Morning Markets Brief 10-21-2020

Summary and Price Action Rundown

Global risk assets are trading with a cautious tone this morning as investors continue to monitor US stimulus negotiations and digest mixed earnings reports. S&P 500 futures indicate a 0.2% lower open after the advanced 0.5% yesterday, upping the index’s year-to-date gain to 6.6%, which is 3.9% below early September’s record high. Equities in the EU are underperforming while Asian shares were mixed overnight. The dollar is sliding back toward recent lows while longer-dated Treasury yields are continuing higher within their recent range, with the 10-year yield at 0.80%. Brent crude prices remain choppy around $42 per barrel after the OPEC ministerial meeting earlier this week produced few headlines.

Pre-Election Stimulus Hopes Waver as Differences Persist

Thought House Speaker Pelosi has downplayed her self-imposed deadline of yesterday and talks are continuing today, mixed signals are dampening optimism for a pre-election pandemic relief package. With time running short for House Democrats and the White House to successfully bridge their key differences over stimulus bill terms before the election, Speaker Pelosi has signaled that she will continue negotiating through the end of the week rather than hold to her deadline of this evening. Speaker Pelosi and Secretary Mnuchin continued their talks yesterday, though no deal was finalized, and are set to meet again today. White House Chief of Staff Meadows made encouraging statements on CNBC after the closing bell, characterizing the two sides as narrowing their differences and Speaker Pelosi continued to express optimism. Senate Majority Leader McConnell, however, has reportedly been warning the White House against making a deal with House Democrats prior to the election when his priority is confirming Amy Coney Barrett to the Supreme Court. Yesterday, McConnell stated he would bring a comprehensive coronavirus bill to the Senate floor should an agreement be reached, though it is not clear whether there would be sufficient support from the GOP caucus to pass it. Meanwhile, the Senate will vote on a bill that would reallocate unused funds from the March stimulus package to resume the Paycheck Protection Program and support small businesses. Today, the Senate will also vote on a $500 billion broader stimulus package, though Democrats are expected to block both from passing.

Earnings Reports Continue to Provide Scant Support for Stocks

Amid broadly mixed results for the third quarter (Q3), the high-profile disappointment for Netflix after yesterday’s closing bell is not spilling over into broader sentiment. Shares of Netflix are down 5.3% in pre-market trading after the streaming giant added fewer subscribers than expected and guided for a lower number of subscribers in the upcoming quarter. With so-called “stay at home” stocks like Netflix leading the rebound for US equity indexes over the past six months, some analysts are suggesting that this downbeat result is another sign that despite the persistence of Covid-19, the advantage of the pandemic’s corporate “winners” might be waning. However, shares of Snap are surging, with a 23.2% gain in early trading, after the company impressed analysts with its strong sales figures after yesterday’s closing bell. Proctor & Gamble also beat estimates yesterday and posted moderate gains. Today, Tesla, Verizon, CSX, and Chipotle will issue results, with AT&T, Intel, American Airlines, Coca-Cola, and American Express reporting through the remainder of the week. With 75 of the S&P 500 corporates having reported, 86.7% of results have featured a positive earnings-per-share (EPS) surprise and 72.0% have topped revenue estimates, though these impressive upside percentages have failed to provide support to reporting company share prices, which have mostly declined following results.

Additional Themes

Google in the Antitrust Crosshairs – The Department of Justice (DoJ) announced its intent to file an antitrust lawsuit yesterday against Google, claiming the IT behemoth has engaged in conduct aimed at preserving a monopoly in search and search-advertising services, but its share price closed higher nonetheless and is rising in pre-market trading as well. The filing marks the most aggressive antitrust challenge by the US government in more than two decades, marking a significant shift from policymaker attentiveness to active pursuit of tech giants that have long been identified as suspects of monopolistic practices. Eleven states will join the federal government’s complaint which follows a year-long probe by DoJ investigators and a major congressional report finding that Google and other tech giants have wielded their dominance in anticompetitive ways.

Brexit Headlines Spur the Pound – The UK currency is up 0.8% versus the dollar this morning after EU Chief Brexit Negotiator Barnier made upbeat comments on the prospects for a deal and highlighted the EU’s “respect of British sovereignty.” These remarks drew a positive response from financial markets and also the UK government, with a spokesperson welcoming the ingratiating rhetoric.

Morning Markets Brief 10-20-2020

Summary and Price Action Rundown

Global risk assets are moving higher this morning as investors ponder US stimulus prospects and await key earnings figures. S&P 500 futures point to a 0.6% higher open after the index lost 1.6% yesterday, paring the index’s year-to-date gain to 6.1%, which is 4.3% below early September’s record high. Equities in the EU are flat while Asian shares were mixed overnight. The dollar is steadying near recent lows while longer-dated Treasury yields are edging higher within their recent range, with the 10-year yield at 0.78%. Brent crude prices remain choppy around $42 per barrel after yesterday’s OPEC ministerial meeting produced few headlines.
11th Hour Fiscal Stimulus Push Comes Down to the Wire

