Morning Markets Brief 8-3-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight with some solid economic data supporting sentiment despite ongoing US-China tensions, while last week’s strong earnings from IT giants look set to extend US equity gains despite uncertainty over the latest US pandemic stimulus bill. S&P 500 futures point to a 0.5% higher open after the index rose 0.8% on Friday to put gains for the week at 1.7%, moving further into positive territory for the year but staying just shy of mid-July’s peak for the pandemic. The tech-heavy Nasdaq is poised to extend its outperformance. Equities in the EU and Asia posted gains overnight. The dollar downtrend is pausing again this morning and longer-dated Treasury yields are rising from their lowest levels since early March, with the 10-year yield at 0.55%. Brent crude prices are turning lower toward $43 per barrel as traders remain wary of rising OPEC output amid ongoing demand weakness.

Agreement on US Pandemic Relief Bill Remains Elusive

Congressional leaders and Trump administration officials continued negotiations over the weekend, but the sides remain stalemated over the issues of enhanced unemployment benefits. With the additional $600 per week in jobless benefits mandated by the CARES Act officially expiring on Friday, apparent urgency on both sides of the aisle to find a deal has not yet borne fruit. The need for extending some degree of augmentation is widely acknowledged but Treasury Secretary Mnuchin over the weekend continued to reiterate the position of Congressional Republicans and the White House that $600 is too generous and disincentives beneficiaries to return to work, while Speaker Pelosi indicated on Sunday that Democrats are united in pushing to retain that amount. Late last week, White House officials offered an extension of the $600 benefits for one week, and again suggested separating this issue from the larger stimulus package, a proposal that Democrats rejected, in keeping with their ongoing resistance to a piecemeal approach to the relief bill. House Speaker Pelosi, Senate Minority Leader Schumer, Secretary Mnuchin, and White House Chief of Staff Meadows are reportedly set to meet again today. House Majority Leader Steny Hoyer has canceled the House’s August recess until an agreement is reached, while the Senate is set to enter recess on August 7th. Meanwhile, Senator Romney and a group of other Republican Senators have proposed a 3-month extension to the expanded benefits that would allow states the option of a gradually decreasing flat rate ($500 in August, $400 in September, etc.) or replace 80% of a worker’s usual wages. States would also be allotted $2 billion to update unemployment insurance systems to facilitate the targeted wage replacement.

US-China Tensions Flare Over Social Media

After President Trump indicated that he would move to ban a Chinese-owned social media platform from the US, investors are pondering the ramifications of the decision. In the latest escalation of friction between Washington and Beijing, President Trump ordered ByteDance, the Chinese owners of popular but controversial video-sharing app TikTok, to exit its US operations on Friday. Over the weekend, amid expressions of interest by Microsoft to purchase TikTok’s business lines in the US, Canada, Australia, and New Zealand, the White House set an unofficial deadline until September 15th for the deal to be finalized. For context, TikTok has been criticized by US officials and a number of its US competitors for censorship, alongside allegations of ties to the Chinese military. Its 2017 purchase of another app that helped launch its popularity in the US is still under review by the Committee on Foreign Investment in the United States (CFIUS), which is Chaired by Treasury Secretary Mnuchin.  TikTok has 165 million users in the US and 2 billion worldwide. Regarding potential retaliation, Beijing has limited options for a directly proportionate response given that it already bans Facebook, Twitter, and Google. Over the weekend, Secretary of State Pompeo indicated that other Chinese-owned software platforms would also be facing restrictions.

Additional Themes

Earnings Season Rolls On – The busiest and most consequential period of second quarter (Q2) earnings season has concluded, featuring dramatic outperformance by US tech giants Apple, Amazon, and Facebook last week. However, this week still features some meaningful reports, including companies that have faced notable impacts from the pandemic. Tyson Foods, Clorox, Allstate, Prudential, Walt Disney, Wynn Resorts, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak, AMC Entertainment, and Norwegian Cruise Lines are among the headliners this week. With 313 of S&P 500 companies having reported, 85.0% of results have featured a positive earnings-per-share (EPS) surprise and 66.4% have topped revenue estimates. However, growth of sales and earnings are down 11.8% and 10.4%, respectively, thus far year-on-year.

July PMIs Reflect Recovery – China’s privately-compiled manufacturing purchasing managers’ index (PMI) for July registered 52.8 versus a forecast of 51.1 and the prior month’s 51.2 reading. Meanwhile, the final readings of EU and Japanese manufacturing PMIs were revised higher from their preliminary estimates released last month, though the latter remained in contractionary territory. For context, PMI readings above 50 denote expansion of the sector. US PMIs for July are due later this morning.

Morning Markets Brief 7-31-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight after strong earnings reports from US tech giants, though investors note mixed economic data and uncertainty over the latest US pandemic stimulus bill. S&P 500 futures indicate a 0.3% higher open as this week’s meandering price action continues, with the index holding in slightly positive territory for the year but remaining below last Wednesday’s peak for the pandemic. Equities in the EU and Asia mostly gained overnight. Ongoing dollar weakness is pausing this morning, but longer-dated Treasury yields are still sinking, with the 10-year yield at 0.54%, its lowest level since early March. Brent crude prices continue to hover above $43 per barrel as demand concerns remain a headwind.

