Markets in Limbo Mode Again

The Catch Up

• Markets in Asia followed roughly the path of US equities yesterday, as they were mostly down, with investors in the tech sector getting a confidence boost after strong earnings by Microsoft, with still looking to the Federal Reserve's guidance on its monetary policy today.

• Performance was mixed in Asia with the ASX and KOSPI lossing 0.57% and 0.47% respectively while the Nikkei, CSI300 and the Hang Seng were up by 0.33%, 0.13%, and 0.18% due to the tech sectors. Stock index futures were in the red, with the US500 shedding 0.11% and the DAX losing 0.27%.

• Yesterday, all three major Wall Street indices were marginally down, on account of the stretched valuations observed in the markets. Still, Microsoft shares rose 4% in extended trading after its Azure cloud computing services grew more 50%. The results boosted optimism for other tech giants, including Apple and Facebook which will announce quarterly results later in the day.

• Analysts now appear even more optimistic about Microsoft and even comment that the company is likely to lead the market again. The top five US tech companies (Microsoft, Facebook, Apple, Amazon, and Alphabet) were around 24.6% of the total market cap of the S&P500 in August but have since dropped to 22.7%. The share is still higher than the 15% observed two years ago.

• At the moment, the S&P500 is trading at 22.7 times its expected earnings, near its September peak of 23.1 times, which was its most inflated level since the dotcom bubble in 2000. One cannot but wonder regarding the valuations are too high for them to be meaningful as traders have reflected these worries by engaging in profit-taking especially in cyclical shares.

• On the policy front. the US Federal Reserve is due to announce results of its two-day policy meeting later today, with analysts expecting it to remain dovish to help speed the economic recovery.

• On a similar topic, stimulus talks are also in focus with Senate Majority Leader Chuck Schumer saying Democrats will move forward on President Joe Biden's $1.9 trillion coronavirus relief plan without Republican support if necessary.

• The bond market was not reflecting the above though, as benchmark 10-year Treasuries traded at a yield of 1.040%, having hit a three-week low of 1.028% yesterday on rising speculation Biden may have to scale back and possibly delay his ambitious stimulus plan.

• The International Monetary Fund raised its forecast for global growth in 2021, as widely expected, and many investors expect the global economic recovery from the pandemic-driven downturn to continue.

• The top securities regulator in Massachusetts thinks trading in GameStop Corp stock, which skyrocketed for a fourth straight day, suggests there is something "systemically wrong" with the options trading surrounding the stock. GameStop has surged more than seven-fold to $147.98 from $19 since Jan. 12, spurring concerns over bubbles in stocks that hedge funds and other speculative players bet will fall in value.

• Profits at China's industrial firms grew for the eighth straight month in December, suggesting a sustained recovery. Profits surged 20.1% y/y in December, after rising 15.5% in November. China is the only major economy in the world to avoid a contraction in 2020, with gross domestic product up 2.3% for the full year. For the full year of 2020, annual profits for China's industrial firms grew 4.1%y/y.


Currencies

• The US Dollar did not move much, as investors await the Fed's decision for clues on whether they should buy riskier currencies.

• As a result, the Euro held firm at $1.2162, while Sterling rose to $1.3735, its highest level since May 2018 and the Japanese Yen edged back slightly to 103.71.

• Similarly, the Australian Dollar was little changed at $0.7744, showing muted response to stronger-than-expected local inflation data. On the other hand, the NZDUSD pair was slightly down.


Oil & Gold

• Oil prices rose today, after data releases showed that US stockpiles were down last week, while China, the world's second-biggest oil user, reported its lowest daily rise in Covid-19 cases, boosting hopes of a demand increase.

• WTI futures were up 0.4%, reaching 52.81 per barrel, while Brent crude futures were 0.3% higher, trading above the $56 per barrel mark.

• On the negative side, fuel inventories were up in the US, again promoting worries about fuel demand being anemic as long as the Covid-19 issue is not resolved.

• Gold prices continued to move lower, with futures of the precious metal moving to $1845 per ounce. Gold investors are awaiting for the US stimulus plan to go through the Senate as a hope that the metal's price will rise on account of higher perceived inflation.