Daily updates on foreign exchange news

Novox 2.22 Reference of Fx market

Asia-Pacific equities kicked off the week with a mixed tone after a muted session on Wall Street last Friday. The S&P 500, Dow Jones and Nasdaq Composite ended -0.19%, 0.00% and +0.07% respectively, with nearly 90% of S&P 500 constituents closing in the red.

Globally, more than 204 million people have received at least 1 shot of a Covid-19 vaccine, while the 7-day average of new daily cases has fallen to nearly half of the peak seen in mid-January. The US$ 1.9 trillion Covid relief package is heading for a House vote this week and the Biden administration is expected to reveal a multitrillion-dollar infrastructure plan in March. Against this backdrop, the reflation trade looks set to continue at the expense of a weaker US Dollar.

Sentiment appears to be underpinned by the progress of vaccine rollouts and prospects of new rounds of fiscal stimulus, but rising longer-dated yields have caught investors’ attention.

It is worth noting that the 10-Year US Treasury yield climbed to a fresh 12-month high of 1.348% on Friday as inflation expectations rose. Longer-dated yields are usually moving in tandem with inflation expectations, which has been propelled by rising commodity prices and reflation hopes lately.

Rising yields could dent stock market sentiment in several aspects. First, it may translate into higher debt servicing for corporates, as borrowing costs based on floating rates become higher. Second, higher bond yields offer an alternative to dividend yields, and this makes stocks less appealing compared to bonds on a risk-adjusted basis. Third, stocks’ intrinsic value is undermined by rising rates as future cashflows are discounted back at higher required rates of return. Therefore, any further significant rise in yields may derail stock markets’ upward trajectory and inhibit central banks from carrying out further easing measures.

US 10-Year Treasury Yield

Australia’s ASX 200 index started modestly higher after falling 1.34% on Friday, led by materials (+2.09%), real estate (+0.47%) and information technology (+0.25%) sectors, whereas defensive-linked healthcare (-1.66%) and utilities (-0.86%) lagged. The index looks set to test the 20-Day Simple Moving Average (SMA) line at 6,804 for immediate support.

Hong Kong’s Hang Seng Index (HSI) is undergoing a market survey about expanding its constituents from 52 to 80 by including a more diversified portfolio of blue chips in the wake of Chinese technology listings. The survey results will be released on this Friday.

Traders are facing a busy week ahead in terms of macro events: US consumer confidence, RBNZ interest rate decision, US durable goods order, core PCE price index and Michigan consumer sentiment are in focus. Fed Chair Jerome Powell’s Congressional testimony on the 23rd of February will be closely watched for clues about future monetary guidance, in particularly surrounding inflation, stimulus and vaccine progress. 

Crude oil prices fell 4.5% over the last two trading sessions, retracing sharply from a 12-month high as Texas’ oil wells gradually resumed production after extreme weather halted nearly 1/3 of America crude output. Rising geopolitical uncertainties as a result of the standoff between US and Iran over nuclear talks may pave way for heightened price volatility ahead. Technically, WTI crude oil prices appear to have entered a short-term correction with the MACD indicator forming a bearish crossover (chart below).

Looking back to Friday, 6 out of 11 S&P 500 sectors ended lower, with 89.9% of the index’s constituents closing in the red. Consumer discretionary (-0.74%), communication services (-0.42%) and utilities (-0.26%) were among the worst performing sectors, while information technology (+0.17%) and financials (+0.11%) were up slightly.

S&P 500 Sector Performance 19-02-2021