Morning Markets Brief 7-21-2020

Summary and Price Action Rundown

Global risk assets are advancing this morning after EU leaders cemented agreement on a historic pandemic relief bill, while investors continue to anticipate more impending US fiscal stimulus and monitor corporate earnings reports. S&P 500 futures point to a 0.7% higher open after the index turned positive for the year yesterday, registering a new high for the pandemic, while the Nasdaq jumped to a new all-time record high. Equities in the EU are outperforming following news of the budget deal while Asian stocks also moved higher overnight. The dollar is retreating further, while longer-dated Treasury yields are flat, with the 10-year yield at 0.62%. Brent crude prices are vaulting above $44 on the improving demand picture.

EU Leaders Strike Historic Fiscal Deal

EU assets are rallying on the completion of an unprecedented pandemic relief package that features key elements of fiscal federalism, alongside a broader multi-year regional budget deal. EU leaders agreed on a landmark stimulus package that will see the bloc issue €750 billion ($860 billion) of joint debt to help member states mitigate the ongoing economic downturn. The emergency fund will give out €390 billion of grants, which was reduced over the course of negotiations from the €500 billion figure originally proposed by in May, and €360 billion in low-interest loans. The deal was announced in a tweet from European Council President Michel, while French President Macron called it a “historic day for Europe” and German Chancellor Merkel expressed relief, saying “We have come up with a response to the biggest crisis the EU has faced.” Dutch Prime Minister Rutte, who took the hardest line among the so-called “Frugal Four” countries (Sweden, Denmark, Austria, and the Netherlands) secured an emergency brake that would allow any country to raise concerns that another was not honoring promises to reform its economy, and temporarily halt transfers of EU recovery money by Brussels.

Leaders also signed off on the EU’s next seven-year budget, which totals €1.074 trillion. The final compromise included budget rebates for the Frugal Four, reducing their annual net contributions. Denmark, Germany, the Netherlands, Austria, and Sweden will get more than €50 billion in rebates over the next budget cycle.

Of the emergency funding, Italy, the original EU epicenter of the pandemic, will likely be the biggest beneficiary from the plan and expects to receive about €82 billion in grants and about €127 billion in loans, according to initial estimates. Italy’s 10-year government bond yields are continuing to trend lower, along with borrowing costs in other southern European countries. Italy’s yield spread over German bunds, a key metric of Italian creditworthiness, is trading at 1.53 percentage points, its best level since February after trading nearly twice that level in March. Meanwhile, the euro is holding its recent gains versus the dollar and nearing its strongest level since January 2019. The Euro Stoxx index is 1.5% higher today, stretching its rally since mid-May to 24.1% and cutting losses for the year to 8.1%. EU bank stocks are leading to the upside this morning with a gain of 3.4%, though sector performance remains at a depressed -28.6% year-to-date.

Earnings Season Continues After Mixed Start

Analysts are gearing up for another busy week of second quarter (Q2) earnings reporting after last week’s first set of reports provided scant direction for stocks. The second week of Q2 earnings season began slowly yesterday with Halliburton and IBM the only notable results. The oil services giant impressed analysts with its cost control and pivot to international opportunities amid struggles in the US shale patch, lifting its shares 2.5% yesterday, while the tech stalwart topped earnings expectations with growth of its key cloud-computing business line, boosting its equity price 5.2% in pre-market trading. This morning, the calendar features results from Coca-Cola, Lockheed Martin, Synchrony Financial, and Philip Morris, while Capital One, United Airlines, Snap, and Texas Instruments report after the closing bell. Of the 52 S&P 500 companies that have issued results, a lofty 83.0% have topped earnings-per-share (EPS) estimates while 73.1% have beaten revenue projections. Still, the growth of sales and earnings remains down year-on-year, with declines of 3.7% and 21.5%, respectively, thus far.

Additional Themes

US Pandemic Relief Bill Negotiations Heat Up – House Speaker Pelosi and Treasury Secretary Mnuchin are scheduled to meet today as Senator McConnell and his Republican colleagues prepare to put forth their proposed stimulus package, estimated at $1.3 trillion. Negotiations are likely to be centered on enhanced unemployment benefits, which are set to expire at the end of this week, and provisions for state and local governments.

Biden Proposes “Caring Economy” – Former Vice President Biden unveiled the latest plank in his economic platform, which proposes $775 billion to support child and elderly care.