Morning Markets Brief 7-2-2020

Summary and Price Action Rundown

Global risk assets are advancing this morning ahead of US nonfarm payroll figures for June despite continued acceleration of US coronavirus infections. S&P 500 futures indicate a 0.7% higher open after the index gained another 0.5% yesterday, extending its three-day rally to 3.6% and paring its year-to-date downside to an equal 3.6%. The tech-heavy Nasdaq registered a fresh record high yesterday. Equity market volatility had remained elevated over recent weeks as Covid-19 resurgences impede reopening efforts in various hotspots in the US and around the world, but this week’s rally has thus far proven impervious to worsening pandemic data. Equities in the EU and Asia also continued higher overnight. The dollar is little changed ahead of nonfarm payrolls while longer-dated Treasury yields are steady, with the 10-year yield at 0.68%. Brent crude prices are rising above $42 per barrel on bullish US inventory figures.

Nonfarm Payrolls Expected to Show Continued Improvement

Buoyant equity markets are reflecting optimism for continued improvement in this morning’s release of US jobs figures for June, though Treasuries and the dollar remain unmoved. Today’s nonfarm payrolls data for June is being released a day earlier than usual due to the observed 4th of July holiday tomorrow. After consensus estimates for May’s reading proved wildly inaccurate, economists are forecasting roughly 3 million new jobs last month, up from 2.5 million in May, as last month saw a further loosening of lockdown restrictions allowing more businesses to open. For context, May was expected to show another 7.5 million in layoffs after 20.7 million jobs lost in April and the dramatic upside surprise sent US equities and Treasury yields higher, though both the S&P 500 and 10-year Treasury yields are now trading below the levels they closed on that day. The unemployment rate is expected to decline to 12.5% from 13.3% in May, an improvement but still residing at a historic high. Downside risks in the data remain however, as some economists have noted that stimulus-related impacts, which may not be replicated in June, may have partly fueled May’s nonfarm payroll gain. Yesterday’s private business employment numbers from ADP pointed to more job gains, indicating that 2.4 million workers were hired last month, falling short of consensus projections of a 2.9 million gain and dipping from May’s 3.1 million new jobs but still showing brisk pace of labor market healing. Today’s release of initial jobless claims for the week ending June 27th and continuing claims for the prior week are, however, expected to show only moderate improvement.

Fed Communications Point to Continuation of Ultra-Accommodative Policy

FOMC meeting minutes for June downplayed the probability of yield curve control (YCC) as an impending policy step in favor of strong forward guidance on rates. The FOMC minutes from the June 9-10th meeting were released yesterday, with analysts focused on indications that the Fed is strongly considering implementing forward guidance in the near term to augment asset purchases, but is cool to YCC as it weighs policy options to navigate the remainder of the coronavirus-induced recession. FOMC members generally indicated support for outcome-based forward guidance with variations tied to inflation, employment, or calendar-based guidance. Many participants remarked that so long as the Committee’s forward guidance remained credible on its own, it was not clear that there would be a need to reinforce forward guidance with the adoption of a YCC policy. Thus, the general consensus was that Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency MBS as more information about the trajectory of the economy becomes available. Additionally, FOMC members regarded sustained support from fiscal policy as important as highly accommodative monetary policy to facilitate a durable recovery, pointing to uneven improvements in consumer demand, a dearth of public infrastructure projects due to strained state and local government budget conditions, or the decline in energy prices as factors likely to depress business spending.

Additional Themes

Dismal US Covid-19 Data Tempered by Vaccine News – Yesterday, new US cases posted a new daily record over 50,000 with continued acceleration in hotspots like Florida, Texas, California, and Arizona. Worsening US pandemic data and news of reversed or paused reopening efforts, which continued yesterday with McDonalds and Apple announcing more closures, had recently weighed broadly on investor sentiment. However, optimism over prospects for a vaccine buoyed US equities yesterday after Pfizer and Oxford detailed progress in human trials.

Oil Prices Holding Gains – International benchmark Brent crude and US benchmark WTI remain near recent highs amid supportive US inventory data yesterday, which showed the largest drawdown this year. Earlier, oil prices had received a boost from an OPEC report showing improved compliance by cartel members with ongoing production cut commitments, taking OPEC output to its lowest level since May 1991 last month.