Tech Stocks Lead Higher After Strong Earnings

Amid the busiest stretch of second quarter (Q2) earnings season, tech outperformance keeps rolling following yesterday afternoon’s strong results from IT giants. After the market close, Apple, Amazon, Google, and Facebook all reported impressive earnings and revenues, beating estimates across the board and their shares are mostly higher in pre-market trading. Amazon topped expectation for massive revenue growth from e-commerce, while Apple outpaced revenue and iPhone sales estimates. Analysts were focused on how a reduction in ad spending affected Facebook and Google in Q2 and the initial stock reactions are positive for Facebook, though Google is lagging this morning. While the S&P 500 index has been struggling to remain within positive year-to-date territory, the outperformance of tech stocks has remained near recent extremes despite some modestly corrective activity in recent weeks. Shares of Amazon, Apple, Facebook, Netflix, Google, and Microsoft are up 65.2%, 31.0%, 14.3%, 50.1%, 14.5%, and 29.3%, respectively, year-to-date. By contrast, indexes of US financials, industrials, and materials stocks are -23.1%, -10.3%, and -4.2% on the year. Thus far, aside from spurring more lopsided gains for IT giants, Q2 earnings has provided little overall direction to the broader indexes despite a high degree of upside surprises over sales and profit forecasts. With 305 of S&P 500 companies having reported, 84.4% of results have featured a positive earnings-per-share (EPS) surprise and 66.9% have topped revenue estimates. However, aggregate growth of sales and earnings are down 9.7% and 11.2%, respectively, thus far year-on-year.

Global Economic Data Reflects Uneven Recovery

After yesterday’s release of US Q2 GDP, which showed a historically steep contraction, and further deterioration in labor market indicators, economic data from around the world showed a mixed picture overnight. Chinese manufacturing surprised with yet another month of growth in July over expectations of a minor softening. The manufacturing PMI in China unexpectedly rose to 51.1 from 50.9 in the previous month, compared with market estimates of 50.7. A total of 17 out of the 21 industrial sectors recorded PMIs above the 50 threshold for expansion, compared with only 14 sectors recording growth in June. This was the fifth straight month of increase in factory activity and the strongest since March, as the mainland economy continues to recover after the government lifted strict lockdowns and ramped up investment. Meanwhile non-manufacturing PMI edged down to 54.2 from 54.4, the fifth consecutive month of growth in the service sector as sentiment strengthened markedly. Also in Asia, Japan’s consumer confidence index rose slightly in July, improving for a third straight month to its best level since March, but a recent surge in coronavirus cases suggest a murky outlook for the economy. In the EU, GDP contracted sharply in Q2, underperforming the US with a decline of 12.1% over the prior quarter and down 15.0% year-on-year (y/y). Regional inflation for July remained soft at 0.4% y/y but above forecasts of 0.2%. The euro is slightly lower this morning but remains near its strongest level versus the dollar in over two years. Later this morning, June US personal spending and income data, along with the Fed’s preferred inflation metric, are due.

Additional Themes

Unemployment Benefits in Focus as Congress Debates Relief Bill – Negotiations continue to drag on in Washington over the Republican HEALS Act as augmented unemployment benefits are set to expire today. The wrangling is centered around the amount of these unemployment benefits, as well as over aid for states and localities to bolster their budgets.

Looking Ahead – Next week, the calendar features potentially market-moving US economic data, with July nonfarm payrolls in the spotlight amid consensus estimates of 1.6 million jobs added after June’s 4.8 million, though estimates vary widely and even range into negative territory. Also on the calendar are US purchasing managers’ index readings for July, which will be scrutinized for signs of backsliding amid the resurgence of Covid-19 in various states around the country. The Bank of England and Reserve Bank of Australia also meet next week. The continuation of Q2 earnings season will bring reports from Tyson Foods, Clorox, Allstate, Prudential, Walt Disney, Wynn Resorts, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak, AMC Entertainment, and Norwegian Cruise Lines.

Morning Markets Brief 7-30-2020

Summary and Price Action Rundown

Global risk assets turned lower overnight ahead of the busiest day of corporate earnings season, which will feature reports from IT giants, while investors mull yesterday’s Federal Reserve decision, await key economic data, and monitor wrangling on Capitol Hill over the latest pandemic stimulus bill. S&P 500 futures point to a 1.3% lower open after yesterday’s 1.2% rally took the index back into slightly positive territory for the year as it continues to fluctuate below last Wednesday’s peak for the pandemic. Equities in the EU and Asia also retreated overnight. The ongoing dollar downtrend is pausing today, while longer-dated Treasury yields are sinking, with the 10-year yield at 0.55%, its lowest level since early March. Brent crude prices are sliding below $43 per barrel amid demand concerns.

