Chief Investment Office 6 Sep 2021
US
The long-awaited jobs report triggered small moves in the equity market, with investors weighing whether a sharp slowdown in US hiring would make the Federal Reserve delay a reduction in economic stimulus.
Traders turned to the perceived safety of technology giants, while most groups in the S&P 500 Index fell. The benchmark closed 0.03% lower at 4,535.43 on Friday (3 September). Volume was low ahead of the Labor Day holiday. The Treasury curve steepened, with the gap between 5Y and 30Y yields increasing. Investors also assessed a Bloomberg News report saying that Senate Democrats are discussing a wider range of tax proposals than President Joe Biden envisioned, including levies on stock buybacks, carbon emissions, and executive compensation.
The addition of 235,000 jobs in August – the smallest gain in seven months – suggests central bankers will need to see improvement before starting to slow bond buying, according to several analysts. Meantime, President Biden said the economic recovery remains “durable and strong”, blaming the retrenchment in hiring on the spread of the delta variant of coronavirus.
In the run-up to the jobs report, equity funds attracted USD19.2b of inflows, trailed by the USD12.7b allocated to bonds, according to Bank of America. The firm cited EPFR Global data for the week through Wednesday. Outflows from cash funds were the biggest in seven weeks, with USD23b exiting.
Travel companies such as Carnival and American Airlines Group fell as employment in leisure and hospitality – which had posted strong gains recently – was flat in August. Moderna said it completed its submission to US regulators for clearance of a booster dose of its Covid-19 vaccine. Forte Biosciences plummeted after its only product in development failed to have an effect on a common skin disease.
Broadcom, one of the world’s largest chipmakers, climbed after giving a bullish sales forecast, helped by demand for components used in corporate computer networks and smartphones. – Bloomberg News.
The Dow Jones Industrial Average lost 0.21% to 35,369.09 while the Nasdaq Composite Index rose 0.21% to 15,363.52.
EUROPE
Europe stocks remained rangebound near all-time highs Friday (3 September), ahead of US jobs report that investors will analyse for clues on the direction of the Federal Reserve’s monetary policy.
The Stoxx Europe 600 Index closed 0.56% lower at 471.923 with consumer products and tech stocks showing the biggest declines. Miners and autos advanced the most.
The benchmark has been stuck in a tight range for the past two weeks, with equities in the region close to record levels. The Stoxx 600 is up 19% this year, driven by optimism over an economic recovery, as market participants await central banks steps toward tapering. – Bloomberg News.
JAPAN
The prospect of a new Japanese leader encouraged equity investors to lift local stocks to three-decade highs.
Investors will now go into a rare period of political excitement in Tokyo, as potential replacements to the unpopular Yoshihide Suga jostle to become head of the ruling Liberal Democratic Party (LDP) – and the next prime minister – with one candidate already promising to spend trillions of yen.
The Nikkei 225 Index could rise as high as 36,000 this year, or 24% from the current level, an analyst wrote in a report Friday (3 September) – provided the new premier is able to secure more hospital beds for Covid patients to sustain Japan’s economic recovery from the pandemic.
A change at the top will allow investors to focus on Japan’s strengths, such as its “world leading” companies and low Covid deaths, said a portfolio manager. Suga struggled to present his policies in a way to win public support.
“Suga had created an atmosphere of uncertainty, and investors hated that,” he said. “Many of his problems were beyond his control, but there was a perception that Japan was ‘in a mess’.”
It was not always the case for Suga. As prime minister he oversaw what seven years of his predecessor Shinzo Abe’s “Abenomics” could not, as the Nikkei 225 returned to the 30,000 level for the first time since 1990. His domestic programmes for digitalisation and childcare created many stock winners, while he was not afraid to push for sweeping reform of mobile phone firms.
Focus will now shift to the forthcoming vote to elect a new LDP chief. Traders expect a possible pop based on reports Friday that Taro Kono, the social media savvy overseer of Japan’s vaccine response, plans to run.