Morning Markets Brief 7-1-2020

Summary and Price Action Rundown

Global risk assets are settling lower this morning to begin third quarter trading on a cautious note as investors ponder the recovery outlook while awaiting key US data and more communications from the Federal Reserve. S&P 500 futures point to a 0.6% lower open after the index rallied another 1.5% yesterday, closing a positive second quarter of trading on an upbeat note and taking year-to-date downside to 4.0%. After the sharp rally from March lows topped in early June, volatility has remained elevated and US stocks have struggled for direction amid pronounced uncertainty over the interrelated economic and public health outlooks. Equities in the EU are down this morning while Asian stocks were mixed overnight. The dollar is moving higher while longer-dated Treasury yields are up from recent lows, with the 10-year yield at 0.68%. Brent crude prices are rising above $42 ahead of US inventory data.
Fed Accommodation in Focus Ahead of Meeting Minutes

Investors will parse the minutes of the June FOMC meeting for any additional insights on the policy outlook, particularly the Fed’s posture toward enhanced rate guidance or yield curve control. The Fed left its policy rate unchanged at 0-0.25% in the June 10th decision and no new policies were enacted, while the tone of the accompanying statement and Chair Powell’s press conference was decidedly dovish. According to the updated interest rate projections (the “dot plot”), all but two FOMC members expect that it will be appropriate to keep rates at zero through 2022. However, market participants were left uncertain regarding future policy maneuvers, with Chair Powell again only noting that forward guidance and yield curve control (YCC) are being considered, so the minutes will be scrutinized for signals on these points. Alongside the rate outlook, the Fed projected that the US economy will shrink 6.5% in 2020 but show a 5.0% gain in 2021 followed by 3.5% in 2022, with unemployment estimated to be 5.5% by the end of 2022. However, the range of forecasts is wide, with GDP for next year seen falling between -1% to 7% and unemployment from 4.5% to 12%, reflecting great uncertainty over the possible lingering impact of the virus. Yesterday, however, the tone of Chair Powell’s testimony before the House Financial Services Committee was more upbeat than his most recent communications during his Humphrey-Hawkins testimony before Congress last month and at his press conference following the June FOMC meeting, but re-emphasize the Fed’s commitment to use its “full range of tools” to support the recovery.

Uneven Global Economic Data Paints Mixed Picture of Recovery

China’s Caixin Manufacturing PMI for June unexpectedly rose to 51.2 in June from 50.7 the previous month, beating market consensus of 50.5 and tagging a six-month high. For context, PMI readings above 50 denote expansion in the sector. Output grew on the back of a renewed increases in new orders and buying levels rose the most since January 2018. On the other hand, export work continued to fall due to weak global demand. The Shanghai Composite posted a solid rally after these upbeat figures, though the renminbi remained stable versus the dollar. Contrastingly, the Bank of Japan’s Tankan index for large manufacturers’ sentiment plunged to an eleven-year low of -34 in the second quarter (Q2) from -8 in Q1, undershooting estimates of -31. For context, Tankan readings below zero indicate worsening conditions. Sentiment deteriorated the most among firms producing motor vehicles (-72 vs -17 in Q1). Still, large firms in Japan plan to raise their capital spending by 3.2%, up from 1.8% in the previous quarter and above a 2.1% expected decline. Among non-manufacturing large firms, sentiment tumbled to a 10-year low of -17 from 8 in Q1 and compared with expectations of -18. Meanwhile, German unemployment in June hit a five-year high of 6.4% and UK nationwide home prices fell 1.4% month-on-month in June after a 1.7% decline the prior month.

Additional Themes

FedEx Joins Pandemic “Winners” – Shares of the shipping bellwether are up 9.9% in pre-market trading after management issued better-than-anticipated earnings figures for their fiscal Q4 following yesterday’s closing bell. Cost savings in other areas offset increased spending on enhanced employee protection measures amid the pandemic while air cargo volume rose.

More Disheartening Covid-19 News – Economists from Goldman Sachs are estimating that 40% of the US has now halted or partly reversed reopening measures amid the resurgence of coronavirus cases in key hotspots. Yesterday, Texas recorded a new single-day high in cases while California registered its second highest daily tally. The EU will ban travelers from the US, while New York, New Jersey, and Connecticut have widened the number of states from which travelers will be required to quarantine for two weeks.