Federal Reserve Remains Focused on Downside Risks

With policy settings remaining unchanged as expected, investors focused on the resolutely dovish tone of accompanying communications and the Fed’s commitment to extend its ultra-accommodative policies, which further depressed Treasury yields and the dollar. The FOMC voted unanimously to maintain policy rates in a range of 0-0.25%, matching market expectations, but the dovish atmospherics weighed on Treasury yields across maturities, pulling 10-year Treasury yields to their lowest level since early March. Sliding interest rates, along with the Fed’s dim growth outlook, sent a broad dollar index to its lowest level in nearly two years yesterday, although it steadied overnight. The accompanying statement reiterated the Fed’s commitment to use its “full range of tools to support the US economy in this challenging time” and to achieve the objectives of its dual mandate, namely full employment and price stability at 2% inflation. Regarding the anticipated policy pivot this fall, the Fed’s communications provided only hints, with Chair Powell indicating that any enhanced guidance would be referenced to existing policy frameworks. On the timing, he noted that the FOMC was still conducting its monetary policy strategy review but would conclude in the “near future,” suggesting that the September meeting would be the venue for rollout. Chair Powell also stated that the Fed will sustain its historic easing until confident economy has “weathered recent events.” In the meantime, he “thinks the most central fact or the most central driver of the path of the economy is the virus,” and as such “in the broad scheme of things, there will be a need both for more support from [the Fed] and more fiscal policy.” In the near term, Chair Powell said the Fed does not see inflation on the horizon yet, calling the pandemic “a disinflationary shock” though he noted that “there’s a lot of discussion over how this might lead to inflation over time.”

Equities Fluctuate Ahead of Key Earnings Releases

Amid the busiest stretch of second quarter (Q2) earnings season, US stocks continue to alternate between gains and losses this week, with caution reemerging ahead of today’s consequential reports. With Q2 earnings season thus far sending mixed messages amid a high degree of upside surprises on headline numbers but lackluster details and guidance, today’s bevy of reports from high-flying tech giants and an array of other corporate bellwethers could provide greater directionality to the broader stock indexes. The spotlight is on Apple, Amazon, Google, and Facebook, all of which report after the closing bell. Shares of these four tech giants all rallied 1-2% yesterday despite already lofty valuations and the grilling their CEO’s received before the House Judiciary Committee on antitrust, data privacy and anticompetitive practices. Other companies issuing results today include UPS, DuPont, Eli Lilly, Comcast, Valero Energy, Proctor & Gamble, Mastercard, and Yum! Brands before the opening bell, with reports due from Ford, Shake Shack, US Steel, Expedia, MGM Resorts, Caterpillar, and Exxon Mobil alongside the tech giants after markets close. Yesterday, AMD was a standout performer, capitalizing on the travails of its competitor Intel, while Starbucks also impressed analysts despite a revenue plunge. Results from traditional economy bellwethers GM, GE, and Boeing, however, were less upbeat and shares of all three retreated following their releases. With 229 of S&P 500 companies having reported, 83.4% of results have featured a positive earnings-per-share (EPS) surprise and 65.5% have topped revenue estimates. However, aggregate growth of sales and earnings are down 9.6% and 14.2%, respectively, thus far year-on-year.

Additional Themes

US Economic Data in Focus – GDP for Q2 is expected to plummet 34.5% after a 5.0% Q1 contraction, although estimates range from -25% to -40%. Meanwhile, after last week’s tally of initial jobless claims increased for the first time since March, another increase is expected in today’s reading of new filings for the week ending July 25th, from 1.416 million to 1.445 million.

EU Growth Figures Meet Expectations – German GDP was slightly worse than expected, contracting 10.1% quarter-on-quarter versus a -9.0% forecast, following a 2.0% retrenchment in Q1. EU economic confidence gauges were relatively steady. The euro is dipping just below two-year highs versus the dollar.

Morning Markets Brief 7-29-2020

Summary and Price Action Rundown

Global risk assets are modestly positive this morning amid the ongoing barrage of major corporate earnings reports, while investors await a Federal Reserve decision and monitor wrangling on Capitol Hill over the latest pandemic stimulus bill. S&P 500 futures indicate a 0.2% higher open after yesterday’s decline took the index back into slightly negative territory for the year, while choppiness continued in the tech-heavy Nasdaq. Equities in the EU and Asia were mixed overnight. The dollar is extending its downtrend, while longer-dated Treasury yields are edging up, with the 10-year yield at 0.59%. Brent crude prices are up toward $44 per barrel.

