Friday, January 8, 2021

Asia Times: Markets ignores short-term headwinds; an annual rebalancing event may help drive crude oil prices temporarily higher

  • Dollar
  • Gold
  • Yen
  • Stocks
  • NonFarm Payrolls
  • Oil


Market Recap: Markets ignores short-term headwinds; an annual rebalancing event may help drive crude oil prices temporarily higher

Tech bounced back to lead gains in the broad market on Thursday as the politics continue to unfold in the US. That said, markets seem to be dismissing most of the pessimistic news (including Democrats calling for US President Donald Trump's early removal, multiple White House officials resigning and short-term economic headwinds from surging Covid-19 infections across the world) in favour of expectations for larger scale fiscal spending moving forward. Better-than-expected non-manufacturing PMI from ISM for December likely also fuelled the rally, rising to 57.2 (E: 54.5, P: 55.9) with an increase across new orders, production, and export orders. Despite this, the expansion in the index does appear to be overstated thanks to a slowdown in supplier deliveries resulting from supply chain disruptions. The report’s survey responses still highlight the pandemic's negative impact (on both supply chain disruptions, demand, and difficulty in retaining labour) on the sector especially as states renew lockdown measures.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.69% +211.73 31,041.13
S&P500 +1.48% +55.65 3,803.79
Nasdaq +2.56% +326.69 13,067.48
*Source: Bloomberg

While tech drove the S&P500 on Thursday, several cyclical sectors also managed to advance as investors remain optimistic on expectations for the global economy. Tech's outperformance also highlighted that Wednesday's selloff was likely overdone, especially with the sector likely to be used as a short-term hedge against the surge in Covid-19 infections and as the Democrats' tax reform plans will probably not materialise in the near future in consideration of the fragile economy. Gains in small caps kept on pace, with both the Russell 2000 and S&P600 closing the day more than 1% higher. Expect the upcoming earnings season to be closely watched, especially since stocks are likely trading on borrowed valuations for future earnings. Traders will likely focus on the outlook of companies for the rest of the year with emphasis on demand expectations for cyclical goods. Major US banks will start the ball rolling with JPMorgan, Citigroup and Wells Fargo expected to report earnings next week.


In contrast, the dollar experienced an uptick on Thursday, a day after 10-year yields rose back above 1%. Longer-term certainty seemed to help the greenback's case as investors flocked back into the currency following risk-on sentiment in the bonds market. It seems that benchmark yields advancing past 1% may have sparked a selloff in the Treasuries market, contributing to the demand for the dollar. Still, commodity-linked currencies were the better performers of the basket of G10 currencies, while safety-net currencies were at the tail end of the group.

Initial jobless benefit claims unexpectedly dipped to 787,000 while economists were anticipating a 13,000 increase to 800,000. The previous week's reading was also revised upwards to 790,000. However, the decline was mainly due to seasonal adjustments, as actual non-seasonally adjusted figures shows the measure rising by 77,000 to 922,000. Regardless, layoffs will likely remain at elevated levels for as long as Covid-19 restrictions continue. Aggregated continuing claims dipped further as well. ISM's PMI reports reflect this as both manufacturing and non-manufacturing sectors face difficulty in both finding and retaining its workforce due to the restrictions despite an expansion in demand for goods. The most recent private employment report from ADP for December signals a similar trend in private firms as well (service providing sectors, especially the leisure and hospitality industries suffered the largest decline jobs during December). We expect a similar trajectory for the official jobs report from the US Bureau of Labor Statistics (BLS) later today as well, i.e. a contraction of jobs in the US economy following months of expansion.


Investors' risk appetite continued to grow in markets, pulling demand away from safe haven assets. Gold and silver both fell. The Japanese yen fell against every other G10 currency aside from the Swiss franc. US Treasuries mostly fell across the board, with 10-year yields rising 4.4bps to 1.08%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.24% -4.66 1,913.95
Silver -0.55% -0.15 27.14
USD/JPY +0.75% +0.77 103.81
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.0bps 0.14%
10-Year +4.4bps 1.08%
30-Year +3.9bps 1.85%
*Source: Bloomberg

Oil futures inched forward, with oil traders mostly ignoring the impending plunge in demand with England back in full lockdown. The Brent and WTI active crude oil futures are trading at or near overbought levels (based on 14-day RSI) and coupled with short-term headwinds due to Covid-19, looks set up for a possible downside correction soon. A rebalancing in the world's main commodity indices (S&P GSCI Index and Bloomberg Commodities Index) that's expected to start today could also be driving the recent rally, as the annual event is expected to work in crude oil's favour after 2020's devaluation in crude oil prices. Apart from this tailwind, indications of waning demand is growing with signals from refiners (SK Innovation Co keeping run rates at record lows of about 70%) and shale producers (Devon Energy Corp says the recent rally in oil prices will not be a driver for the company to return to production growth without cost considerations). This suggests that we may see added upside volatility in crude oil futures over the next few days before we start to see some weakness in crude oil prices in what we expect to be a healthy correction.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +0.15% +0.08 54.38
WTI +0.40% +0.20 50.83
*Source: Bloomberg

In Asia, equities were trading mostly higher on Friday morning with a stronger bias towards indices with a stronger weightage in tech. Nikkei and KOSPI were trading upwards of 1% while the ASX200 advanced relatively less at +0.39% as of 9.05am (GMT +8). Asia market investors will likely be looking to Samsung Electronics’ earnings report later today for indication of a possible upside surprise in demand after the company was less optimistic for the latest quarter in its previous report. Futures tracking major indices in the US continued to stay in the green as of 8.55am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.16% +322.40 27,812.53 8:45:20 AM
KOSPI +1.60% +49.30 3,080.98 9:05:20 AM
ASX200 +0.39% +26.25 6,738.20 9:05:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.15% +46.00 30,988.00 8:55:21 AM
S&P500 Futures +0.18% +6.75 3,802.25 8:55:23 AM
Nasdaq 100 Futures +0.16% +21.25 12,949.25 8:55:22 AM
*Source: Bloomberg

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

  • Germany Nov Industrial Production (3pm)
  • Eurozone Nov Unemployment Rate (6pm)
  • US Dec Change in NonFarm Payrolls (9.30pm)
  • US Dec Unemployment Rate (9.30pm)