Though investors remain focused on the base case of another round of pandemic relief spending after the election, intensifying efforts to reach a deal before tonight’s deadline are likely to keep equity market volatility elevated. House Speaker Pelosi and Treasury Secretary Mnuchin proceeded with further stimulus negotiations yesterday afternoon and are set to talk again today ahead of Pelosi’s stated deadline of this evening to secure a pre-election package. Earlier this month, House Democrats had passed a $2.2 trillion package which has received stark criticism from Republicans. Likewise, the White House’s $1.8 trillion proposal fell short of the Democrats’ target. Over the past few weeks, Pelosi and Mnuchin have struggled to reach a compromise, with state and local government aid, liability protections, coronavirus funding, and tax credits as some of the major sticking points. President Trump has stated recently that he is in favor of a higher-value deal, and has even expressed his readiness to match (or exceed) Democrats’ $2.2 trillion offer. Analysts remain skeptical, however, that Senate Republicans would agree in sufficient numbers ahead of such a high-stakes election when President Trump is meaningfully lagging in the polls. Nonetheless, on Sunday, the President voiced his confidence that members of his party will sign on in support, regardless of many Republican Senators having publicly expressed staunch opposition to a multi-trillion dollar package. Senate Majority Leader Mitch McConnell is preparing a vote on repurposing the money left over in the Paycheck Protection Program and is expected to propose a narrower $500 billion coronavirus stimulus deal to the Senate, though neither stands a chance of passing the House given how the last $650 billion Senate version bill was received by Democrats.

More Mixed Earnings Provide Scant Direction to Equity Markets

High-profile reports today may help set the tone for the remainder of earnings season. After the first week of third quarter (Q3) earnings season, which features results from US megabanks, provided upside surprises on headline numbers but elicited nuanced market reactions, this week’s earnings feature a wider sector variation, including tech and consumer goods. Halliburton and IBM reported yesterday, before the opening bell and after closing bell, respectively, with their upside surprises in both sales and earnings providing little support for their share prices. Oilfield services giant Halliburton showed easing losses in its report, but its stock price closed lower as yesterday’s selloff intensified, while IBM beat estimates after the closing bell owing to the strength of cloud computing business, though its stock is down 2.8% in after-hours trading following uncertain guidance from management for future quarters. Today features results from Procter & Gamble, Netflix, Snap, Texas Instruments, and Travelers, while Tesla, Verizon, CSX, Chipotle, AT&T, Intel, American Airlines, Coca-Cola, and American Express report through the remainder of the week. With 58 of the S&P 500 corporates having reported, 86.2% of results have featured a positive earnings-per-share (EPS) surprise and 69.0% have topped revenue estimates, though these impressive upside percentages have failed to provide support to reporting company share prices, which have mostly declined following results.

Additional Themes
People’s Bank of China (PBoC) Holds Steady Despite Renminbi Strength – As anticipated, the PBoC left its Loan Prime Rate (LPR) unchanged for the sixth straight month overnight, with the one-year LPR at 3.85% and the five-year LPR 4.65%. This comes after the release of an encouraging set of September data over the weekend, featuring upside surprises in retail sales and industrial production. With China’s recovery gathering pace and the central bank continuing to refrain from aggressive monetary easing measures being enacted by its global peers, the renminbi is unsurprisingly trending stronger. Today’s slight gain has taken the Chinese currency to its highest level versus the dollar since early July 2018.

Australian Dollar Reacts to RBA Easing Hints – The Australian dollar is down 0.5% versus its US counterpart this morning, as the currency continues to descend from its nearly two-year high, as traders seize upon remarks by a Reserve Bank of Australia (RBA) official hinted at the possibility of resorting to negative interest rate policy (NIRP). Specifically, RBA Assistant Governor Kent discussed the prospects for further easing, and noted that NIRP was possible. The Bank of England has made similar references to the possibility of negative rates.

Morning Markets Brief 10-19-2020

Summary and Price Action Rundown

Global risk assets are rallying this morning amid possibly brighter US stimulus prospects and solid Chinese economic growth figures. S&P 500 futures indicate a 0.8% higher open after the index closed flat on Friday as tech stocks lagged, holding its weekly performance at 0.2% and its year-to-date gain at 7.8%, which is 2.7% below early September’s record high. Equities in the EU are modestly higher while Asian shares were mixed overnight. The dollar is sinking lower while longer-dated Treasury yields are rising within their recent range, with the 10-year yield at 0.77%. Brent crude prices remain choppy around $42 per barrel.

Fiscal Stimulus Remains in Focus Amid Last Minute Deal Push

With the prospects for post-election fiscal stimulus a key factor for investor sentiment, House Speaker Pelosi’s final offer over the weekend and President Trump’s pro-stimulus rhetoric are helping support this morning’s rally. After continuing talks with Treasury Secretary Mnuchin over the weekend, Speaker Pelosi indicated that any pre-election stimulus deal would need to approved by tomorrow and made no indication that she was altering the position of House Democrats on the $2.2 trillion package they passed into law earlier this month. President Trump, however, has shifted his rhetoric on the size of the package, stating in a campaign stop in Nevada over the weekend that he wants “a bigger number than [Pelosi] wants” and suggesting that he would be able to marshal enough GOP support on Capitol Hill to pass an upsized bill. Analysts remain skeptical, however, that Senate Republicans would agree in sufficient numbers ahead of such a high-stakes election when President Trump is meaningfully lagging in the polls. Consequently, investors remain focused on post-election scenarios for stimulus, but these latest developments still provide some slim hope of more prompt agreement and suggest that in the case that no pre-election stimulus deal is reached and President Trump wins reelection, he will push swiftly for a higher number for the bill.

