Thursday, January 7, 2021

Asia Times: Risk appetite soars as Democrat Sweep opens floodgates for fiscal spending

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

01072021a

Market Recap: Risk appetite soars as Democrat Sweep opens floodgates for fiscal spending

Stocks on Wall Street gained on Wednesday on the back of Democrats gaining control of Congress after winning both Georgia seats. Despite that, equities still ended below intraday highs as markets were impacted by civil unrest due to demonstrators forcing Congress to postpone Joe Biden's Electoral College certification after storming the Capitol building and forcing lawmakers to evacuate to a secure location. Again, stocks were very much skewed in the way of cyclical sectors and companies that would benefit more from a Democrat-led stimulus plan that is expected to pass easily through Congress. This also means that the reflation trade is regaining traction and will likely be started to be more greatly reflected in prices, assuming investors can continue to ignore short-term headwinds from virus concerns.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.44% +437.80 30,829.40
S&P500 +0.57% +21.28 3,748.14
Nasdaq -0.61% -78.17 12,740.79
*Source: Bloomberg

Big tech suffered the most from the Democrat sweep, as they will likely be the most affected by potential tax reforms of a Biden administration. In contrast, banking stocks soared as greater fiscal spending is likely to spark a surge in lending and consequently send expectations for profits of banks with core business around spread rates surging. Other cyclical sectors that benefited from the news were materials, energy, and industrials. However, the highlight of the day was in small caps with the Russell 2000 having its best single-day gain since May 2020 as smaller firms are more likely to thrive in a low rate environment coupled with strong fiscal spending. In company news, the New York Stock Exchange will proceed with the delisting of the three major China telecom companies (China Mobile, China Telecom and China Unicorn), with the Treasury Department announcing that stocks of those companies will not be able to be purchased starting on January 11th and must be fully divested by November when transactions will be frozen. On a separate but similar note, a Wall Street Journal report citing people with knowledge of the matter suggested that the US is considering adding Alibaba and Tencent to a list of companies in which US citizens are prohibited from investing, sending shares of Alibaba that are listed on in the US down 5.32% on the day.

01072021b

Foreign exchange market performance was skewed largely towards commodity-linked currencies, while major safety net currencies dipped against the dollar. The overall Dollar Index still managed to edge out gains, likely thanks to the civil unrest that saw lawmakers evacuated from the Capitol building and as the index's heavier weightages on the yen and sterling helped boost its overall performance. The outlook for the greenback however remains weak, especially after the minutes of the December 15th FOMC meeting showed policymakers’ current dovish tendency. Highlights of the minutes include policymakers' outlook for a short-term downward impact on the economy thanks to the surging Covid-19 cases, while vaccines drive the medium-term growth outlook. The minutes did however note uncertainty with regards to potential delays in vaccine deployment and the general population’s propensity of adoption. Still, rates are signalled to stay at current levels until the labour market reaches levels consistent with maximum employment, and at policymakers' discretion based on more qualitative factors on the economy rather than quantitative. The unanimous vote to keep asset purchases at the current pace suggests that it is unlikely that we will see tweaks to that area in the coming months. The meeting minutes reiterates the narrative that 2021 will very much see focus from markets on the US government policies instead of the central bank, with markets likely only watching language of policymakers for the outlook for rates and quantitative easing beyond 2021.

01072021c

Safe haven currencies fell across the board as risk appetite surged on Wednesday. Gold fell more than 1%, while the Japanese yen was the worst performing currencies in the G10 basket. US Treasuries tumbled, sending benchmark 10-year yields above 1% for the first time since March 2020 to 1.04%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.61% -31.40 1,918.61
Silver -0.95% -0.26 27.29
USD/JPY +0.31% +0.32 103.04
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.6bps 0.14%
10-Year +8.1bps 1.04%
30-Year +10.6bps 1.81%
*Source: Bloomberg

Oil futures surged on the announcement of Democrats gaining control of the Senate but pared some of those gains after demonstrators in the US stormed the Capitol building in the US. The news also came on the back of other boons for oil markets, including the unilateral production cut from Saudi Arabia earlier in the week and the US' Energy Information Administration (EIA) reporting a tightening of crude oil inventories early in the US on Wednesday. The EIA's weekly report showed US crude stockpiles declining the most since August for the week ended January 1st. There were more pessimistic spots in the report however, as distillate and gasoline supplies both increased during the week, along with a large dip in implied demand across both end products. This also means that refining margins are likely to dip even despite the tightening of supply in the US as consumption takes a hit, probably due to the surge in Covid-19 cases. Oil markets will need to further ignore short-term headwinds due to the impact of the surge in Covid-19 cases across the UK and US in order to add to gains, suggesting that we could see a downward correction after weeks of optimism. With our outlook still titled towards the upside for the longer-term, this implicitly could signal a buying opportunity (for long-only strategies) or a time spread play to take advantage of mispricing in later-dated crude oil contracts in the event of a material drop in spot prices.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +1.31% +0.70 54.30
WTI +1.40% +0.70 50.63
*Source: Bloomberg

Asian indices were surging in the early hours of Thursday's trading day and we expect that to continue through the session as investors price in a lower tendency of US lawmakers on conflicts in international trade. Muted trading on Wednesday in Asia is likely also contributing to the rise in upside volatility today after investors adopted a more wait-and-see approach to the Georgia runoff elections. The Nikkei, KOSPI and ASX200 were all trading close to gains of 1.5% in the earlier trading hours of Thursday's trading session. Futures tracking major indices in the US were in the green as of 9.15am (GMT +8) as well, signalling the lingering bullish sentiment on the day. In addition, e-mini futures tracking the Nasdaq 100 was leading gains among major US index futures, a potential signal that yesterday's dip in the tech sector could have been overdone especially in the short-term.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.59% +437.03 27,492.97 9:05:50 AM
KOSPI +1.59% +47.92 3,016.13 9:25:50 AM
ASX200 +1.67% +112.25 6,719.30 9:25:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.18% +55.00 30,775.00 9:15:46 AM
31 +0.36% +13.50 3,754.00 9:15:53 AM
Nasdaq 100 Futures +0.67% +85.25 12,702.25 9:15:49 AM
*Source: Bloomberg

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

  • Germany Nov Factory Orders (3pm)
  • Eurozone Dec Inflation Rate (Core CPI/CPI) (P) (6pm)
  • US Jan 1st/Dec 25th Initial/Continuing Jobless Claims (9.30pm)
  • US Dec Non-Manufacturing PMI (ISM) (11pm)