Morning Markets Brief 6-30-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight after key Chinese economic data outpaced expectations while investors await today’s testimony from Fed Chair Powell and Treasury Secretary Mnuchin. S&P 500 futures indicate a 0.1% higher open after the index rallied 1.5% to start the week following Friday 2.4% loss, taking year-to-date downside to 5.5%. After their steep rally from the April trough, US stocks have struggled for direction over recent weeks as concerns over resurgent coronavirus cases in various hotspots in the US and overseas dampen recovery optimism. Equities in the EU are modestly higher while Asian stocks rallied overnight. The dollar is edging higher while longer-dated Treasury yields remain flat, with the 10-year yield at 0.63%. Brent crude prices are fluctuating above $41 per barrel.

Powell and Mnuchin Testimony in Focus

The prepared remarks from the two officials released in advance of today’s testimony before the House Financial Services Committee both convey optimism in the outlook while advocating further stimulus. The tone of Chair Powell’s statement is more upbeat than his most recent communications during his Humphrey-Hawkins testimony before Congress earlier this month and at his press conference following the June FOMC meeting, but re-emphasize the Fed’s commitment to use its “full range of tools” to support the recovery. The remarks cite a faster-than-anticipated pace of economic “bounceback,” calling it an “important new phase.” However, in keeping with previous communications, the outlook is described as “extraordinarily uncertain” with recovery dependent upon reasonably successful public health outcomes. Thus, Chair Powell will again stress the need for continued accommodation, including his thinly veiled advocacy of additional fiscal stimulus measures. This comes as Congress and the White House are set to restart negotiations over the next pandemic relief package later this month amid considerable disagreement over the size and composition of the spending. Meanwhile, Treasury Secretary Mnuchin’s prepared remarks emphasize the speed of the recovery, citing one private sector estimate of a V-shaped rebound, but indicate that more support may be needed, particularly for hard-hit industries.

China’s Growth Data Shows Steady Improvement

The official reading of China’s purchasing managers’ index (PMI) for June was better than expected and signaled continued recovery from the depths of February’s contraction. The official manufacturing PMI in China unexpectedly rose to 50.9 in June from 50.6 in the previous month, topping consensus estimates of 50.4. For context, PMI readings above 50 denote expansion in the sector. This was the fourth straight month of increase in factory activity and reflected the strongest pace of expansion since March. The state statistics bureau said in its announcement of the PMI reading that supply and demand are starting to pick up, with the index for new orders rising for two straight months. The new export order sub-index, however, remained in deeply contractionary territory at 42.6. The service sector also showed improvement, as the official non-manufacturing PMI increased to 54.4 in June from 53.6 in the prior month, which is the level it was forecast to maintain. This marked the fourth consecutive month of growth in the service sector and the strongest acceleration since January. Still, analysts are wary that a recent resurgence of new coronavirus cases in Beijing and some surrounding cities threatens to weigh anew on the domestic services sector.

Additional Themes

Well Fargo Cuts Its Dividend – Last Thursday, the Fed released its Stress Test results for the “Too Big to Fail” banks in the US, which issued all passing grades but called on banks to halt share buybacks and put dividends under review on a bank-by-bank basis, based on strength of capital in a severely adverse economic situation caused by the coronavirus. After markets closed yesterday, each bank released their planned dividend for the third quarter and all but Wells Fargo were allowed to maintain their current dividend levels. Wells Fargo said the Fed’s assessment of its business will warrant a reduction to its quarterly payout, which was widely expected by investors. Wells Fargo had a per share dividend of 51 cents and simply gave the guidance that it will be reduced as they reassess the future payout. CEO Charlie Scharf stated that the bank expects to have second quarter results that “will include an increase in the allowance for credit losses substantially higher than the increase in the first quarter.” Shares of Wells Fargo are -0.7% in pre-market trading and have fallen 6.0% over the past week

Hong Kong in Focus – News overnight indicated that China has passed its controversial security legislation for Hong Kong. This followed news that the US Commerce Department is removing preferential treatment for certain sensitive exports to the territory as part of the progressive rollback of Hong Kong’s special trading status due to China’s encroachment on its autonomy.

Five Minute Macro 6-29-2020

Covid infection rates remain the main driver of risk this week, while The Fed Bank Stress Test enters the mix for the first time. Fiscal stimulus moves down to the third spot and Pressure on social media content enters at the fourth spot. Finally, US political uncertainty rounds out the top five.