Earnings Season Enters Its Second Week After a Mixed Start

Investors remain attuned to income reports after the first week of third quarter (Q3) earnings season provided upside surprises on headline numbers but elicited nuanced market reactions. Corporate earnings season thus far has provided little direction to equity markets despite a preponderance of better-than-expected earnings and sales results. Roughly 10% of S&P 500 companies issued results, the majority coming from financials including leading US banks, among which a notably high 86% exceeded earnings per share (EPS) estimates in Q3, and by a wider margin than average. Meanwhile the year-on-year decline remains the second steepest for a quarter since the 2008 Financial Crisis at -18.4% at this week’s close. Meanwhile, 82% of S&P 500 companies that have reported thus far have seen actual revenues exceed estimates by an average of 3.6%, well above the five-year average of 61% of companies. This week’s earnings feature a wider sector variation than the bank-heavy week one, including tech and consumer goods, with Halliburton and IBM reporting today and Procter & Gamble, Netflix, Snap, Tesla, AT&T, Intel, and Coca-Cola through the rest of the week.

Additional Themes

Chinese Growth Data Shows Improvement – Chinese equities were mixed overnight but the renminbi continued to strengthen versus the dollar, registering its strongest level since July 2018, after key mainland economic readings provided an encouraging picture of the ongoing recovery. The 4.9% Q3 GDP growth print was slightly lower than estimates of 5.5% but still reflected improvement from 3.2% the prior quarter, and the latest data from September was even more upbeat. Industrial production grew 6.9% year-on-year (y/y) versus 5.8% expected and 5.6% the prior month, while retail sales also surprised to the upside at 3.3% y/y versus a forecast of 1.6% and an August reading of 0.5%. Fixed asset investment for September was nearly in-line with projections at 0.8% year-to-date after the -0.3% reading for the prior month.

Oil Prices Rangebound as OPEC Meets – Today’s ministerial meeting precedes the broader summit on December 1st, when the cartel and its allies will revisit their plans for ongoing supply restrictions, which have been incrementally loosened over recent months and are expected to be reduced again at year-end. The decision to ease off the tightest level of curbs has been accompanied by the Saudis and Russians adopting a hard line on compliance with the remaining commitments, castigating members that have lagged their output cut quotas. In a feisty press conference at the mid-September monitoring committee meeting, the Saudi oil minister warned that speculators betting on lower crude oil prices would be “ouching like hell.” This comes amid reports that renewed output from Libya is already at 500K barrels per day.

Morning Markets Brief 10-15-2020

Summary and Price Action Rundown

Global risk assets are extending their recent downtrend this morning as muddled earnings, lingering US political and policy uncertainty, and the Covid-19 resurgence continue to dampen investor spirits. S&P 500 futures indicate a 1.0% decline at the open after the index shed 0.7% yesterday, paring its year-to-date gain to 8.0%, which is 2.6% below early September’s record high. Equities in the EU are underperforming as Covid-19 containment measures are reinstated in major regional cities, while Asian shares posted more moderate losses overnight. Boosted by safe haven demand, the dollar is rallying from multi-year lows while longer-dated Treasury yields continue to descend below recent highs, with the 10-year yield at 0.70%. Brent crude prices are also retreating but remain within their recent range, trading above $42 per barrel.

Early Earnings Reporting Season Drawing a Mixed Market Reception

Third quarters (Q3) corporate earnings reporting season continues today, as Morgan Stanley closes out the results from US megabanks, which have been broadly uneven. Yesterday, Bank of America, Goldman Sachs, and Wells Fargo reported their third quarter earnings results with Goldman Sachs outperforming. The megabank reported an earnings-per-share (EPS) of $9.68, trouncing estimates by $4.24, and revenue climbed to $10.78 billion, a nearly 30% increase from one year ago. As with the prior quarter, the upside was driven by trading revenues, with fixed income, currencies and commodities (FICC) revenue climbing 49% and equities trading grew by 10%. Additionally, asset management increased 77%, wealth management by 13%, and investment banking grew 7%. With Goldman primarily focusing on trading, asset management, and investment banking, the need for credit loss provisions is typically smaller, relative to its peers. Goldman increased provisions by $278 million, less than expected, though falling in the same range as other reporters thus far. However, despite the strong performance, shares of Goldman closed mostly flat on the day. Meanwhile, shares of Bank of America fell 5.3% after the bank narrowly beat earnings estimates but fell short of revenue projections. Performance was particularly impacted by shortfalls in net interest income (NII), which declined 16.9% from last year. After yet another disappointing quarter for the bank, executives remain upbeat, as CFO Paul Donofrio stated “Q3 likely will be the bottom for NII and we are optimistic it will move higher in 2021.” Wells Fargo stock fell 6.0% after it too reported a notable decline in NII by nearly 19%. On the positive side, fee income was stronger, mortgage banking grew just over 400% from last quarter, and credit loss provisions of $769 million were well below estimates. So far, megabank results are echoing themes from last quarter, with trading-intensive banks reaping significant returns, and consumer-facing banks falling short as the low rate environment poses a major headwind for NII. Yesterday, the KBW Bank Index closed down 1.8% on the day to deepen its year-to-date loss to 32.2%. This morning, Morgan Stanley will release its Q3 earnings, closing out the US megabank reports.

