Tuesday, December 22, 2020

Asia Times: Congressional leaders reach deal on US$900 billion spending bill, but sentiment was dampened by virus concerns

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Market Recap: Congressional leaders reach deal on US$900 billion spending bill, but sentiment was dampened by virus concerns

Stocks in the US were buoyed by US lawmakers reaching a consensus on a relief bill, although it was not enough to stop a decline in the S&P500 as virus concerns resurface. Congressional leaders reached a bill that is worth about US$900 billion in spending to help support the US economy late on Sunday in the US. Main parts of the bill include but is not limited to:

  • Pay outs of US$600 to most Americans
  • Additional US$300 per week in enhanced unemployment benefits through March
  • US$284 billion top up to the Paycheck Protection Program for small businesses
  • US$69 billion for vaccine development testing and community health
  • US$15 billion for airlines
  • US$14 billion for public transit
  • US$13 billion in aid to farmers and ranchers

Liability protection for businesses, and state and local government aid was still not present as negotiators failed to reach an agreement on that front. The relief bill will head to the House and Senate for a vote late on Monday in the US, where Congress is expected to pass the bill despite some complaints from lawmakers that there was not enough time to scrutinise the bill. Still, both Republican and Democrat leaders expect to have enough support to pass the bill through both chambers. We expect focus to now shift to the coming runoff election in Georgia on January 5th, since it will likely be the determinant for future scale of spending by the White House. Divide on that front remains strong, with Democrat leaders remarking that more needs to be done in terms of financial aid while Republican leaders remain firm on opposing measures such as state and local government aid.

The much anticipated fiscal aid bill still wasn't enough to spark a broad market rally in equities, signalling that it was likely already priced in the market while attention shifted to the newly mutated strain of the novel coronavirus in the UK. The new strain of virus in the UK is likely causing some concern due to British officials’ comments on its higher propensity of rapid spreading. Preliminary analysis in the UK suggests that this new strain may be up to 70% more transmissible than other strains and may be contributing to the spike in cases in the country. Monday's drop in equities was likely sensitivity to that news that surfaced over the weekend that saw the British government walking back on its plans for a five-day pause on lockdown restrictions for the Christmas holidays. But officials from the WHO do not expect the new variant to strongly impact vaccines based on current information. Studies are still ongoing, but it appears that the current thought from officials is that vaccines may only need to be altered over time as mutations occur, similar to that of the seasonal flu that mutates every year. Covid-19 vaccines that have so far been proved to be effective in trials are types that can easily be tweaked as necessary, accord to officials, which suggests that the risk of vaccines being rendered ineffective is low.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.12% +37.40 30,216.45
S&P500 -0.39% -14.49 3,694.92
Nasdaq -0.10% -13.12 12,742.52
*Source: Bloomberg

S&P500 sectors were broadly lower, driven only by gains in the financial sector as it benefits from the Fed's decision to lift restrictions off stock buybacks for the largest of US banks. Major banks in the US rallied as a result, with share of Goldman leading gains with a 6.13% surge. Still, sector data suggests that aside from energy, the underperformers of the day were tilted towards more defensive sectors including utilities, consumer staples and health care. This does suggest that the market is likely still cautiously optimistic of an economic recovery in the US in the longer-term despite the broader S&P500 selloff. Similarly, the Russell 2000 outperformed most major indices except for the DJIA. Its dominance is however downplayed by the fact that the other major small cap index, the S&P600 fell 0.32%, suggesting it may be more of a momentum play than a fundamental one. VIX had its largest single-day spike since late October.

In company news, Nike rose upwards of 4% after boosting its forecasts for its full-year revenue. The move also prompted multiple analyst upgrades to its stock which likely helped in the upside during the day. Tesla fell as 6.49% on Monday after the electric automaker was added to the S&P500. The likely reason is a reduction in speculative interest in the stock after it became added to the index as it loses some of that momentum it experienced on the announcement of the news. Investors exiting positions as the stock becomes more liquid likely added to that downward pressure as well.