Morning Markets Brief 6-29-2020

Summary and Price Action Rundown

Global risk assets were mixed overnight and investor sentiment remains fragile as the continued resurgence in US coronavirus cases clouds recovery hopes, while the Fed’s conservative stress test results added to the headwinds on bank shares. S&P 500 futures point to a 0.3% higher open after the index sank 2.4% on Friday to close a choppy week on a downbeat note, taking its week-to-date loss to 2.9%, month-to-date decline to 1.2% and year-to-date downside to 6.9%. After their steep rally from the April trough, US stocks have struggled for direction over recent weeks as concerns over resurgent coronavirus cases in various hotspots in the US and overseas dampen optimism. Equities in the EU are modestly higher while Asian stocks were mostly lower overnight. The dollar is slightly weaker while longer-dated Treasury yields flat, with the 10-year yield at 0.64%. Brent crude prices are holding above $41 per barrel as ongoing supply cuts provide support despite dimming recovery hopes.

US Bank Stocks in Focus Ahead of Dividend Announcements

Shares of major US financial institutions are attempting to rally in pre-market trading after posting sharp losses on Friday as conservative Fed stress test results limited dividend payouts, while sinking interest rates and a deteriorating growth outlook compounded the pressure. Last week, the Federal Reserve released its assessment of the cohort of 33 of the largest banks in the United States with a positive outlook, with all passing their stress tests. “The banking system has been a source of strength during this crisis, and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks,” said Fed Vice Chair Randal Quarles. Despite the banks’ ability to pass loan loss provisions, the central bank said it would impose dividend caps and a restriction on share buybacks in the third quarter of this year to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event,” disappointing some investors. In its summary of the coronavirus sensitivity analyses, the Fed said third-quarter dividend payments could “not exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters.” The Board is also requiring banks to re-evaluate their longer-term capital plans. Analysts estimate the new formula would affect Wells Fargo’s third quarter dividend, and then Goldman Sachs’s fourth quarter dividend payments so it can have a ‘stress capital buffer’ when new requirements commence in October. At the Fed’s request, individual banks had held off announcing their dividend plans until today. The selloff in US financials was pronounced on Friday, with an index of major bank stocks down 6.4%, as many investors who prioritized the banks’ premium dividends as their greatest appeal exit their positions.

Worsening Coronavirus Data Puts US Growth Outlook in Focus

Investors are awaiting Thursday’s release of June nonfarm payroll data after last week’s US economic data continued to suggest a recovery trajectory, though reversals in economic reopening are dampening optimism. Last week’s reading of US personal income for May dropped 4.2%, reversing last month’s 10.8% gain but beating consensus estimates of -6.0%. The drop was the largest since January 2013 and was mainly the result of the decrease in government social benefits as pandemic response payments from federal economic recovery programs declined from April. Meanwhile, personal spending shot up a record-high 8.2% month-over-month, slightly below estimates of 9% but reversing April’s record drop of 12.6%. For context, May data has been noisy but better than expected for key gauges such as nonfarm payrolls, retail sales, and durable goods orders, though weekly jobless figures remained worryingly high. On Thursday, US nonfarm payrolls for June will be released after the US economy unexpectedly added 2.5 million jobs in May, the most on record, beating expectations of an additional 8 million job losses after a record high of 20.7 million in April. Estimates are for the June reading to feature 3 million new jobs and a decline in the unemployment rate from 13.3% to 12.5%. The backdrop to this positive news, however, is a progressive rollback in US economic reopening measures amid spiking Covid-19 cases in various hotspots.

Additional Themes

Boeing Up on Max News –Dow futures are being supported this morning by a pre-market rally in Boeing stock following reports that the US government is greenlighting 737 Max test flights.

Social Media Pressured Over Content – More companies are announcing an advertising hiatus on Facebook, citing hate speech and divisive content on the platform. Starbucks, PepsiCo, and Diageo are among the latest to temporarily pull their advertising. Unilever, the consumer goods giant, said on Friday that it will halt US advertising on Facebook and Twitter for at least the remainder of the year, following the likes of Verizon, Patagonia, and North Face. Unilever is one of the largest advertisers in the world, spending $42.3 million on Facebook ads alone last year. Shares of Facebook and Twitter fell 8.3% and 7.4%, respectively, on Friday following the news and are 4.4% and 3.2% lower in pre-market trading this morning.