Significant US Growth and Labor Figures in Focus

Today’s initial jobless claims data kicks off a series of notable US economic releases before the weekend. Initial jobless claims are expected to settle to 825K in the week ending October 10th after posting 840K in the week ending October 3rd, which topped market forecasts by 20K and represented only a slight downtick from the prior week’s upwardly revised 849K figure. This week’s reading is projected to mark the seventh consecutive week that claims remained in the 800K’s territory, roughly four-times the pre-pandemic level, suggesting the labor market has made limited overall improvement amid waning fiscal support. Continuing claims last week fell to 10.98 million in the week ending September 26th, a nearly 1 million drop from the prior week’s report, and registered below market consensus of 11.40 million. The reading marked the lowest level since early April when the effects of the coronavirus pandemic had just started to coalesce. Outside of state programs, Pandemic Unemployment Assistance (PUA) data totaled to 464K in the week ending October 3rd, a 44K decline from the prior report’s figure which underwent a significant downward revision. Total persons claiming unemployment benefits under all programs fell by 1 million to 25.5 million in the week ending September 19th. Also due today are October’s regional manufacturing indexes for New York and Philadelphia, followed by tomorrow’s US September industrial production number, which is expected to show a modest acceleration. Perhaps most importantly, the health of the US consumer will be in focus with tomorrow’s release of September retail sales data and the U. Michigan consumer sentiment gauge for October, with both expected to reflect broad stability at solid levels.

Additional Themes

Covid-19 Resurgence – EU and UK equity indexes are down 2-3% this morning amid rising investor concerns that the second wave of the coronavirus outbreak will reverse the ongoing economic recovery in the region. Both London and Paris are implementing more severe restrictions, though these fall short of the full-scale lockdowns that were prevalent last spring at the outset of the pandemic.

US Political Uncertainty Remains Elevated – With the second presidential debate cancelled following President Trump’s refusal to take part in a virtual version of the event, both candidates will appear in competing “town hall” discussion formats this evening, with Biden on ABC and President Trump on NBC. Some commentators are critical of NBC’s airing of the Trump town all at the same time as the previously scheduled Biden event, denying some viewers the opportunity to view both. Polls remain steadily in favor of Biden, though investors maintain broad skepticism of their accuracy. Equity volatility futures, while moderating over the past week, still reflect expectations of heightened stock market turbulence around the election and for the months that follow.

Morning Markets Brief 10-14-2020

Summary and Price Action Rundown

Global risk assets are struggling for direction again this morning as the recent rally pauses amid key corporate earnings reports and lingering political and policy uncertainty. S&P 500 futures point to a flat open after the index declined 0.6% yesterday, paring its year-to-date gain to 8.7%, which is 1.9% below early September’s record high. Equities in the EU and Asia were mixed overnight. The dollar is stabilizing near multi-year lows while longer-dated Treasury yields continue to slip below multi-month highs, with the 10-year yield at 0.72%. Brent crude prices remain choppy above $42 per barrel as demand concerns remain a headwind.

Earnings Reporting Season Continues with Reports from US Megabanks

Corporate earnings reporting season kicked off in earnest yesterday, as upside surprises from key US megabanks failed to impress investors. Yesterday, JPMorgan and Citigroup kicked off the third quarter earnings season as both US megabanks topped earnings and revenue expectations, but their stocks closed lower amid lack of upside catalysts for the coming quarters. JPMorgan reported an earnings-per-share (EPS) value of $2.92, topping consensus projections by $0.73 and recording a 9% increase from Q3 2019. Revenues totaled to $29.15 billion, a 3% decline from one year ago. JPMorgan saw significant total trading growth of 30% as investment banking revenue rose 12% to $2.1 billion, the fixed income division’s revenues surged 29%, and equities were up by 32%. Importantly, credit loss provisions rose by only $611 million, falling well short of the $2.88 billion forecast and a trivial comparison to the $10.47 billion injection during the second quarter. The move suggests that the bank may be projecting less-than-expected loan defaults moving forward. The increased trading revenues, lower provisions, and healthy deposit growth all offset lower-than-expected revenues from net interest income (NII), which has struggled to yield healthy revenues in the low interest rate environment. Citigroup reported earnings of $1.40 and revenue of $17.3 billion, and also saw its growth driven by higher trading volume and lower credit loss provisions. Fixed income trading activity increased 18% from last year, and equity trading grew by 15%. Citigroup added just $314 million to credit loss reserves, compared to $5.6 billion last quarter. The bank’s initiative to expand branches in the US proved fruitful last quarter, with North America-based deposits climbing 19%. In other reports yesterday, Delta Airlines reported a quarterly net loss of nearly $5.4 billion and reiterated the continued presence of industry shortfalls. Travel demand remains about 70% below the same time last year, and the carrier said it would delay the purchase of aircraft to better suit its outlook. Today, Bank of America, US Bancorp, Wells Fargo, and Goldman Sachs report earnings, with Morgan Stanley issuing its results tomorrow.

UK Backs Away from Brexit Bluff

The pound is stabilizing this morning after reports have indicated that Prime Minister Johnson will not abruptly pull out from Brexit negotiations with the EU at his self-imposed deadline of tomorrow to secure a deal. Citing an unnamed source, the articles suggest that the UK government will continue to negotiate over the coming days and will likely reassess their progress after the EU leaders’ summit. PM Johnson and European Commission President von der Leyen are scheduled to speak today, though no breakthroughs are expected. EU negotiators and leaders, including German Chancellor Merkel, emphasize that key hurdles remain and consensus is insufficient for terms to be considered at the upcoming EU leaders’ summit, which begins tomorrow. PM Johnson has employed brinksmanship in his Brexit negotiations to decent effect and has signaled that he is prepared to take the UK into a no-deal Brexit at year-end. The UK pound, which has served as a barometer for the fortunes of Brexit, is rangebound against the weakening dollar but is hovering barely above five-year lows versus the euro, suggesting a disparity of leverage in these negotiations. Fishing rights remain a key sticking point, along with treatment of Northern Ireland and UK business subsidies.