Federal Reserve Decision in Focus

Though no major changes are expected to current monetary settings, analysts will be highly attuned for any signals on impending policy shifts at the September meeting. In a bit of housekeeping yesterday, the Fed announced it would be extending its credit lending facilities through the end of the year. The myriad of facilities originally set to expire at the end of September will now run through to 2021. Later today, at the conclusion of the July meeting, the FOMC will release its key interest rate decision, with no change expected again. At the June meeting, the Fed left the target range for its federal funds rate unchanged at 0-0.25%, matching market expectations. However, the accompanying communications were more dovish than anticipated, and all but two of the FOMC participants expected it would appropriate to keep rates at zero through 2022. Meanwhile, the Fed reinforced its commitment to maintain “smooth market functioning” by promising to maintain its Treasury and mortgage purchases “at least at the current pace” of $80bn Treasuries and $40bn of mortgage backed securities (MBS) a month “over coming months,” as opposed to the open-ended period of the pandemic response in April minutes, easing from its peak of purchasing $300 billion in securities during the early days of pandemic-related shutdowns in the US. With interest rates and quantitative easing likely to remain steady, the focus will be on any additional information on a potential pivot to enhanced guidance or perhaps even some degree of specific yield-curve control at the September meeting. Additionally, the Fed Chair Powell will likely continue to advocate for augmented fiscal support to underpin the expansion.

Earnings Convey Mixed Messages

Amid the busiest stretch of second quarter (Q2) earnings season, caution took hold yesterday after a decidedly mixed set of results as analysts brace for key releases from IT giants and other household names later this week. Yesterday featured the earnings releases before the opening bell from 3M, DR Horton, Pfizer, Raytheon, JetBlue, and McDonalds, which reflected widely varied performance. On the downside, 3M, McDonald’s, and JetBlue missed on earnings consensus estimates, though the latter two beat depressed revenue projections. Industrial conglomerate 3M had the worst share price response, losing 4.8% after reporting a plunge in demand across its business lines and an organic revenue decline of 13%. McDonald’s saw store sales drop 24%, though noted its drive-thru and delivery performance offset major losses. Its shares fell 2.5%. DR Horton, Pfizer, and Raytheon all beat earnings and revenue projections for the second quarter, though only Pfizer stock managed to rise as the others were hit by profit-taking. After yesterday’s closing bell, Visa, Starbucks, Aflac, eBay, and AMD also reported mixed results, though AMD and Starbucks outperformed notably, sending their shares higher in pre-market trading. With 194 of S&P 500 companies having reported, 83.5% of results have featured a positive earnings-per-share (EPS) surprise and 65.8% have topped revenue estimates. However, aggregate growth of sales and earnings are down 8.7% and 14.9%, respectively, thus far year-on-year.

Additional Themes

Strategic Government Support Lifts Kodak – Amid increased urgency from the pandemic, the Trump administration’s policy push to re-shore strategic manufacturing from overseas took a step forward. Eastman Kodak stock jumped 207.6% yesterday after soaring over 300% at the outset of trading after it was announced that the company had received a $765 million government loan to expedite domestic production of drugs for several medical conditions. The loan is reportedly part of an effort to reduce US reliance on foreign sources of medication and drugs according to the International Development Finance Corporation (the successor to the Overseas Private Investment Corporation). The loan has been issued under the Defense Production Act. The loan has a 25-year term and is estimated to create around 350 jobs.

Pandemic Relief Bill Negotiations Grind Onward – With the battle lines drawn over key issues such as augmented unemployment benefits, aid for states and municipalities, and relief for renters, House Speaker Pelosi, Senate Minority Leader Schumer, Treasury Secretary Mnuchin, and White House Chief of Staff Meadows have been meeting. Though all are aiming for a package by the end of the week, concerns about timeline slippage are growing. Both the House and Senate appear poised to wait until agreement to try to pass anything further.

Morning Markets Brief 7-28-2020

Summary and Price Action Rundown

Global risk assets have turned lower this morning amid a slew of major corporate earnings reports, while investors monitor wrangling on Capitol Hill over the latest pandemic stimulus bill. S&P 500 futures point to a 0.3% lower open after yesterday’s rally took the index back into positive territory for the year but fell short of last Wednesday’s peak for the pandemic. The tech-heavy Nasdaq erased last week’s rare underperformance with a 1.7% rally yesterday but is wavering this morning. Equities in the EU and Asia were mixed overnight. The dollar continues to sink lower versus its peers, while longer-dated Treasury yields are steady, with the 10-year yield at 0.61%. Brent crude prices are holding above $43 per barrel.

This Week’s Corporate Earnings Barrage Begins

US equities have been broadly supported but struggling to make upside headway during the first two weeks of second quarter (Q2) earnings reporting, as analysts await this week’s set of results featuring major tech giants and other US corporate bellwethers. With last week marking the first third of S&P 500 companies to report Q2 earnings, analysts are still groping for consistent themes heading into this week’s major lineup of results. With 155 of S&P 500 companies having reported, 84.8% of results have featured a positive earnings-per-share (EPS) surprise and 67.8% have topped revenue estimates. Both percentages place higher than their respective five-year averages. However, aggregate growth of sales and earnings are down 7.8% and 15.1%, respectively, thus far year-on-year. Today, Visa, Pfizer, McDonald’s, 3M, Starbucks, AMD, Chubb, eBay, Aflac, and DR Horton report. Pre-market releases have been mixed, with 3M undershooting earnings estimates and McDonald’s posting a steeper-than-expected decline in sales, while Pfizer and Raytheon both topped consensus forecasts. Among the later reports, Visa’s payments volume will be in focus, and DR Horton will provide insights on the US housing market, which has displayed great resiliency thus far during the pandemic. The rest of this week’s calendar features reports from major industry bellwethers, including GE, Boeing, GM, Qualcomm, PayPal, Facebook, UPS, Yum! Brands, Comcast, Proctor & Gamble, Mastercard, Ford, Apple, Shake Shack, Google, US Steel, Amazon, Expedia, Caterpillar, and Exxon Mobil.