Morning Markets Brief 6-26-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as investors monitor US financial sector regulatory maneuvers and await more economic data. S&P 500 futures have been choppy again overnight but indicate a 0.2% higher open after yesterday’s late session rally pared the index’s year-to-date downside to 4.5% following Wednesday’s 2.6% drop. After their steep rally from the April trough, US stocks have struggled for direction over recent weeks as concerns over resurgent coronavirus cases in various hotspots in the US and overseas cloud recovery hopes. Equities in the EU are climbing as the European Central Bank pledges more stimulus, while Asian stocks were mostly higher as well. The dollar is flat while longer-dated Treasury yields are lower, with the 10-year yield at 0.67%. Brent crude prices are back above $41 per barrel as supply cuts and economic recovery hopes continue to provide support for oil prices.

US Bank Stocks Set for Choppy Trading Amid Regulatory Crosscurrents

Shares of major US financial institutions rallied after that announcement early yesterday that certain financial regulations would be loosened but are reversing those gains in pre-market trading after conservative Fed stress test results. US financial stocks gained yesterday on the news of easing restrictions on risk exposure ahead of the Federal Reserve’s stress test results, which were released after markets closed. Regulators finalized the latest revisions of the so-called Volcker rule, imposed under the 2010 Dodd-Frank Act, to let banks increase their dealings with venture capital funds. The regulators also scrapped a requirement that lenders hold margin when trading derivatives with their affiliates. The reversal of the inter-affiliate margin requirement for swaps trades could free up an estimated $40 billion for Wall Street banks, though regulators added a new threshold that limits the scale of margin that can be forgiven. The FDIC board passed the new rule in a 3-1 vote, along party lines. At the same time, the CFTC barred exchanges from disclosing cleared swap participants, so banks will lose the ability to learn the identities of counterparties in cleared swaps transactions. Overall, these expected rule changes helped boost sentiment on the sector ahead of the release of Fed stress test results, which were announced after markets closed and featured a more conservative approach than some investors had hoped. The Fed’s “most high-profile stress test since the financial crisis” this year included an extra coronavirus “sensitivity analysis” that resulted in a cap on dividends at the level of the second quarter and a extends the prohibition on stock buybacks until at least the end of the third quarter. Individual banks will reveal their specific figures on Monday. Although analysts suggest that this result is not surprising, shares of major banks are giving back a portion of yesterday’s rally in pre-market trading.

US Economic Data in Focus

After yesterday’s US economic data sent mixed signals, investors will closely parse today’s releases for any additional clarity on the trajectory of the recovery. May data has been noisy but better than expected for key gauges such as nonfarm payrolls and retail sales. Yesterday, May durable goods orders dramatically outpaced expectations, though weekly jobless figures remained worryingly high. Today, personal income and personal spending readings for May are due, with expectations for the April trends to flip, with income forecast to decline 6.0% but spending to rise 9.2% from the prior month’s respective prints of 10.5% and -13.6%. Also due is the Fed’s favored inflation metric, the Personal Consumption Expenditure (PCE) Price Index. In April Headline PCE decreased 0.5% month-on-month (m/m) and is projected to improve to 0%.

Additional Themes

Retail Rebound Re-Examined – Nike shares are down 3.4% in pre-market trading after management announced disappointing fiscal fourth quarter (Q4) results. Online sales for the athletic giant provided less of a cushion for the lost sales due to store closures than analysts had hoped. Both earnings and revenue deeply undershot estimates, with the former posting an unexpected loss. This comes after Nike stock had recouped all of its year-to-date losses while an ETF of consumer discretionary stocks is similarly trading 1.0% higher on the year.

Looking Ahead – The coming holiday-shortened week in the US, with the 4th of July being observed on Friday, is still going to feature major economic data as the US nonfarm payrolls for June will be released on Thursday. The US economy unexpectedly added 2.5 million jobs in May, the most on record, beating expectations of an additional 8 million job losses after a record high of 20.7 million in April. Estimates are for the US economy to have added 3 million new jobs and for the unemployment rate to drop from 13.3% to 12.5%. Additionally, minutes from the June FOMC meeting will provide more insight on the views of Fed officials as they held policy rates steady but maintained a downbeat outlook and projected zero interest rates for an extended period. Overseas, China’s June purchasing managers’ indexes will be in focus as economists ponder the trajectory of their recovery from the pandemic