Additional Themes

Fate of Fiscal Stimulus Hinges on US Election – Yesterday, Majority Leader McConnell indicated that he is preparing a Senate vote next week on another “skinny” stimulus package, this time focused on replenishment of the Payroll Protection Program (PPP), which disburses funds to small businesses. House Speaker Pelosi predictably rejected this approach, while President Trump tweeted “Go big or go home!!!” in response. For context, President Trump announced last Tuesday that he was pulling out of stimulus talks after weeks of prevarication, and then abruptly pivoted to offer a $1.8 trillion deal last Friday, to which the reception has been cool.

Snags in Covid Treatment Trials – Markets were rattled yesterday by a surprise announcement from Johnson & Johnson indicating that a patient in its vaccine trial had become unexpectedly sick, causing a halt to the testing program for the time being. Shares of the pharma giant fell 2.3%. This came ahead of today’s announcement that Eli Lilly’s vaccine trial is also on hold now over health concerns, which sent its shares 0.8% lower in pre-market trading. Such pauses are considered typical in drug trials, and AstraZeneca’s trial was delayed in early September after a subject fell ill. Analysts continue to ponder the outlook for a vaccine, with the base case roughly approximating a partially effective vaccine by next spring.

Morning Markets Brief 10-13-2020

Summary and Price Action Rundown

Global risk assets are muted and mixed this morning as their recent rally pauses amid the start of key corporate earnings reports. S&P 500 futures indicate a flat open after the index advanced 1.6% yesterday in low-volume holiday trading, upping its year-to-date gain to 9.4%, which is 1.3% below early September’s record high. Equities in the EU and Asia were mixed overnight. The dollar is stabilizing near multi-year lows while longer-dated Treasury yields are edging lower from multi-month highs, with the 10-year yield at 0.76%. Brent crude prices remain choppy above $42 per barrel as demand concerns remain a headwind.

Earnings Reporting Season Begins

TCorporate earnings reporting season kicks off in earnest this week, with muted expectations and relatively low investor attention. Third quarter (Q3) earnings season begins this week with big banks at the outset, where credit adequacy will again be the primary focus. Companies have offered scant insight into earnings expectations thus far, with only 69 of the S&P 500 companies issuing any sort of earnings-per-share (EPS) guidance for the quarter, falling well below the five-year running average of 104 companies reporting per quarter. Of the 69 companies, 46 issued positive earnings expectations while 23 expect negative results. Heading into the first week of reports, analysts have positively adjusted earnings-growth projections by nearly 5% from estimates at the beginning of the quarter. Currently, Q3 earnings are estimated to decline by 20.5%, and if this value should register as the actual decline for the quarter, it will mark the second largest year-over-year decline in earnings reported by the index since Q2 2009, only trailing the previous quarter’s -31.6% figure. The estimated revenue decline also improved during the quarter from -5.4% to -3.5% after net upward revisions to estimates during the quarter. Most notably, the Q3 bottom-up EPS estimate, which aggregates the median EPS estimates for all S&P 500 constituents, increased by 4.1% from June 30th to September 30th.

Stimulus Expectations Center on Post-Election Action

The widening polling lead for Joe Biden in recent weeks is raising investor hopes for a clean and clear election outcome and also focusing attention on the prospects for a $3+ trillion fiscal stimulus package early next year if Democrats sweep the White House, Senate, and House of Representatives. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. This is being reflected not only in the current US equity rally but diminishing bets on stock market volatility around the election, with level of VIX futures in the coming months moderating significantly over the past week. For context, the primary risk around this election for investors is that of a drawn out and disorderly dispute to declare a winner of the presidential contest and any clear-cut result would likely be met with relief. Meanwhile, President Trump looks unlikely to get a stimulus bill agreed prior to the election despite backpedaling on his pronouncement a week ago that he was unilaterally suspending negotiations with House Democrats over the draft package. The White House has since pivoted to offer a $1.8 trillion deal last Friday, though the reception from both Republican and Democratic leaders on Capitol Hill has been cool.

Additional Themes

German Economic Sentiment Wilts – In September, the ZEW survey of economic sentiment retreated unexpectedly to a five-month low of 56.1, dramatically missing estimates of 72.0 and reversing the optimism of August’s 77.4 reading, which was the highest since May 2000. This comes amid a resurgence of Covid-19 in parts of Germany and elsewhere in the EU. Meanwhile, the Bundesbank’s Financial Stability Review, which was published today, warned that the “effects of the real economic crisis have not yet fully arrived in the German financial system” and that insolvencies would continue to rise amid the persistence of the pandemic.

Mixed Chinese Trade Data – In September, the pace of China’s export growth undershot estimates of 10.5% year-on-year (y/y), printing 8.7%, which is down from 11.6% in August. Meanwhile, imports handily topped expectations, rising 11.6% y/y versus a forecast of 1.0% and -0.5% the prior month. The resulting trade surplus is at its narrowest level since March. Analysts are pondering the outlook for export recovery amid the ongoing impact of the Covid-19 pandemic in the rest of the world, which surging imports reflect China’s domestic rebound.

Morning Markets Brief 10-9-2020

Summary and Price Action Rundown

Global risk assets are extending their recent rally this morning as investors continue to pin their hopes on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures point to a 0.5% higher open after the index advanced 0.8% yesterday, upping its year-to-date gain to 6.7%, which is 3.7% below early September’s record high. Equities in the EU and Asia were mixed overnight. As investors continue to assess the outlook for policy stimulus, the dollar is sinking lower while longer-dated Treasury yields are fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy around $43 per barrel amid crosscurrents in the demand outlook and another Gulf hurricane.