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Risk-off seems to be marginally spilling over into the currency markets. The dollar mostly gained against most other currencies for the second day in a row. The Swedish krona outperformed the basket of G10 for the second day in a row, while commodity-related currencies were at the tail end of the basket in terms of percentage performance against the greenback. The Japanese yen remained flat against the dollar but gained against most other currencies, signalling that there may have been some risk aversion in markets on Monday.

Sterling continues to dip, now pressured by both the new strain of the virus within the bloc contributing to the surge in Covid-19 cases and as the UK inches closer to that December 31st deadline to the Brexit transition period. Bloomberg reported that the UK is looking to offer more ground on fishing rights in exchange for the EU to back down in other areas, according to people familiar with talks. In our view, this was another signal that both sides want a deal before December 31st. The latest of virus developments is also likely to further incentivise this. However, with several details still causing a roadblock before an agreement is made, the downside risk of delays in details being published for businesses and customs to adjust to trading restrictions continues to inch higher as we approach the December 31st deadline.

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Safe haven assets tilts towards the upside on Monday, spurred by the selloff in equities following virus concerns. Gold inched slightly lower and appears to mostly be an effect of the stronger greenback. The yen remained flat against the greenback but gained against the euro. US Treasuries gained across the board, pulling benchmark 10-year yields back 1.2bps to 0.93%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.24% -4.46 1,876.89
Silver +1.39% +0.36 26.17
USD/JPY +0.02% +0.02 103.32
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.0bps 0.12%
10-Year -1.2bps 0.93%
30-Year -1.9bps 1.67%
*Source: Bloomberg

Oil futures faced the largest impact from virus concerns as traders price in the risk of a wider spread lockdown across the world along with the already in-force restrictions in London and southeast of England. Travel to the UK was also suspended by parts of the world, likely adding to pressure on oil prices. New York Governor Andrew Cuomo remarks that he believes the new strain is already in New York probably fanned fears as well. Add to that the recent rally in crude oil prices despite US crude oil supply still at elevated levels and we may be seeing a deeper downside correction in prices to reflect the short-term virus concerns that oil markets has likely largely ignored over recent weeks. Still, we expect there to be a floor to prices with vaccines being rolled out, assuming that thoughts on vaccines being little impacted by the new virus variant holding true.

Oil Futures Daily Change (%) Net Change Closing Price
Brent -2.58% -1.35 50.91
WTI -2.58% -1.27 47.97
*Source: Bloomberg

Asian equities were showing a second day of weakness in earlier trading on Tuesday morning. We expect that to continue through the day as it tracks sentiment across the world that risk of a new wave in multiple parts of the world is rising. Important to note that this means that short-term risk is being fuelled by the new strain of the coronavirus since vaccines are unlikely to reach widespread availability until at least Q1 2021 in developed countries with the current production capacity. The Nikkei, KOSPI and ASX200 were all trading lower in the earlier hours of Tuesday's trading session. Futures tracking major indices in the US were also trading lower apart from the tech-heavy Nasdaq 100 as of 9.26am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei -0.75% -198.57 26,515.85 9:16:45 AM
KOSPI -0.45% -12.54 2,766.11 9:36:40 AM
ASX200 -0.70% -46.28 6,623.60 9:36:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.14% -41.00 30,072.00 9:26:38 AM
US Futures -0.07% -2.50 3,683.25 9:26:47 AM
Nasdaq 100 Futures +0.21% +27.00 12,710.50 9:26:47 AM
*Source: Bloomberg

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

  • UK Q3 GDP (F) (3pm)
  • Germany Jan Consumer Confidence Survey (Gfk) (3pm)
  • US Q3 Inflation Rate (Core PCE/PCE) (F) (9.30pm)
  • US Q3 GDP (F) (9.30pm)
  • US Dec Consumer Confidence (Conf. Board) (11pm)
  • US Dec Manufacturing Index (Richmond Fed) (11pm)