Morning Markets Brief 6-25-2020

Summary and Price Action Rundown

Global risk assets were mixed overnight as the continued rise in coronavirus cases in various hotspots in the US and overseas undermines hopes for the economic rebound, with more key US labor market data due today. S&P 500 futures have been choppy overnight and indicate a 0.3% lower open after falling 2.6% yesterday, which erased most of last week’s rebound and deepened the index’s year-to-date loss to 5.6%. Equities in the EU are rebounding from yesterday’s underperformance while Asian stocks were mixed overnight, with a number of bourses closed for holidays. Amid the cautious market mood, the dollar is edging upward and longer-dated Treasury yields are lower, with the 10-year yield at 0.67%. Brent crude prices are back below $40 per barrel as estimates of US inventory data showed a bearish buildup.

Optimism for the Economic Recovery Wavers Amid Rising Coronavirus Cases

Investors are confronting the rising likelihood that progress toward reopening will be impeded or in some cases rolled back in order to contain the widening spread of Covid-19 infections in key hotspots in the US and overseas. Market sentiment deteriorated yesterday as the US posted its largest single-day increase in coronavirus cases since the outset of the pandemic, alongside other discouraging news on the public health front. Two weeks ago, US cases were rising at 20,000 per day but that tally has risen to 36,880 currently, topping the previous high on April 24, and 33 states are registering a higher seven-day average of new infections than they were two weeks prior. Meanwhile, state leaders in New York, New Jersey, and Connecticut announced that they will require a 14-day quarantine for anyone arriving from a coronavirus hotspot, while new record numbers of daily infections were reported in California (7,149), Florida (5,508), and Texas (5,551) and available ICU beds are dwindling in Houston, where Apple announced they are re-closing more stores. Disneyland in California has now delayed its scheduled reopening beyond July 17 with no new data given and New York is delaying its reopening of malls, movie theaters, and gyms. Governors and mayors remain generally resistant to reversing reopening efforts or imposing other more stringent restrictions, though Nevada and Miami are the latest locales to require use of masks in public. Overseas, reports are noting clusters of infections in Germany and Tokyo leading to re-imposed restrictions, while the UK prepares to forge ahead with its reopening plans slated for early July.

IMF Sounds a Cautious Note on the Global Economy

The IMF turned more negative on the global grows outlook while investors await more key US labor market data this morning. Following similarly downbeat projections from the World Bank and OECD in recent weeks, the IMF issued downgraded economic forecasts for 2020 yesterday, with global GDP moving from its estimate of -3.0% in April to -4.9% currently. The report also warned of the potential for “long-lasting negative consequences” for the global economy. The OECD issued its revised outlook earlier this month, calling for a 6% contraction in global growth this year, with its estimate for US GDP at -7% and the EU at -9%, and only a 5% rebound in 2021 for the worldwide economy. Similarly, the World Bank sees the global economy shrinking 5.2% for the year and warned of a more adverse scenario in which the global GDP contraction could be as high as 8%, with emerging market economies shrinking around 5% and an estimated sluggish 1% global recovery in 2021. Speaking earlier this week, World Bank Chief Economist Reinhart cautioned that a rebound should not be confused with a recovery and that returning to pre-pandemic income levels could take years. As investors continue to ponder the uncertain economic outlook, they will parse releases of US weekly initial and continuing jobless claims later this morning, as well as May durable goods orders.

Additional Themes

Fed’s Bank Stress Test Results Due – Investors will be highly attuned to these results for any ramifications for bank capital management, particularly share buybacks and dividends. For context, last year’s stress test included as its most severe hypothetical scenario a global recession resulting in $410 billion in total losses for the 18 participating institutions, the US unemployment rate rising by more than 6 percentage points to 10%, a major decline in real estate prices, and elevated stress in corporate loan markets. “The results confirm that our financial system remains resilient,” Vice Chairman Randal K. Quarles said at the time. The Fed has already said that this year’s stress test results will “include additional analyses that explore how plausible risks to the economy stemming from the coronavirus response could affect bank capital.” There remains a lack of consensus how severe the Fed makes their “additional analyses” of the coronavirus risks to the economy.

Oil Prices Battered by Rising US Inventories and Demand Fears – US crude stockpiles rose to a record high 540 million barrels last week according to the Energy Information Administration, while the resurgence in Covid-19 cases dampens the demand outlook.

