Market Overview: Beware of Rally, Shake Coming

Market Overview: Beware of Rally, Shake Coming

Market Overview: Beware of Rally, Shake Coming

The Day Ahead

  • The United States prints personal consumption expenditures prices for 1Q20, as well as the Energy information Administration’s crude oil, gasoline, fuel production, and heating oil stocks change for the week concluded 22 may.
  • South Korea announces April’s industrial production.
  • Japan releases April’s industrial production and May’s Tokyo consumer price index.

Overview

• United States stocks power higher on economy optimism.
• Europe stocks eke out gains as rebound laggards beat defensives.
• China investors are pouring investments into the Hong Kong market.

Markets

USA

US stocks advanced for a third day on rising optimism the pandemic’s damage to the economy has peaked. Treasuries rose and oil slipped.

The S&P 500 Index climbed to an 11-week high, holding above 3,000 points and its average price for the past 200 days, technical levels considered key by chart watchers. The benchmark also closed 1.48% higher at 3,036.13 on Wednesday (27 May). For a second day, stocks most corrected by the consequences of the economy shutting, from Carnival Corporation to United Airlines, performed best as investors anticipate a sharp uptick in spending on nonessential goods and services. Stay-at-home beneficiaries from Peloton Interactive to Zoom Video Communications fell.

The NASDAQ indices turned positive late in the session when Micron Technologies Inc forecast earnings that were prior to estimates, lifting chipmakers. The Russell 200 Index jumped over 3%, and the Dow Jones Industrial Average surged 2.21% to 25,548.27, led by American Express and Goldman Sachs.

The recent equity rally “is a sign that investors are becoming optimistic about the reopening of the economy and the drug-treatment development,” said Shayne Heffernan, CEO and Founder of Heffx. “We hope that it will eventually result in a normalisation in the market, however we have to keep a watch on the re-emergence of virus cases.”

Rising tensions with China continued to occupy part of investors’ minds. Secretary of State Mike Pompeo said the United States has certified that Hong Kong is no longer politically autonomous from China, a move that might have far-reaching consequences on its special trading status. On Tuesday, reports indicated that the United States was considering sanctions over Beijing’s crackdown in the former British colony.

Europe

Europe stocks closed in positive territory for a third day as investors ditched the winners of the market rebound to boost shares that had lagged behind. The Stoxx Europe 600 Index rose 0.24% to 349.75, closing at its highest level since 6 March. Cyclicals as well as banks and carmakers led gains, while health care and tech shares declined.

Optimism is growing about a path out of lockdowns because the region’s Governments continue to ease virus-related restrictions without experiencing a resurgence in cases, while prospects of an EUR750b (USD823b) fiscal stimulus package from the European Union also boosted sentiment

Europe equities have now recovered about half the losses spurred by the initial reaction to the coronavirus outbreak in February-March. The Stoxx 600 is on track for its best May performance in a decade, up 2.9%.

Shares in peripheral Europe climbed once news of the EU stimulus package, with Greece leading gains, up 3.9%, after additionally obtaining a double upgrade from Morgan Stanley. Among notable movers, Finnish tire maker Nokian Renkaat Oyj jumped 15% appointing a new Chief executive officer.

Japan

Japan Prime Minister Shinzo Abe doubled Japan’s stimulus measures as he looked to deliver on his bold promise to keep businesses and households afloat with the world’s biggest virus-response package.

His cabinet approved Wednesday (27 May) a JPY117t (USD1.1t) set of measures that features financing help for struggling companies, subsidies to help firms pay rent, and several trillion yen for health care assistance and support for local economies. The spending are going to be funded by a second supplementary budget that breaks a record for an additional budget set only last month.

The latest aid was finalised after data last week (ended 22 May) confirmed Japan has sunk into a deep recession and polls showed support for Prime Minister Abe’s cabinet dropping to a recent low over its handling of the outbreak. Apparently sensing the necessity to do more, Abe vowed on Monday to bring the tally of measures to around 40% of gross domestic product.

The ramped-up support went well beyond what was expected just a week ago giving a stronger impression that the administration was pulling out all the stops to save jobs and businesses despite the inconsistent disbursement of earlier measures such as cash handouts and subsidies.

While the government ended its nationwide state of emergency this week and new virus cases have tailed off, the economic outlook remains grim. Analysts see gross domestic product shrinking by over 20% this quarter and say the recovery may well be slow as exports, tourism, and business investment struggle to rebound.

The new measures match the overall size of April’s JPY117t package, bringing the total of the two packages to just under JPY234t. The record second extra budget of JPY31.9t to help fund the measures comes less than a month after the passage of the first.

The Nikkei 225 Index gained 0.97% to 21,626.28 in early-Thursday trading. It climbed 0.70% to 21,419.23 on Wednesday.

Mainland China and Hong Kong

Mainland cash is flowing into Hong Kong’s stock market at an unparalleled pace, providing support to a market at the centre of rising tensions between Beijing and Washington.

Eligible investors, which can vary from brokers to insurers or individuals with a minimum of CNY500,000 (USD70,000) in their trading accounts, had been net buyers of Hong Kong stocks in all but six sessions this year and pumped USD35.4b so far across the border, the most for the period in data going back to 2017. Buying accelerated as Beijing’s plan to impose a security law on the city sparked an equity crash last week. The top targets of inflows were Chinese state-owned companies.

History shows mainland buying tends to pick up once Hong Kong shares drop. Onshore investors bought the dip in March when the Hang Seng Index fell to its lowest in more than three years. State-backed funds have also stood by to assist steady Hong Kong’s markets around key political events, such as in 2017 when Xi Jinping visited the city to mark 20 years of Chinese rule.

Nervousness is building in Hong Kong’s financial markets after China confirmed plans for new national security laws that critics say would curtail the rights and freedoms of the city’s citizens. The United States is considering a range of sanctions on Chinese officials and businesses in response, as well as whether to declare that the former colony has lost its autonomy from Beijing.

Hong Kong equities extended losses Wednesday (27 May) afternoon, with the Hang Seng falling as much as 1.1% before closing at 0.4%. The city’s chief executive, Carrie Lam had said Tuesday (26 May) that the national security law will bolster business confidence, citing the Hang Seng’s rebound that day. She added that concerns over the law were unwarranted.

Chinese investors now own about 2.9% of the total market value of Hong Kong stocks eligible for cross-border trading, the highest since Hong Kong exchange data became available in March 2017, according to a market watcher. It’s unclear whether or not China’s state-directed funds have been involved in recent days’ buying or whether they earmarked any cash to stabilise the market. Such funds have regularly intervened to manage swings in China’s USD7.4t equity market, particularly around politically sensitive dates.

The MSCI Hong Kong Index, which unlike the Hang Seng Index does not embrace mainland firms, has fallen 21% in the past 12 months, led by real estate companies. One of the main attractions of Hong Kong stocks for mainland investors is low valuations. The Hang Seng China Enterprises Index of Chinese firms listed in the city trades at 8 times the next twelve months’ projected earnings, compared to 11 times for the Shanghai Composite Index.

The Shanghai Composite Index finished 0.34% down at 2,836.80 while the Hang Seng Index fell 0.36% to 23,301.36 on Wednesday

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