Markets Jul 21

Vaccine, stimulus hopes give legs to rally

Asian markets are getting a lift from positive developments in trials for coronavirus vaccines and hope of more stimulus from the US and Europe

Vaccine, stimulus hopes give legs to rally
A health worker shows tubes with blood samples at the 32nd Zone General Hospital in the Mexican Social Security Institute (IMSS) in Mexico City on July 20, 2020. A vaccine to counter the coronavirus is unlikely to be available before year-end, analysts have said. Photo: Pedro Pardo / AFP.

(ATF) Financial markets are getting a leg up this morning from positive developments at trials for coronavirus vaccines and hopes of more stimulus from the US and Europe.

Japan’s Nikkei 225 benchmark has advanced 0.63%, Australia’s S&P ASX 200 is up 1.31% and CSI 300 has climbed 0.62%. Risk sentiment remains positive after Wall Street’s gains overnight as the Dow Jones Industrial Average edged up 0.03%, the S&P 500 gained 0.84% and the Nasdaq Composite jumped 2.51% to yet another record high, its seventh peak in July.

European Union leaders are on the verge of an agreement on a stimulus package whose size is still being debated – an earlier proposal was for 750 billion euros ($858 billion).

Investors are hoping for another round of US economic stimulus after congressional Republicans announced plans to seek another $1 trillion in coronavirus economic relief.

DBS Bank analysts said there was optimism built around the possibility that Covid-19 vaccines could be found by September and that the EU may be able to finally break the Recovery Fund deadlock with negotiations having spilled into the fourth day.

But they said there was reason to be cautious.

'Vaccine at year-end earliest'

“A vaccine is still seen only available by the end of the year at the earliest. Until proven wrong, it is hard to ignore the eventual drag on economic activities and potential loan losses at banks from the coronavirus resurgence, especially as earlier stimuluses that are due to expire become extended with less aggressive measures,” they said in a note.

DBS analysts also cautioned that the geopolitical landscape had also deteriorated, not only from US-China tensions, but also those between China and Australia, Canada and the UK. Opinions over the US elections scheduled for November have yet to coalesce into a game plan. For now, risk appetite is underpinned in the short-term, investors are still watchful for a summer correction after a four-month rally.

There is caution about a stimulus in the world’s largest economy.

“We see a risk of policy exhaustion, especially in the US. Additional unemployment benefits and small business support are set to expire, and states may be forced into austerity to close large budget shortfalls. We could see a $1-1.5 trillion fiscal package that extends some (but not all) federal stimulus measures through late-2020,” BlackRock said analysts in a report.

Credit markets are trading firm with the Asia IG index one basis point tighter at 76/77 bps and sovereign CDS moving in by 2-3 basis points. After China Huarong and GS Caltex priced deals overnight, ICBC InternationalState Power Investment Corp and Mirae Asset Daewoo are in the market with bond offerings.