Morning Markets Brief 6-23-2020

Summary and Price Action Rundown

Global risk assets are higher this morning amid upside surprises in key global economic data following some volatility overnight induced by a miscommunication over the US-China Phase One trade deal. S&P 500 futures indicate a 0.7% higher open after the index recouped Friday’s losses yesterday to pare its year-to-date downside to 3.5%. Equities in the EU and Asia were mostly higher overnight after White House officials and President Trump scrambled to clarify the administration’s position on the US-China trade deal (more below). The dollar is continuing lower, while longer-dated Treasury yields edging higher, with the 10-year yield at 0.73%. Crude oil prices are advancing to new multi-month highs amid OPEC supply cuts and demand hopes.

Miscommunication on US-China Trade Roils Markets Overnight

White House trade advisor Navarro’s remark last evening that the Phase One trade deal was “over” sent global risk assets into a tailspin, prompting swift clarifications from President Trump and National Economic Council Director Kudlow. In answering a question on the President’s posture toward the US-China Phase One trade deal last night during an interview on Fox News, Navarro stated that “It’s over,” which was seized upon by traders as signaling a White House repudiation of the deal. S&P 500 futures fell precipitously, losing 1.9% as the news reverberated across global financial markets. Shortly thereafter, NEC Director Kudlow disputed Navarro’s statement and reaffirmed the US commitment to the Phase One trade deal, after which President Trump tweeted that the accord is “fully intact” and expressed his hope that China would honor its commitments thereunder. Navarro later walked back his comment, stating that his answer was “taken wildly out of context” and that he was not referring to the Phase One trade deal, indicating that he was instead trying to make a point about the lack of trust between Washington and Beijing.

Global Growth Indexes for June Outperform Expectations

With investors focused on the prospects for a near-term rebound in the global economy, today’s broadly upbeat preliminary June purchasing managers’ indexes (PMIs) are fueling more optimism this morning. The initial readings of June manufacturing and service PMIs in Australia, Japan, France, Germany, the EU, and UK were all released overnight and painted a generally more positive picture than economists had anticipated. US readings are due later this morning. While the gauges were expected to show continued improvement from April’s historical depths of contraction, most were expected to stay in retrenchment mode, which is consistent with PMI readings below 50. However, France moved into expansionary territory in both the services and manufacturing components of its June PMIs, registering 50.3 and 52.1, respectively, versus estimates of 45.2 and 46.0. Germany’s rebound was not as robust but still outpaced forecasts, with services and manufacturing at 45.8 and 44.6 whereas consensus expectations had been 42.3 and 42.5. The EU-wide readings of 47.3 for services and 46.9 for manufacturing similarly topped estimates. In the UK, manufacturing surprisingly edged into expansionary mode at 50.1 and beat expectations of 45.0 while services jumped to 47.0 versus the 40.0 forecast. Overnight, Australia’s PMI readings also leapt higher, with services hitting 53.2 and manufacturing at 49.8 though Japan’s figures were less impressive, with manufacturing stagnating further from the prior month at 37.8 and services improving from May but remaining deeply depressed at 42.3.

Additional Themes

Coronavirus Hotspots Remain a Concern – Analysts are awaiting today’s testimony before Congress by White House public health advisor Dr. Fauci, who has made cautious statements on the current state of the pandemic, contrasting with the more upbeat tone from other Trump administration officials. Meanwhile, the governor of Texas yesterday called the current Covid-19 outbreak in his state “unacceptable” and that it “must be corralled” but said a return to lockdowns were the “last option.” Governor Abbott, however, did concede that “additional measures” could be needed if the adverse trends continue, and he urged residents to wear masks in public and abide by social distancing guidelines. For context, investor optimism over the process of economic reopening has been clouded by surging cases in states like Florida, Texas, and Arizona, which have moved swiftly ahead with reopening plans. However, the unwillingness of state leaders to re-impose significant additional restrictions has helped boost market spirits in spite of the public health consequences.

Oil Prices Extend Their Uptrend – After OPEC and its allies (known collectively as OPEC+) reaffirmed their commitment to the ongoing supply cuts and laggards signed on for compensatory reductions, reports this morning indicate that more cartel members are submitting details to show compliance. For context, the total coordinated output curbs of 9.7 million barrels per day are set to run through the end of next month.

Five Minute Macro 6-22-2020

Covid resurgence remains the main concern of markets while Fiscal stimulus moves into the second spot. US Political uncertainty moves into the third spot and Cooling US-China relations takes the fourth spot. Finally OPEC supply cut compliance enters at the fifth spot.