Former Foreign Minister Fumio Kishida has already said he is running. While not as popular as Kono, markets can take heart from his plans to spend “tens of trillions” of yen if he wins power – indeed, any potential replacement to Suga is likely to accelerate spending.
Others say investors still need to be cautious. As the tide turned on Suga’s popularity in January, just as Tokyo began a state of emergency that essentially has never ended, a prescient report from Fitch Ratings warned that a failure by Suga to contain the virus could lead to his being ousted.
That has now come to pass. But the report further outlined a more long-term risk – of a return to the “revolving door” pattern of premierships that saw Japan go through six prime ministers in as many years after the popular Junichiro Koizumi stepped down in 2006.
Any successor to Suga may not find the coronavirus any easier to tame, and public opinion could quickly shift again. – Bloomberg News.
The Nikkei 225 Index rose 1.68% to 29,618.50 in early-Monday trading, after gaining 2.05% to 29,128.11 the previous session.
MAINLAND CHINA & HONG KONG
Officials in China’s financial capital of Shanghai are closing a route used for decades by companies operating in the technology sector to draw foreign investment.
Startups that have recently applied to Shanghai’s National Development and Reform Commission (NDRC) for permission to inject money into affiliated entities incorporated in places like the Cayman Islands are being turned away, according to people familiar with the matter. Such outbound direct investment is one common way Chinese companies have established and then put money into so-called variable interest entity structures (VIE) – a process to attracting foreign investment and list overseas.
Firms that approached Shanghai’s NDRC are being told the process for outbound investment into VIE structures is being halted, the people said, asking not to be named speaking on a sensitive issue. The changes follow a directive from Beijing, one person said.
China is moving to plug regulatory gaps that for decades allowed technology giants like Alibaba Group Holding and Tencent Holdings to sidestep restrictions on foreign investment. In July, regulators proposed rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review.
If rolled out across the country, Shanghai’s restrictions would have far-reaching implications for Chinese upstarts already squeezed by a flurry of regulations targeting online companies in finance, education, ride hailing, e-Commerce and more.
Regulators are discussing tougher oversight of VIEs nationwide, though the rules have yet to be finalised, the people said. It is unclear what these will mean for existing VIEs, many of which trade on exchanges in Hong Kong and New York.
Offshore listings came under scrutiny after Didi Global forged ahead with its American float despite objections from officials worried about data leaks and national security.
China’s recent crackdowns on a slew of technology companies have rattled global investors and triggered warnings from the US Securities and Exchange Commission. Gary Gensler suspended new initial public offerings of China-based companies in August until they provided more details on risk disclosures, including information about their VIE structures. – Bloomberg News.
On Friday (3 September), the Hang Seng Index fell 0.72% to 25,901.99 while the Shanghai Composite Index lost 0.43% to 3,581.73.
REST OF ASIA
Blank cheque companies could revive Singapore’s languishing market for initial public offerings (IPOs) as stock exchanges from Mumbai to Seoul profit from blockbuster deals.
Singapore Exchange (SGX) presented rules for the listing of special purpose acquisition companies, or SPACs, as it attempts to get a slice of what has become a worldwide frenzy. It is allowing SPACs to list under a rulebook that is lenient than initially envisioned and more in line with the framework in the US.
SGX hosted just three IPOs this year and has struggled to attract big newcomers amid long-time woes of low liquidity and squeezed valuations. The move on SPACs, which is expected to draw in listings from sectors including technology, comes as global financial regulators are raising scrutiny of these structures.
India’s Zomato, Indonesia’s Bukalapak.com, and South Korea’s Krafton are some examples of Asian startups that listed in recent weeks in their home markets in deals worth more than USD1b each. Singapore’s most recent tech debut, Aztech Global, raised around USD220m in March.
Singapore’s stock market has been traditionally dominated by finance and property firms, held mostly as dividend plays, and is short on tech names – the hottest theme in global equity markets since the pandemic began.