Negotiations Begin in Earnest Over the Senate Republican’s Stimulus Bill Draft

Yesterday’s late afternoon release of the draft bill was the starting gun for what analysts expect will be a fraught negotiation, with trillions of dollars separating the two parties. The area of greatest urgency is enhanced unemployment benefits, with millions of American still out of work due to the pandemic and the current $600 per week boost expiring at month-end. The Republican proposal begins by cutting this to an extra $200 per week, then transitioning to a sliding scale based on 70% of previous wages earned but with a cap of $500 per week for the federal enhancement. Analysts suggest that this more complex scheme could take anywhere from two to five months to roll out as states will face significant difficulties in implementation compared to the flat amount previously used. Speaker Pelosi has made clear her intention of defending the $600 payments through the end of the year. Other provisions include liability protections for hospitals, schools, and nonprofits, $105 billion allocated towards school reopening, $16 billion for enhanced testing measures, a $60 billion top-up of the Payroll Protection Program (PPP) targeted at SMEs that have seen 50% or greater falls in revenue, and another set of $1200 direct payments to individuals earning less than $75K per year, plus some modest tax breaks related to business operations during the pandemic. Congressional Democrats have lambasted the provisions as inadequate, failing to effectively cover issues including rental assistance and state and local government funding support, both of which featured prominently in the Democrat’s $3.5 trillion HEROES Act proposal that passed in May.

Additional Themes
Two-Day Fed Meeting Kicks off Today – No major policy maneuvers are expected, though analysts will parse the accompanying communications for clues as to a potential policy pivot at the September meeting to some form of enhanced forward rate guidance. At the June meeting, the FOMC retained its current policy settings, as expected, and Chair Powell discussed the potential for yield caps and augmented guidance down the road, as the focus remained firmly on downside risks to the recovery.

Gold Prices Tag All-Time High – With the dollar in a downtrend, global interest rates at historic lows, deficits soaring, and geostrategic tensions simmering, factors have been aligned for gold price upside. The yellow metal registered an all-time high overnight near $2000 per ounce after an 8.3% month-to-date gain, and analysts are generally calling for more upside give the persistence of the upside drivers. Silver prices have also skyrocketed, soaring nearly 30% in July. –

Morning Markets Brief 7-27-2020

Summary and Price Action Rundown

Global risk assets are mostly higher this morning ahead of a week of major corporate earnings, key economic releases, and a Federal Reserve meeting. S&P 500 futures indicate a 0.4% higher open, which would retrace last week’s choppy 0.3% decline that took the index back into negative territory year-to-date after it registered a new high for the pandemic on Wednesday. The Nasdaq posted rare underperformance last week, falling 1.3% as high-flying IT shares reversed from lofty levels, but is set to rebound today ahead of major tech earnings this week. Equities in the EU and Asia were mixed overnight. The dollar continues to sink lower versus its peers, while longer-dated Treasury yields are declining, with the 10-year yield at 0.58%. Brent crude prices are holding above $43 per barrel.

Pivotal Week for Corporate Earnings

The second week of second quarter (Q2) earnings reporting again provided scant direction for stocks as analysts brace for this week’s busy calendar of results, featuring major tech giants and other US corporate bellwethers. Friday marked the close of the second week of Q2 earnings season with 181 of the S&P 500 companies reporting results to date. Thus far, 85.5% of results have featured a positive earnings-per-share (EPS) surprise and 67.7% have beaten revenue estimates, with both percentages being higher than their respective five-year averages. While this usually indicates positive trends, earnings and revenue estimates prior to the start of the quarter had been significantly lowered, with Q2 estimated earnings languishing in the doldrums at -44.7% year-on-year (y/y) two weeks ago. The current blended earnings decline, which combines actual results from companies that have reported and estimates of those that have not yet done so, has improved slightly to -42.4% from last week’s -44.1%. The blended revenue decline for the second quarter sits at -10.1%, rising from the revenue decline of -10.4% last week, and forming a trend of improvement from -10.8% two weeks ago. This week’s calendar features reports from major industry bellwethers, including Pfizer, 3M, McDonald’s, DR Horton, Harley-Davidson, eBay, Starbucks, Visa, GE, Boeing, GM, Qualcomm, PayPal, Facebook, UPS, Yum! Brands, Comcast, Proctor & Gamble, Mastercard, Ford, Apple, Shake Shack, Google, US Steel, Amazon, Expedia, Caterpillar, and Exxon Mobil.