Brightening Post-Election Stimulus Prospects Buoy Market Spirits

The strong likelihood of a pandemic relief deal after the election, and potentially a $3 trillion package in the event of a Democrat sweep of both houses of Congress and the White House, is supporting investor sentiment despite yesterday’s disappointment over airline stimulus. Yesterday, House Speaker Pelosi dampened expectations of near-term completion of a standalone relief deal for airlines after discussions with Treasury Secretary Mnuchin over recent days failed to bear fruit. In line with her previous negotiating position, she rejected even this limited foray into a piecemeal approach at stimulus, stating “there is no standalone bill without a bigger bill.” With the polls reflecting an increasingly lead for Joe Biden, analysts do not expect Speaker Pelosi to offer significant concessions to the White House on their current $2.2 trillion offer, though she indicated that she remains “at the table.” Meanwhile, the White House is signaling renewed appetite for a comprehensive deal, but there is no indication that they are set to up their offer in order to bridge the gap between their roughly $1.6 trillion position and the House Democrats’ higher figure, with the amount of state aid remaining a particular sticking point. Amid the wrangling over this round of stimulus, however, investors do not expect to have to wait long for a deal to pass. If President Trump secures a second term, House Democrats will likely make the necessary compromise to get a bill through before year-end and if Biden emerges victorious, he may sign a stimulus bill upwards of $3 trillion if Democrats capture the Senate as well (more below).

Tentative Ebbing of US Political Risk

With investors focused primarily on the risk of a narrow and disputed election result, leading to weeks or months of uncertainty amid recounts, litigation, and civic unrest, the widening lead for Biden over the past week is raising hopes for a clean and clear outcome. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. Indications from key House and Senate races raise the possibility of a Democrat sweep, which would yield a significantly more aggressive approach to fiscal stimulus, though analysts note promised tax increases on corporations and the wealthy as well as a more proactive overall regulatory environment under the Democrats as offsetting factors. Though the polls indicate a rising likelihood of a clear-cut election result, the political atmosphere remains tense and volatility futures continue to reflect expectations for elevated turbulence into and around the election date of November 3rd. News yesterday that President Trump is declining to participate in the upcoming second presidential debate due to its virtual format, alongside the worrisome developments in Michigan, are keeping the political temperature elevated.

Additional Themes

Oil Prices Fluctuate as Another Hurricane Barrels Through the Gulf – Like Hurricane Laura in late August, Hurricane Delta is picking up strength as it approaches landfall on the gulf coast, requiring the shutdown of exposed energy facilities, like drilling rigs and refineries in its path. Category 4 Hurricane Laura, which was stronger than Delta is now at Category 3, spared the gulf energy infrastructure and resulted in only fleeting upside in oil prices. Despite the cloudy demand outlook and worsening supply dynamics, oil prices have remained broadly rangebound for months, with the weakening dollar providing key support.

Looking Ahead – Next week features a busy market calendar, with the unofficial start of third quarter (Q3) corporate earnings reporting season kicking off with US mega-banks on Tuesday. Companies have thus far offered scant insight into earnings expectations, with only 67 of the S&P 500 companies issuing any sort of guidance for the quarter (45 positive and 22 negative), which falls well below the five-year running average of 106 companies. On the upside, analysts have positively revised Q3 estimates from the beginning of the quarter, with earnings expected to decline by 21% and revenue by 3.6% compared to projections of -25.3% and -5.4%, respectively, on June 30th. US September retail sales and industrial production are also due, alongside inflation figures.

Morning Markets Brief 10-8-2020

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as investors refocus on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures indicate a 0.5% higher open after the index jumped 1.7% yesterday, erasing Tuesday’s downside and upping its year-to-date gain to 5.8%, which is 4.5% below early September’s record high. Equities in the EU and Asia were broadly higher overnight. As investors continue to assess the outlook for policy stimulus, the dollar is slightly lower while longer-dated Treasury yields fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy, jumping back toward $43 per barrel amid crosscurrents in the demand outlook.

Investors Recalibrate Expectations for Fiscal Stimulus

Amid President Trump’s public vacillation on pandemic relief negotiations as he attempts to recover from the coronavirus, investors are setting their sights on the prospect of even greater fiscal support after the election. Yesterday, US equities recouped their losses from Tuesday’s rollercoaster session, with traditional economy stocks leading to the upside, while the dollar weakened and longer-dated Treasury yields sold off, a pattern that suggests rising expectations for more fiscal stimulus, though consensus is shifting to a post-election deal. President Trump has publicly vacillated over the pandemic relief bill, again reversing his stance yesterday just hours after publicly announcing his decision on Tuesday to cancel talks with Democratic leadership until after the November 3rd election. Specifically, the President again took to Twitter yesterday morning to convey his readiness to sign standalone bills for provisions such as direct stimulus checks and an extension of PPP, particularly for the airlines industry which is facing upwards of 32,000 furloughs. Though President Trump’s most recent swerve is in a more stimulus-friendly direction, Speaker Pelosi is unlikely to make any near-term concessions to the White House in pursuit of a deal given Joe Biden’s increasing lead in the polls and Democrats are rejecting this piecemeal approach, as they have done repeatedly throughout this negotiation. Still, the prospects look favorable for specific airline industry aid, which Speaker Pelosi has endorsed and was the subject of discussion with Treasury Secretary Mnuchin yesterday, with further talks expected today. With regard to the broader deal, investors are increasingly focused on the prospects of an agreement following the election. In the case of a Trump victory, the House Democrats will likely accede to something like the $1.5 trillion version currently being supported by the White House, and if Joe Biden wins, the swing factor would be the Senate, with a Dem sweep pointing to passage of a considerably upsized package of roughly $3 trillion by early next year (more below).

