Markets Aug 12

US stimulus stalemate slams markets

Gold crashes after mammoth rally; US Treasuries slide sending yields higher; US dollar firm

US stimulus stalemate slams markets
A healthcare worker carries a biohazard bag containing a test kit at a drive-in coronavirus testing centre on August 11, 2020 in Los Angeles. California reported 12,500 new cases after backlogged cases from a data glitch began appearing in the system. Photo: Mario Tama/ Getty Images/ AFP.

(ATF) An intensified US stimulus debate spooked investors as questions arose about the support to households, businesses, and the stock market.

“The possibility that US fiscal stimulus won’t be enacted this month – or even in September – is weighing on equity markets in the region. A gap higher in bond yields in the US overnight has also negatively impacted valuations,” Isaac Poole, CIO at Oreana Financial Services, said.

In Asia, Australia’s S&P ASX 200 eased 0.44%, Hong Kong’s Hang Seng index edged down 0.2% and South Korea’s Kospi was also marginally lower.

China’s CSI 300 underperformed the region with the benchmark tumbling 2.2% as the tech war with the US intensified.

A US executive order banning China's TikTok could prevent American app stores from offering the popular short-video app and make advertising on the platform illegal, documents showed.

Gold collapsed, registering its biggest fall in seven years falling to $1,880 per ounce and US Treasury yields gapped, with the 10-year yield rising 2 basis points to 0.655%.

This is giving a boost to the US dollar which has risen against a basket of currencies to 93.87.

Political blame game, US markets down

Overnight, US Senate Majority Leader Mitch McConnell blamed the Democrats for the stalemate.

“The Speaker and the Democratic Leader say they won’t allow another cent for families, schools, or the PPP unless they get a trillion-dollar state government slush fund, way beyond Covid needs,” he said in a tweet. “These unrelated liberal demands are blocking billions in aid that families need now.”

This triggered a sell-off in Wall Street and the weakness spilled into Asian trading.

“The sell-off in the final two hours was triggered by Senate Republican leader Mitch McConnell, who confirmed that there had been no new talks after Republican and Democrats failed to agree on the package last Friday,” DBS Bank strategists said in a note.

“The Senate was scheduled to start its summer recess on 7 August and return on 8 September.”

The Dow Jones Industrial Average fell 0.4%, the S&P 500 index slipped 0.8% and the Nasdaq tumbled 1.7%.

Covid risk spurring caution

Analysts are turning bearish on the recovery in the world’s largest economy as the re-openings could have come too soon amid a second wave of infections.

“The rising Covid-19 infections and deaths convinced several states to pause, or backtrack on, plans to re-open their economies,” Joel Prakken, IHS Markit's chief US economist, said.

“We also expect rising infections to encourage new caution by consumers and business independent of official measures to contain the virus, even as federal fiscal support wanes and state and local governments tighten budgets. Consequently, we revised down our forecast for growth in 2021 from 3.7% to 3.1%.”

Credit markets are trading weaker but primary markets remain busy with investors hunting for yields.  China Great Wall AMC issued a bond mandate , MTR Corporations set a greenbond price guidance, China Great Wall also announced an initial price guidance , Axiata Group unveiled price guidance for a two trancher, and Yunda Holdings came into the market with a bond guidance .