Morning Market Brief 6-22-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning amid ongoing concerns that the Covid-19 resurgence will impede reopening plans, while analysts are noting various China-related headlines. S&P 500 futures point to a choppy open after the index struggled for direction last week and closed Friday on a downbeat note to take its year-to-date loss to 4.1%. Equities in the EU and Asia were mixed overnight in muted trading, with the Hong Kong index underperforming on news regarding China’s impending security law for the territory (more below). The dollar is slightly lower, while longer-dated Treasury yields are flat, with the 10-year yield at 0.69%. Crude oil prices are hovering near three-month highs after last week’s OPEC compliance review reaffirmed the cartel’s commitment to supply curbs.

Coronavirus Concerns Keep Investors on Edge

A steady drumbeat of worrisome figures suggests that coronavirus resurgences could impede reopening plans. US equities surrendered early gains on Friday and then dipped into negative territory after Apple announced that it would be temporarily re-closing some of its stores in developing Covid-19 hotspots like Florida and Arizona. That ended a week of generally positive developments on a sour note, and global risk assets remain choppy this morning after the weekend brought more concerning news on the pandemic. The infection data continues to worsen in some areas, with seven states registering new record high cases, though the previous epicenter of the US outbreak, New York City, is showing low and stable transmission rates that have allowed the Phase 2 of reopening to commence this week. Oklahoma is among the burgeoning hotspots, which had raised concerns about President Trump’s campaign rally in Tulsa over the weekend that was held in an indoor arena. Also, shares of cruise lines slid on Friday as operators disclosed that they would voluntarily cease all voyages from US ports until September 15. Thus far, however, no mass lockdowns have been re-imposed in the US. Overseas, cases are continuing to rise in Germany after the EU’s largest country escaped the worst of the initial wave, while reports of another outbreak in Rome are also being noted by analysts, and Australia’s state of Victoria extended its state of emergency for another four weeks. On a more positive note, reports from China indicate that the recent outbreak that resulted in re-imposed restrictions in some areas of Beijing is slowing.

Investors Note China Headlines

Though market reactions have been modest, China-related developments are providing little cheer to investors this morning. Over the weekend, the People’s Bank of China retained its interest rates as expected and provided no indication that it is set to deviate from its current wait-and-see approach. Analysts have noted the steady climb in Chinese bond yields since their springtime low, which is in sharp contrast with most developed market sovereigns. For context, the US 10-year Treasury yield is languishing barely 15 basis points above record lows at 0.69%, whereas China’s 10-year yield is 2.92% after having risen 44 basis points since April. Meanwhile, on the US-China relations front, analysts are noting headlines that China has banned chicken imports from a particular Tyson’s plant that suffered a coronavirus outbreak, with this coming just a week after China reportedly reaffirmed its US farm good purchase commitments under the Phase One trade deal. Also, the US has rejected Beijing’s proposal on increased flight routes for Chinese carriers unless some reciprocal changes are made. Neither of these developments are considered a serious escalation of US-China tensions but keep attention on the frayed relationship. Lastly, Hong Kong’s benchmark Hang Seng stock index underperformed overnight as China confirmed that the new security law it is imposing on the territory explicitly allows Hong Kong laws to be overridden in some cases. The Hang Seng slipped 0.5% to extend its year-to-date (ytd) underperformance against regional peers to -13.1%, with the Nikkei down 8.3% ytd and the Shanghai Composite only 2.8% lower by comparison.

Additional Themes

Bank of England Policy Pivot – After meeting market expectations for additional quantitative easing but keeping interest rates on hold at last week’s BoE meeting, Governor Bailey indicated in an op-ed today that he would focus on shrinking the central bank’s balance sheet before commencing with rate hikes. Gilts and the pound are rallying on this dovish shift.

Geopolitical Tensions Remain a Backburner Issue for Markets – Concerning developments in Libya over the weekend, as Egypt threatened to intervene in that civil conflict, are having scant apparent impact on oil prices this morning. Meanwhile, investors continue to monitor the situation on the Korean peninsula after a week of bellicose rhetoric from Pyongyang, which prompted South Korea to vow retribution for continued provocation. The Korean won fell another 0.5% overnight, though disappointing export figures were another headwind, as the currency has lost 2.0% versus the dollar since North/South tensions flared.