Fed Communications Put Additional Easing in Focus

With investors pondering whether the FOMC might enact more aggressive easing in pursuit of their newly revised and more ambitious inflation and employment targets, the minutes kindled anticipation of more asset purchases. The September FOMC Meeting Minutes were released yesterday, highlighting that Fed officials see rates remaining at the 0-0.25% range through at least 2023 based on the current outlook, in pursuit of the revised policy targets: labor-market conditions achieve maximum employment, with a particular focus on lower-income segments, inflation reaches 2%, and inflation is on track to moderately exceed 2% for some period of time. So far, Fed officials have not specifically clarified what timeframe will be used to gauge the latter condition, though they have emphasized the approach is not anchored to a mechanical model and will maintain some measure of flexibility. The minutes also showed there was further discussion on the Fed’s asset purchase program, noting “that in future meetings it would be appropriate to further assess and communicate how the Committee’s asset purchase program could best support” its objectives. The Fed is currently purchasing $80 billion of US Treasuries and $40 billion in mortgage backed securities monthly. Market participants are also noting a study by a top Fed economist advocating the increasing use of asset purchases for monetary easing when interest rates are at the zero lower bound.

Additional Themes

Veep Debate Remains Orderly – With the polls showing Joe Biden extending his lead over President Trump, the stakes for last night’s Vice Presidential debate were high for both sides. With neither candidate landing a knockout blow, analysts suggest that the proceeding are unlikely to alter the dynamics of the race, which appear to be moving increasingly in favor of Joe Biden. Recent polling suggests Biden holds a nearly double-digit lead over Trump nationwide, is ahead in nearly most crucial swing states by varying degrees.

Weekly Jobless Claims Due – With key support like the Paycheck Protection Program rolling off, economists are bracing for an abrupt readjustment in US labor markets over the coming months. Nevertheless, new filing for the week ending October 3rd are expected to remain broadly steady at 820K. For context, initial jobless claims rose by 837K in the week ending September 26th, slightly below market forecasts of 850K and a decline from the prior week’s upwardly revised 873K figure. The reading marked the fifth consecutive week claims remained in the 800K’s territory, suggesting the labor market recovery remains stagnant as government support continues to wane.

Morning Markets Brief 10-7-2020

Summary and Price Action Rundown

Global risk assets are rebounding this morning after yesterday’s swoon as investors struggle for clarity on the US political and policy outlook amid mixed messages from President Trump over the pandemic relief negotiations. S&P 500 futures point to a 0.7% higher open after the index lost 1.4% yesterday on the President’s apparent pullout from stimulus talks. The late afternoon decline erased solid intraday upside and cut the S&P 500’s year-to-date gain to 4.0%, which is more than 6% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. Amid garbled messaging on the fiscal stimulus front, the dollar is steady while longer-dated Treasury yields are turning higher, with the 10-year yield at 0.78%. Brent crude prices remain choppy, falling back below $42 per barrel ahead of US stockpile data.

President Trump Sends Conflicting Signals on Stimulus

Yesterday, in his first full day back at the White House following his recent hospital stay for Covid-19 treatment, President Trump halted negotiations with House Democrats over the pandemic relief bill and then took to Twitter to push piecemeal stimulus measures. After apparently pulling out from negotiations yesterday afternoon, President Trump sent a barrage of tweets calling for House Democrats to offer support for airlines, renewed funding for the Paycheck Protection Program (PPP), and $1,200 stimulus checks for individuals. Analysts are awaiting a response from Speaker Pelosi, but House Democrats have refused similar White House offers of segmenting relief measures over a series of bills. For context, President Trump yesterday announced over Twitter his rejection of the recently passed $2.2 trillion stimulus package from the House and halted further negotiations until after the November election. He concluded his tweet with upbeat messaging on the economy and a call for the Senate to prioritize confirmation of Amy Coney Barrett to the Supreme Court. Both the S&P 500 and the Nasdaq dropped 2% from their intraday highs after the announcement as investors’ recently rising hopes for further near-term economic support from the government were extinguished. President Trump’s decision seemed to contrast with his tweet from Walter Reed hospital on Saturday in which he stated that the economy “wants & needs stimulus” and pushed for both sides to “work together” toward swift agreement on a package. The newfound push over the weekend from both sides on the stimulus followed the grim announcements from both American Airlines and United Airlines of nearly 32,000 upcoming furloughs between the two companies absent direct government stimulus. Speaker Pelosi has issued statements to both airlines assuring that relief will come either in the standalone form of Rep. DeFazio’s (D-OR)  bill, which extends Paycheck Protection Program (PPP) to the airlines for six months, or as part of the comprehensive package still to be agreed upon.

Fed Minutes to Provide Additional Insight as Monetary Stimulus Bets Rise

The spotlight now shifts back to the Fed, as recent communications indicate that their already downbeat economic projections had assumed additional fiscal support. The minutes from the September FOMC meeting, which are being released today, are expected to feature some incremental details regarding the Fed’s revised interest rate projections with its new and more ambitious inflation targeting and full employment mandates. However, attention is already shifting to the potential for additional stimulus, likely in the form of augmented asset purchases, after the apparent breakdown in negotiations between the White House and House Democrats over the pandemic relief bill. In a speech yesterday, Fed Chair Powell redoubled his calls for more fiscal stimulus to shore up the recovery, stating that fiscal and monetary policy responses have so far underpinned a “strong but incomplete recovery in demand,” and emphasized that the Fed’s current economic outlook assumes additional government support measures. His strong and continued advocacy of more fiscal spending has been echoed almost unanimously by the other members of the FOMC.

