(30 JUNE 2020)DAILY MARKET BRIEF 1: Selective perception of risk.

(30 JUNE 2020)DAILY MARKET BRIEF 1: Selective perception of risk.

30 June 2020, 09:28
Jiming Huang

A robust 44% rebound in US pending home sales has been the major driver of gains in US equities on Monday. The data wiped out the Covid-19 concerns, pushing the Dow 2.32% up. The S&P500 gained 1.47% as Nasdaq ended the session 1.20% higher.

The Federal Reserve (Fed) Chair Jerome Powell sounded optimistic regarding the post Covid rebound in the US economy, but warned that the normalization may be happening too soon too fast and there is ‘extraordinary uncertainty’ regarding the virus advance, as the recent peak in new cases pushed some businesses to reconsider their decision to resume activity in the US. Powell’s optimistic but cautious stance was heard as a sign of empathy from investors, reassuring them that the Fed would continue giving the necessary support to the market. So far, the massive central bank intervention has helped reduce the tail risks in DM credit and rate markets notably, but the credit spreads remain at historically high levels and need to be monitored with caution.

Facebook recovered more than 2% although more leading names announced to halt advertisement on its social media platform, hinting that the company will be facing a sharp decline in its ad revenues from the third quarter. The FB share price retraced to December levels, and is expected to diverge negatively from the rest of the FAANG stocks on the back of rising idiosyncratic risks to its major revenue pillar.

Asian stock markets followed up on timid European and solid US advance. The Nikkei gained 1.79% and the ASX 200 rebounded 1.68% as the Reserve Bank of Australia’s (RBA) Debelle said that the borrowing costs will remain low until the full employment and 2-3% inflation target are reached, and more measures could be deployed if necessary.

Stocks in Hong Kong edged 0.89% higher despite news that the US suspended the city’s special status warning that the new national security law increases risks of doing business with Hong Kong, including the technology protection and other sensitive issues.

But more importantly, the controversies over the Hong Kong’s new national security law has a deteriorating effect on the trade relations between the US and China, as the world economy struggles with a devastating economic slowdown due to the coronavirus shock on both demand and supply side. While investors keep the US-China frictions on the back of their minds, the risks are not being reflected by the pricing in equities.

For now, investors maintain their focus on positive news.

By Ipek Ozkardeskaya

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