Wednesday, January 6, 2021

Asia Times: Shares surge as investors buy the dip; US oil touches 50 for the first time since February

Tags
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

01062021a

Market Recap: Shares surge as investors buy the dip; US oil touches 50 for the first time since February

US equities regained its footing as investors poured back into markets following Monday's slump. Dip buying in our view is the likely scenario, along with prospects of an expected global recovery regardless of which party gains control of the Senate during today's Georgia runoff elections, at least in the short-term. Democrats controlling both chambers of Congress does suggest that scale of fiscal spending is likely to surge, but it also will mean that the Biden administration will more easily to pass laws such as those that reforms the tax code which should be viewed as a headwind for markets. A Republican Senate on the other hand will be able to be the check in balance for the US government but limit the magnitude of fiscal spending. Both scenarios suggest there is still upside in stocks, which leads to the notion that investors are more likely to add to positions in the event of a material dip regardless of the result.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.55% +167.71 30,391.60
S&P500 +0.71% +26.21 3,726.86
Nasdaq +0.95% +120.51 12,818.96
*Source: Bloomberg

Sectors in the S&P500 were broadly higher on the day, with energy stocks leading the way thanks to a surprise move from Saudi Arabia to voluntarily cut oil production after an OPEC+ meeting. Other cyclical sectors including materials and industrials led gains in the index as well. Similarly, small cap indices outperformed that of major indices, signalling that the market continues to favour positionings away from growth stocks. The CBOE's fear gauge, VIX, also eased back 6.04% to 25.34 following the large spike on Monday. On a more political front, the New York Stock Exchange signalled that it may be walking back on a decision to halt the delisting of three major Chinese telecom companies. The consideration from the exchange was reportedly linked to a call from US Treasury Secretary Steven Mnuchin expressing his opposition to the initial decision to halt the delisting, according to reports referring to people familiar to the discussions as source.

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Currency markets were single sided on Tuesday, as G10 currencies all advanced against the greenback. Safe haven currencies were at the tail end of the G10 basket as investors scaled back on risk aversion. In contrast, commodity-linked currencies bested its G10 peers in a reversal from Monday. As in the equity markets, while we do expect markets to remain volatile to short-term headlines, we anticipate that commodity-linked currencies are more likely to outperform, along with higher-risk emerging market currencies as investors seek out higher yielding returns on expectations for a global lift in economic activity thanks to vaccines and pent-up demand.

Broad sentiment aside, better-than-expected manufacturing PMI figures is likely also driving optimism in the market, and consequently adding to downward pressure on the risk averse properties of the dollar. ISM's manufacturing PMI for the US for December rose to 60.7, beating economists' expectations for a marginal dip from a previous of 57.5 to 56.8. While slower supplier deliveries contributed to the spike in the index, the survey was largely positive with the majority respondents displaying optimism on current demand and the outlook of their respective industries. Survey respondents also continued to show concern on the supply constraints pertaining to the lack of labour due to the effects of the pandemic, which will likely continue as Covid-19 infections in the US show no sign of slowing. In conclusion, ISM’s report cements that momentum in the US' economic recovery is continuing at a strong pace but is limited by the risk in supply chain issues caused by difficulty in securing and retaining workers due to the pandemic.

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Safe haven assets were mostly skewed towards risk-on appetite across broad markets. Gold inched higher but does appear to be driven by a weaker dollar. The Japanese yen gained against the greenback but fell marginally against the euro. US Treasuries fell across the board, with benchmark 10-year yields surging 4.2bps to 0.95%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.37% +7.11 1,950.01
Silver +1.17% +0.32 27.55
USD/JPY -0.40% -0.41 102.72
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.8bps 0.12%
10-Year +4.2bps 0.95%
30-Year +5.3bps 1.71%
*Source: Bloomberg

Oil futures soared after Saudi Arabia pledged to voluntarily cut output by an additional one million barrels a day, more than offsetting the 75,000 barrel a day combined increase from Russia and Kazakhstan in the latest OPEC+ deal for February and March. The decision from Saudi helped the WTI crude oil benchmark touch above $50/barrel briefly, before closing just shy of that level by the end of Tuesday's trading session. The expansion in ISM's manufacturing PMI also likely helped drive crude oil prices as it reinforced the market's view for a robust economic recovery moving forward. The industry-funded American Petroleum Institute's weekly US crude oil stockpile report signalled that inventories fell by 1.66 million barrels last week, along with an increase in gasoline and distillate stockpiles. Expect markets to watch inventories more closely for crude oil's end-products moving forward, with a focus on refining margins.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +4.91% +2.51 53.60
WTI +4.85% +2.31 49.93
*Source: Bloomberg

Asian indices were trading muted on Wednesday morning as investors wait on the Georgia runoff election results. The Nikkei was a touch higher in the early hours of Wednesday's trading session, while the KOSPI and ASX200 were mostly lower. Futures tracking major indices in the US were close to flat as of 9.12am (GMT +8) as well. We expect a close battle for both seats in Georgia, which would mean it is likely that the results will take time to be called, like that seen in November. Interestingly, both Democrat candidates were leading in early results as of 9.28am (GMT+ 8), with a stronger skew towards Democrats in more highly populated counties as compared to November's results. This may mean that recent news could have influenced voters away from the Republican party, offsetting votes from marginally Democrat leaning voters flipping to vote Republican as a check-in-balance for the power skew in Congress.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.03% +7.88 27,166.51 9:02:35 AM
KOSPI -0.16% -4.87 2,985.70 9:22:30 AM
ASX200 -0.82% -54.16 6,627.70 9:22:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.06% +18.00 30,303.00 9:12:38 AM
31 +0.04% +1.50 3,719.75 9:12:37 AM
Nasdaq 100 Futures -0.06% -7.50 12,785.50 9:12:38 AM
*Source: Bloomberg

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

  • China Dec Services/Composite PMI (Caixin) (9.45am)
  • Germany Dec Services/Composite PMI (Markit) (F) (4.55pm)
  • UK Dec Services/Composite PMI (Markit) (F) (5.30pm)
  • Germany Dec Inflation Rate (Harmonised CPI/CPI) (P) (9pm)
  • US Dec Private Employment Change (ADP) (9.15pm)