Additional Themes

US Political Uncertainty in Focus Ahead of Veep Debate – With the polls showing Joe Biden extending his lead over President Trump, the stakes for tonight’s Vice Presidential debate are high for both sides. Lingering health concerns and the Covid-19 containment measures on display in the debate will amplify the tension in the venue, particularly given the news in recent days that more White House staff are testing positive for the virus.

House Democrats Push Big Tech Antitrust – The House Antitrust Subcommittee issued a report yesterday recommending a sweeping new approach to regulating the US IT giants that it describes as “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons” with “too much power.” Recommendations included limits on the areas of business in which each company can operate, which could require a breakup of the giants. Amazon, Apple, Facebook, and Google shares underperformed yesterday, though not dramatically, and are broadly positive again this morning, suggesting that investors remain broadly unconcerned over these ongoing inquiries into anticompetitive practices by these firms.

Morning Markets Brief 10-6-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s rally as investors struggle to gain greater clarity on the US political and policy outlook. S&P 500 futures indicate a 0.2% lower open after the index soared 1.8% yesterday, lifting its year-to-date gain to 5.5%, which is less than 5% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. After yesterday’s burst of optimism on the fiscal stimulus front sharply weakened the dollar and hoisted longer-dated Treasury yields, both are settling down this morning, with the 10-year yield at 0.77%. Brent crude prices are continuing to recover a portion of last week’s steep downtrend, bouncing back toward $42 per barrel.

Tentative Easing of US Political Uncertainty

President Trump’s return to the White House from Walter Reed hospital last night has somewhat moderated US political uncertainty, as an increasing number of analysts suggest that recent development may be adding a degree of clarity to the political and policy outlook. As concerns over a worst-case health outcome for the president have eased, the focus has shifted to the ramification for the election. For context, the locus of US political risk centers on the prospect of a tight presidential race leading to a lengthy, litigated, and disorderly dispute over the outcome. Now, with investors generally assuming that the West Wing Covid cluster will prove to be a meaningful setback to President Trump’s reelection odds, and a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate, there has been an incremental shift toward expectations of a clear-cut Biden victory and perhaps even a Democrat sweep. Though some analysts are focused on the potential for higher taxes under a Biden administration and Democrat-led Congress, the prospect for significantly augmented fiscal spending in such a scenario is seen as a stimulative counterbalance. A closely-followed prediction market has reflected rising odds of a Biden win over the past week and is now near its highest level for this election cycle after registering a peak 66% likelihood late last week. Biden thus far has tested negative for Covid-19. The next major campaign event is tomorrow’s Vice Presidential debate, which is scheduled to take place despite safety concerns.

Fed Communications in Focus

Chair Powell is set to speak this morning ahead of tomorrow’s release of the minutes from the consequential September FOMC meeting. Fed Chair Powell will deliver remarks this morning, kicking off the second day of the National Association for Business Economics’ (NABE) 62nd annual conference. He is expected to continue to make the case for more fiscal stimulus amid a cloudy outlook for the economy and may discuss various aspects of the Fed’s shift to average inflation targeting of 2% and the corresponding interest rate projections that were revealed at last month’s FOMC meeting. The minutes of those proceedings will be released tomorrow and they will be closely parsed for any additional insights on the thinking behind the new policy formulation. For context, analysts have been focused on the areas of ambiguity such as the approximate length of time over which the Fed would be averaging the inflation figures, what degree of price pressure over 2% they would be willing to accept, and how the Fed would react to backsliding away from its targets with interest rates already pinned at the zero lower bound. In his speech yesterday at the NABE Conference, Chicago Fed President Evans took an aggressive stance, stressing that overshooting the 2% inflation target is critical and that “the FOMC needs to have an ‘in it to win it’ attitude toward our inflation objective.”

Additional Themes

Pelosi and Mnuchin Set to Meet on Stimulus – With persistent gaps remaining between the House Democrats’ $2.2 trillion version of the next round of pandemic relief spending, which they passed last Thursday, and the roughly $1.5 trillion package supported by the White House, face-to-face talks between House Speaker Pelosi and Treasury Secretary Mnuchin are set to take place today. This morning, Speaker Pelosi reportedly characterized the negotiations as going “very slowly.” From the hospital over the weekend, President Trump redoubled his support for a pandemic relief bill via Twitter, calling for both side to “get it done” but did not offer any compromise to break the deadlock. Even if the two sides were to agree, the Senate might pose a final obstacle to bill, given that Majority Leader McConnell has warned that he will only bring a vote to the floor if a majority of his Republican caucus supports it.

ECB President Lagarde Talks Stimulus – In an interview with the Wall Street Journal, European Central Bank (ECB) President Lagarde reiterated her warnings about the durability of the EU economic recovery amid pockets of Covid-19 resurgence. She emphasized that the ECB stood ready to “use all the tools,” including interest rates and asset purchases, to counter the risk of a double-dip recession. Recently, ECB officials, including President Lagarde, have focused on the strength of the euro as a headwind in their reflationary efforts. The euro is flat this morning following Lagarde’s remarks but remains near more than two-year highs versus the dollar.