US-China Tensions Remain Elevated but Restraint is Evident

China has closed the US consulate in Chengdu in retaliation for the US closure of the Chinese consulate in Houston, but Chinese assets were steady overnight and the lack of further escalation has eased concerns of a potentially major rupture in relations. Analysts had expected China to respond in kind after the US ordered China’s Houston consulate to be shuttered, though initial speculation had been that Beijing would shutter the US consulate in Wuhan. The US diplomatic presence in Chengdu is considered the more strategic of the two, as it is where the State Department monitors Tibet and the Western China region in general, which is a hotbed of human rights issues. However, no further measures were announced and Chinese assets steadied overnight. After sinking 3.9% on Friday amid the rising tensions, the Shanghai Composite eked out a 0.3% gain overnight, while the Hong Kong Hang Seng lost a modest 0.4% after closing 2.2% lower the prior session. The renminbi also advanced versus the dollar and is near its strongest level since March.

Additional Themes

GOP Draft of US Pandemic Relief Bill Expected Today – Though portions of the Republican’s draft $1 trillion stimulus plan have trickled out, the full text of the version crafted by Senate Majority Leader McConnell’s office is set to be released later today. Among the available details, the most notable is the new unemployment insurance scheme to replace the current $600/week benefits that are set to expire in a few days. The GOP unemployment insurance plan will focus instead on a 70% wage replacement benchmark. Additionally, the plan is said to include direct payments of $1,200 and $2,400 to individuals and families, $105 billion for reopening schools, targeted additional funds for the Payroll Protection Plan (PPP), $16 billion in additional funding for coronavirus testing, tax breaks for businesses to retain workers and retool for new safety protocols, and provisions for flexibility on state use of previous funding. The Trump administration has also backed off its demands for payroll tax cuts. Democrats will contest the absence of additional funding for state and local governments, as well as the lack of support measures for housing and rent. House Speaker Pelosi dismissed talk of a piecemeal approach to passing the bill but administration officials continue to advocate such an approach.

Dollar Downtrend Continues – An index of the dollar versus a broad basket of currencies has reached a nearly two-year low after an abrupt and steep downtrend over the past two months. Analysts are citing a variety of downside catalysts, including failures of US Covid-19 containment and aggressively easy Fed monetary policy.

Morning Markets Brief 7-24-2020

Summary and Price Action Rundown

Global risk assets retreated overnight as US-China friction remained in the headlines, while investors await more key US economic data and corporate earnings. S&P 500 futures point to a 0.2% lower open after the index retreated 1.2% yesterday to erase nearly all the year-to-date upside it had accumulated earlier this week, which had marked a new high for the pandemic. The tech-heavy Nasdaq posted rare underperformance as high-flying IT shares reversed from lofty levels. Equities in the EU and Asia are lower, with Chinese stocks falling sharply (more below). The dollar is down despite the cautious tone in markets, while longer-dated Treasury yields are steady, with the 10-year yield at 0.58%. Brent crude prices are holding above $43.

US-China Tensions Weigh on Sentiment

In the latest cycle of escalation in the ongoing and multi-faceted confrontation between Washington and Beijing, China announced that it had ordered the US consulate in Chengdu to cease operations in retaliation for the US closure of the Chinese consulate in Houston. Analysts had expected China to respond in kind, though initial speculation had been that Beijing would shutter the US consulate in Wuhan. The US diplomatic presence in Chengdu is considered the more strategic of the two, as it is where the State Department monitors Tibet and the Western China region in general, which is a hotbed of human rights issues. Therefore, by choosing Chengdu, analysts suggest that Beijing is taking a more aggressive retaliatory approach, while President Trump has hinted that more Chinese consulates could be closed. Reports earlier this week noted that federal prosecutors are accusing the Chinese consulate in San Francisco of sheltering a Chinese scientist accused of visa fraud for concealing her ties to the Chinese military. Meanwhile, Secretary of State Pompeo delivered hawkish remarks yesterday on the Chinese Communist Party (CCP). Though he did not go so far as to advocate regime change, Pompeo’s rhetoric toward the CCP was harsh and he appealed to the Chinese people to seek change and called upon the international community to aid in that process. The Shanghai Composite fell 3.9% overnight, while the Hong Kong Hang Seng lost 2.2%, as market participants cited the further deterioration in US-China relations as weighing on sentiment.
US Labor Market Data Raises Questions on the Recovery

After yesterday’s disappointing weekly jobless claims data suggested a degree of economic backsliding, analysts await today’s preliminary purchasing managers’ index (PMI) figures for July. The flash readings of July PMI are expected to reflect a transition from contraction to expansion for both US manufacturing and service sectors, with consensus forecasts of 52.0 and 51.0, respectively, after June’s readings of 49.8 and 47.9. For context, PMI readings over 50 denote expansion in the sector. Analysts are wary of setbacks to the US growth recovery amid the resurgence of Covid-19 cases in key regional hotspots, with yesterday’s upside surprise in new jobless claims for the week ending July 18th adding to the concerns. Notably, this reading was the first weekly increase in unemployment claims since late March. Meanwhile, the EU posted better-than-expected preliminary July PMIs, which registered 51.1 for manufacturing and 55.1 for services versus forecasts of 50.1 and 51.0, respectively, representing marked improvement from the prior month’s 47.4 and 48.3 prints. The first readings of UK PMIs for July also meaningfully surprised to the upside and reflected expansion across the board. Nevertheless, the euro and pound are slightly weaker versus the dollar this morning, though the former is close to a two-year peak while the latter is at multi-month highs.