Three of the four most-heavily weighted stocks on the SGX are banks, the biggest of which – DBS Group Holdings – is partly owned by state investment company Temasek Holdings. The fourth, Singapore Telecommunications, is controlled by Temasek. – Bloomberg News.
Australia’s S&P/ASX 200 Index opened 1.02% lower at 7,445.80 on Monday (6 September). It added 0.50% to 7,522.90 the previous session.
South Korea’s Kospi Index fell 0.25% to 3,193.16 early-Monday trading after closing 0.79% higher at 3,201.06.
The Taiwan Stock Exchange Weighted Index rose 1.14% to 17,516.92 on Friday.
COMMODITIES
Oil extended losses after Saudi Arabia slashed crude prices for Asian buyers by more-than-expected just days after the Organization of the Petroleum Exporting Countries+ (OPEC+) agreed to continue raising production.
Futures in New York dipped below USD69.00 a barrel Monday (6 September) morning in Asia after falling 1.00% to USD69.29 on Friday (3 September). Brent for November settlement lost 0.58% to USD72.61 a barrel on the ICE Futures Europe exchange.
The kingdom cut the price of its flagship crude for October by USD1.30, more than double the forecast reduction in a Bloomberg survey. Traders were surprised by the move, attributing it to factors including arbitrage inflows from regions such as the US and competition to retain market share.
After rallying in the first half of 2021, oil’s surge has stalled as the market weighed a mixture of bearish and bullish signals. New Covid-19 variants and the readiness of governments to release strategic reserves weighed on investor sentiment, even as a decline in global crude inventories and record high US fuel consumption added to optimism.
Asian buyers will need to submit their requests for October volumes by 6 September. Saudi official prices for cargo sales to the US, Northwest Europe, and the Mediterranean were stable or little changed, pointing to the producer’s intent on prioritising oil flows to Asia.
Last month, some Asian customers requested less Saudi volumes as the delta variant prompted the return of movement restrictions. Still, OPEC and its allies expect global oil markets will continue to tighten this year even as they revive output, before flipping into surplus again in 2022.
Separately, traders are closely watching for the return of oil production and refineries affected by Hurricane Ida. The US granted a second refiner in Louisiana access to the country’s emergency crude stockpiles as most oil-producing platforms in the Gulf of Mexico remain offline. – Bloomberg News.
CURRENCIES
Gold jumped to a seven-week high after a report showed the US economy added fewer jobs than forecast, easing concerns that the Federal Reserve will soon pare back stimulus. Nickel and aluminium led gains in most base metals.
Data on Friday (3 September) showed the US nonfarm payrolls increased 235,000 in August, the smallest gain in seven months and well below economists’ forecasts. The dollar fell after the report, boosting demand the appeal of metals for investors holding other currencies.
Bullion has struggled this year amid a global economic rebound from the pandemic, which has raised the prospect of central banks reining in massive monetary stimulus. Friday’s US jobs print will ease those concerns, and may reflect growing fears about the rapidly spreading delta variant of Covid-19.
The jobs report “will be perceived by commodity traders as preventing the Fed from taking aggressive action to reduce monetary accommodation, even as labour costs risk driving aggregate prices higher,” a head of commodity strategy said in a note.
The focus will now turn to economic data released ahead of the Fed’s meeting later this month. Any more indications that the US recovery is stuttering may give the central bank cause to delay tapering its asset purchases. Chair Jerome Powell said last week a reduction in monthly bond purchases could begin this year, with the labour market making “clear progress”.
Spot gold rose 1.2% to USD1,830.56 an ounce by 2:27 pm in New York, after touching USD1,834.04, the highest since 15 July. Bullion futures for December delivery climbed 1.2% to settle at USD1,833.70 on the Comex. Spot silver jumped 3.6%, while platinum and palladium also gained. – Bloomberg News.
The US Dollar Index fell 0.21% to 92.035, the euro added 0.04% to USD1.1880, the pound rose 0.27% to USD1.3871, and the yen strengthened 0.21% to 109.71 per dollar.