recent surge in infections over the past few days. Officials have stated that it appears unlikely that the new strain will be immune to the currently available vaccines, however.

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Safe haven assets were tilted to the downside on Friday, suggesting that broad risk aversion was not the driver for the down day. Gold and silver both fell in line with risky assets. The Japanese yen fell against both the dollar and euro. US Treasuries were mostly tilted towards the downside, with benchmark 10-year yields closing Friday 1.3bps lower at 0.95%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.22% -4.07 1,881.35
Silver -0.96% -0.25 25.81
USD/JPY +0.18% +0.19 103.30
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.0bps 0.12%
10-Year +1.3bps 0.95%
30-Year +1.1bps 1.69%
*Source: Bloomberg

Oil futures surged on Friday as it continues to likely be the biggest beneficiary of the back-to-normal trade. Commodities in general appear to be driven by the ongoing optimism for a return to normal environment come the deployment of vaccines. A pure underlying commodity play as opposed to buying commodity miners or producers are especially attractive due to the weaker dollar as well, adding diversification and to an extent hedging as incentive for going long on commodities. For metals, the more popular economic barometer copper is already trading at its highest since 2013, due mostly to it being a proxy for electrical infrastructure which is especially bullish thanks to both fiscal spending on infrastructure and the rise of electric vehicles. In comparison, oil futures are still trading down upwards of more than 10% year-to-date, signalling that there is still some opportunity in crude despite the already significant bounce back from March lows. That being said, Brent's 2-3 month futures contract time spread fell back into a contango on Thursday, a potential signal that markets is taking a breather from the rally. Whether that flip is indicative of a healthy correction or a deeper downside risk is yet to be seen, As per our view in previous reports, oil should still have more upside in the long-term, but may see some downside risks materialise in the short-term. The more recent news of possible fiscal spending in the US may be able to help mitigate that downside however, as markets focus on that news and consequently the longer-term outlook that it adds to the already rosy future that investors picture in a vaccine-driven economic recovery.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.48% +0.76 52.26
WTI +1.53% +0.74 49.10
*Source: Bloomberg

Asian indices open Monday lower, as investors in the region were unimpressed by US lawmakers closing in on a fiscal spending bill. Senate Majority Leader Mitch McConnell said over the weekend that Congress was "really, really close" to a deal on a bill, although Senator John Cornyn added some uncertainty to that after signalling that a deal may only come Monday. New British lockdowns as well as Brexit’s stalemate likely added to downward pressure as well. The Nikkei, KOSPI and ASX200 were all trading lower in the earlier hours of Monday's trading day as a result. US futures tracking major indices were mostly in the green as of 9.20am (GMT +8), although there was a hint of some possible risk aversion in the S&P500.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.55% -147.46 26,615.93 9:10:00 AM
KOSPI -0.49% -13.65 2,758.53 9:30:00 AM
ASX200 -0.53% -35.47 6,640.00 9:29:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.20% +61.00 30,174.00 9:20:00 AM
US Futures +0.03% +1.00 3,707.25 9:20:04 AM
Nasdaq 100 Futures +0.27% +34.25 12,746.75 9:20:04 AM
*Source: Bloomberg

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

  • US Nov National Activity Index (Chicago Fed) (9.30pm)
  • Eurozone Dec Consumer Confidence (11pm) (P)