Additional Themes

Slow Progress Toward US Pandemic Relief Bill – Though portions of the Republican’s draft $1 trillion stimulus plan have trickled out, reports indicate that the official release will be delayed until next week. Among the available details, the most notable is the new unemployment insurance scheme to replace the current $600/week benefits that are set to expire in a few days. The GOP unemployment insurance plan will focus instead on a 70% wage replacement benchmark. Additionally, the plan is said to include direct payments of $1,200 and $2,400 to individuals and families, $105 billion for reopening schools, targeted additional funds for the Payroll Protection Plan (PPP), $16 billion in additional funding for coronavirus testing, tax breaks for businesses to retain workers and retool for new safety protocols, and provisions for flexibility on state use of previous funding. The Trump administration has also backed off its demands for payroll tax cuts. Democrats will contest the absence of additional funding for state and local governments, as well as the lack of support measures for housing and rent, and have rejected suggestions of a piecemeal approach to passing the bill.

Earnings Fail to Stem Tech Stock Selloff – Microsoft and Tesla, which have posted dramatic stock price outperformance this year, topped earnings and revenue projections, but shares of both companies fell yesterday as high-flying IT stocks suffered broad losses.

Morning Markets Brief 7-23-2020

Summary and Price Action Rundown

Global risk assets are moving higher morning as investors focus on relatively upbeat corporate earnings reports while awaiting key US labor market data. S&P 500 futures indicate a 0.4% higher open after the index climbed yesterday to a 1.4% year-to-date gain, marking a new high for the pandemic, though the tech-heavy Nasdaq lagged below Monday’s fresh record high. Equities in the EU are also rising amid positive news in the region (more below), while Asian stocks were mixed overnight. The dollar is continuing lower, while longer-dated Treasury yields are steady, with the 10-year yield at 0.60%. Brent crude prices are hovering above $44.

Earnings Remain Mixed but Broadly Supportive

Although second quarter (Q2) earnings season remains in its early stages, the emerging themes are better-than-expected headline results but cloudy guidance, with investors seemingly keen to accentuate the positive. Telsa reported another solid quarter after yesterday’s closing bell, sending its shares 5.0% higher in pre-market trading, which would add to the carmaker’s already eye-watering 280.6% year-to-date (ytd) stock price gain, which many analysts point to as evidence of a burgeoning bubble in US equities. Meanwhile, Microsoft, which has been another significant outperformer during the pandemic, also beat earnings and sales estimates with its report late yesterday afternoon, but analysts point to the softening in it key cloud business segment as weighing on its share price, which is down 2.1% before the market open. Nevertheless, Microsoft is still dramatically outperforming the wider index, closing yesterday with ytd gains of 34.3%. Today, AT&T, Blackstone, American Airlines, and Twitter are among the companies reporting before the opening bell, while Intel and E*Trade will release their figures after the close. Of the 99 S&P 500 companies that have issued results, a lofty 81.5% have topped earnings-per-share (EPS) estimates while 68.7% have beaten revenue projections. Still, the growth of sales and earnings remains down year-on-year, with declines of 7.0% and 17.0%, respectively, thus far.

US Labor Markets Data in Focus

As analysts ponder the economic ramifications of the ongoing Covid-19 resurgence in the US and the resulting rollback of reopening measures in key virus hotspots, today’s weekly jobless claims data will provide a hint as to the degree of backsliding. This morning’s release of initial jobless claims for the week ending July 18th are expected to show continued stagnation in the prior trend of improvement, with filings projected to remain steady at 1.30 million. For context, the 1.30 million new claims in the week ended July 11th was little-changed from a revised 1.31 million claims in the prior week and above expectations of 1.25 million. Last week’s tally lifted the total claims since March 21st to 51.3 million. Some economists expect labor market deterioration to be significant enough to send July nonfarm payrolls back to negative territory.

Additional Themes

Markets Take US-China Friction in Stride – After briefly weighing on sentiment yesterday, markets have steadied as the latest flare-up in tensions between Washington and Beijing looks set to remain in the diplomatic realm for now. The surprise announcement that the US had demanded closure of the Chinese consulate in Beijing and vows of retaliation from China was the latest escalation in the re-intensifying feud, which has taken on an added significance due to its prominence as a campaign issue for the upcoming US presidential election. Reports suggest that China will close the US consulate in Wuhan and perhaps seek to scale back US diplomatic activities in Hong Kong in retaliation.

