Summary and Price Action Rundown
Global risk assets are rallying to start the week with the progression of economic reopening and higher oil prices buoying sentiment, while Fed Chair Powell offered a more balanced assessment of risks in his commentary over the weekend. S&P 500 futures indicate a 1.7% higher open, which would pare last week’s 2.3% loss for the index that put year-to-date downside at 11.4% and the decline from February’s record high at 15.4%. Equities in the EU are outperforming this morning while Asian stocks were moderately higher overnight. Longer-dated Treasury yields continue to fluctuate above recent lows, with the 10-year yield at 0.65%. Meanwhile, the dollar is edging lower within its recent trading range. Brent crude prices are vaulting higher on upbeat reports of China’s oil demand recovery (more below).
Investors Parse Additional Commentary from Fed Chair Powell
Following a set of remarks last Wednesday that were taken by analysts as cautious and somber, Chair Powell’s interview on CBS which aired over the weekend featured a somewhat more balanced assessment of the economic risks and hinted at future easing strategies. Chair Powell warned that the economic rebound could be so slow as to stretch through the end of next year and that full recovery may require a vaccine. These dour assessments, however, were tempered by his statement that the US economy could “recovery steadily” through the second half of this year in the absence of a secondary wave of infections. On the outlook for monetary policy, Chair Powell reemphasized that “there’s a lot more” the Fed can do and that it is “not out of ammunition by a long shot.” He suggested that forward guidance and adjusting asset purchases might be the next policy levers the Fed would pull, with the full transcript of the interview revealing his continued lack of enthusiasm for negative interest rate policy (NIRP). Also, Chair Powell again hinted an endorsement of additional fiscal support for the economy. This comes after his remarks last Wednesday were characterized by analysts as broadly downbeat, calling the pandemic the “biggest shock to the economy in modern times” and noting that “there is a growing sense that the recovery may come more slowly than we would like” and thereby “turn liquidity problems into solvency problems.” This downside risk was highlighted in the Federal Reserve’s biannual Financial Stability Report, which was published on Friday, saying that adverse economic fallout from the pandemic rendered asset prices “vulnerable to significant price declines.” Chair Powell will again be in the spotlight this week when he testifies alongside Treasury Secretary Mnuchin before the Senate Banking Committee.
US-China Tensions Continue to Percolate
With rhetoric heating up on both sides, a hardening US stance against China on the tech and investment fronts, and threats of potential retaliation by Beijing, investors continue to ponder the ramifications of the re-intensifying friction. Over the weekend, White House advisor Peter Navarro again alleged Chinese malfeasance in dealing with the Covid-19 outbreak. Last week, the US Commerce Department moved to tighten restrictions on the supply of chips to Chinese IT giant Huawei, as Secretary Ross took to Twitter to criticize the company’s conduct. At the same time, however, the Commerce Department extended the licenses it has granted for US companies to do business with Huawei for another 90 days, but warned that this was likely the final extension. Chinese state media indicated that Beijing could retaliate against US companies through cybersecurity reviews, anti-monopoly measures, and placement on the “unreliable entities” list, as well as halting airliner purchases from Boeing. This followed Thursday’s interview in which President Trump indicated that he is focused on Chinese companies that are listed on the NYSE and Nasdaq but have not been subjected to US-standard accounting rules. Earlier last week, the US government retirement savings fund, the Thrift Savings Plan (TSP), suspended their upcoming move that would have allocated a portion of its holding to Chinese stocks in proportion to the weightings of the MSCI All Country World Index.
Additional Themes
Oil Prices Extend Their Rebound – After crashing to two-decade lows in late April, crude oil prices have staged a sharp rally off the lows amid hopes that a combination of supply cuts by OPEC and other major producers and improving demand amid economic reopening will help rebalance the oversupplied market. Reports this morning suggest that Chinese oil demand is back to pre-crisis levels after contracting nearly 20% earlier this year, with sources citing declining use of public transportation as helping boost usage. Last week marked the first time since February that US crude stockpile data registered a weekly drawdown.
This Week – The calendar for the coming days features global purchasing managers’ indexes, China’s interest rate decision, and minutes from the latest Federal Reserve meeting. Also, Fed Chair Powell and Treasury Secretary Mnuchin will testify before the Senate Banking Committee tomorrow, and Powell has another appearance on Thursday to discuss the impact of Covid-19.