Italian Debt Continues to Rally Amid Spending Plans – Yields on 10-year Italian debt have fallen below 1% for the first time since the onset of the pandemic in early March, while the 10-year yield spread to German bunds, a key metric of Italian creditworthiness, are at their most favorable level since late February. This key milestone in the ongoing rally in Italy’s sovereign bonds occurred despite news overnight that the Italian government is preparing a €25 billion special relief budget to cushion the economic blow from the pandemic, which follows two prior stimulus packages totaling €75 billion. However, among EU members, Italy stands to receive the most funds from the EU’s €750 billion pandemic relief package that was agreed earlier this week, with Italian Prime Minister Conte suggesting that the combination of grants and loans to Italy from this historic fiscal stimulus could total more than €200 billion.

Morning Markets Brief 7-22-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors monitor the latest US-China friction and incoming corporate earnings reports while awaiting signals on progress toward the next US pandemic relief package. S&P 500 futures indicate a 0.2% lower open after the index edged further into positive for the year yesterday despite giving up most of its intraday gains as the tech-heavy Nasdaq retreated from yesterday’s fresh record high. Equities in the EU are lower while Asian stocks were varied overnight. The dollar is continuing its downtrend, which accelerated yesterday, while longer-dated Treasury yields are also lower, with the 10-year yield at 0.59%. Brent crude prices are falling back below $44 ahead of US oil stockpile data.

 

US-China Tensions Back in the Headlines

In the latest flare-up in this fraught relationship, Beijing is vowing retaliation against the abrupt US order to close the Chinese consulate in Houston. Reports of fires in the courtyard of the Chinese consulate in Houston, to which local police and firefighters responded, were followed by a US State Department announcement that it had ordered the closure of the Chinese consulate in Houston citing the need to “protect American intellectual property… and private information.” This comes after the US Justice Department yesterday named two hackers it claims are sponsored by Beijing who stole sensitive data and attempted to access coronavirus research. As has been the motif in recent US actions against China, Beijing has decried the move, calling it “unprecedented” and “political provocation,” while vowing unspecified retaliation. Analysts expect that a US consulate in China will be closed in response, with speculation centering on Wuhan. The offshore renminbi weakened abruptly on the news but the downside is moderate at 0.3% and it remains near its strongest levels versus the dollar since mid-March, while an ETF of Chinese stocks is down 1.0% in pre-market trading.

Earnings Season Features More Upside Surprises

Alongside a series of positive second quarter (Q2) results for some traditional US corporate bellwethers yesterday, midsized banks also issued generally better-than-expected figures. The second week of Q2 earnings season took an increasingly positive tone yesterday as releases from Coca-Cola, Lockheed Martin, IBM, and Philip Morris proved broadly supportive of their stock prices, though management guidance for the coming quarters remained highly uncertain. Meanwhile, midsized financial companies also posted encouraging headline numbers yesterday, mirroring the trend from the megabank reports last week. Comercia and Synchrony Financial beat earnings-per-share (EPS) estimates and revenue projections by considerable margins, though revenue plunged 15.8% and 17.9%, respectively, year-over-year (y/y). Though both suffered a reduction in net interest income and added $88 million and $475 million, respectively, to loan loss reserves, offsetting growth in areas such as loans and deposits helped cushion the blow. However, results turned more mixed after yesterday’s closing bell, with Capital One, United Airlines, Snap, and Texas Instruments among the companies reporting. Among these, Snap is the biggest laggard in pre-market trading, with losses of 8.3%. Today, KeyCorp and Northern Trust report before the opening bell, while results from Microsoft, Tesla, Chipotle, CSX, and Discover Financial are due after markets close. Of the 62 S&P 500 companies that have issued results, a lofty 80.7% have topped earnings-per-share (EPS) estimates while 71.0% have beaten revenue projections. Still, the growth of sales and earnings remains down year-on-year, with declines of 6.3% and 20.7%, respectively, thus far.

Additional Themes

Japan’s July PMI Shows Continued Contraction – The preliminary July reading of the Jibun Bank Japan Composite purchasing managers’ index (PMI) rose to 43.9 from a final 40.8 a month earlier, as activity in both the manufacturing and services sectors continued to retrench, though at a more moderate pace. For context, PMI readings below 50 denote contraction in the sector. The manufacturing PMI increased to 42.6 in July from a final 40.1 in June, while the services PMI edged up to 45.2 in July from a final 45.0 in the prior month, with the relaxed of emergency measures providing some relief. The latest readings marked the 15th and 6th straight months of contraction in manufacturing and services, respectively. The rates of contraction for output, new orders, and new export orders all declined. On the inflation front, input prices were broadly unchanged while selling prices declined less than in June. Looking ahead, sentiment deteriorated in manufacturing but remained positive in services. Preliminary July PMIs for the US and EU are due on Friday.

Oil Prices Whipsaw Near Multi-Month Highs – After hitting a nearly $45 peak for the pandemic yesterday, spurred by hopes of improving demand amid another burst of fiscal stimulus by the EU, with a weakening dollar providing another boost, Brent crude prices are turning lower again after the American Petroleum Institute forecast a sizeable build in US oil inventories last week.

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.