Category: Morning Markets Brief

Summary and Price Action Rundown

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

US Bank Stocks in Focus Ahead of Dividend Announcements

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

Worsening Coronavirus Data Puts US Growth Outlook in Focus

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

Additional Themes

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

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

Summary and Price Action Rundown

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

US Bank Stocks Set for Choppy Trading Amid Regulatory Crosscurrents

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

US Economic Data in Focus

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Optimism for the Economic Recovery Wavers Amid Rising Coronavirus Cases

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

IMF Sounds a Cautious Note on the Global Economy

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Miscommunication on US-China Trade Roils Markets Overnight

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

Global Growth Indexes for June Outperform Expectations

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

Additional Themes

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

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

Summary and Price Action Rundown

Global risk assets are broadly higher this morning as signs of cooling US-China tensions and the prospect of more economic stimulus, this time by the EU, are helping support sentiment despite underlying concerns that the Covid-19 resurgence will impede reopening plans. S&P 500 futures indicate a 0.8% higher open after the index struggled for direction over the past two sessions, holding its year-to-date downside at 3.6%. Equities in the EU are outperforming as regional leaders discuss historic stimulus and Asian stocks were mostly higher overnight. The dollar is flat, while longer-dated Treasury yields are also little changed, with the 10-year yield at 0.72%. Crude oil prices are continuing higher after yesterday’s OPEC compliance review.

US-China Trade Deal Reaffirmation Buoys Market Spirits

After months of rising tensions between the two superpowers, headlines overnight indicating that China has agreed to accelerate its US farm goods buying to align with its Phase One trade deal commitments are easing investor concerns. Beijing’s pledge to accelerate the purchases is reportedly a result of the meeting between Secretary of State Pompeo and his Chinese counterpart in Hawaii on Wednesday. The renewed commitments are said to encompass a wide range of US agricultural products, including soybeans, corn, and ethanol. For context, China’s purchases of US farm goods had not been tracking the levels set out in the Phase One trade deal, with statistics showing that in the first four months of 2020, the buying was only 13% of the $36.5 billion target, which lagged even the pre-trade war pace of 2017. The Chinese side has yet to explicitly affirm this recommitment but had issued a broadly positive statement following the meeting, characterizing it as “constructive.” This comes after analysts have noted reports detailing passages from forthcoming book by former White House national security advisor John Bolton relating to President Trump’s posture toward Chinese trade negotiations, in particular with regard to US farm goods purchases. Specifically, Bolton alleges in the book that President Trump asked Chinese President Xi to help him win reelection by increasing buying of US farm products. Regardless, analysts expect that being “tough on China” will remain a key election issue in the runup to November polls. Earlier this week, President Trump signed into law a bill that would target Chinese entities and officials involved in the suppression of Muslim minorities in western China with sanctions, drawing threats of retaliation from Beijing.

 

Barrage of Stimulus News Continues with EU Fiscal Package Negotiations

EU leaders are beginning to wrangle in earnest today over the historic €750 billion pandemic relief plan, which features an unprecedented degree of budget-sharing. Early reports indicate that German Chancellor Merkel and European Central Bank President Lagarde are pushing strongly for the package and warning of the adverse consequences of failure to agree, but that various countries are holding out for concessions. EU assets are broadly stable amid the dispatches from the negotiations. This rounds out a week that featured a daily cadence of headlines signaling an immediate or impending augmentation of major fiscal or monetary stimulus. On Monday, the Federal Reserve announced that its Main Street Lending Program was finally up and running and then enhanced its corporate liquidity facility by moving to individual corporate bond buying rather than less targeted credit ETF purchases. This was followed by two days of determinedly dovish testimony by Fed Chair Powell in front of Congressional committees. Also this week, headlines indicated that the Trump administration is looking for another $2 trillion pandemic relief bill later this summer and will push a $1 trillion dollar infrastructure package. Meanwhile, the Bank of Japan and Bank of England announced additional accommodation at their meetings, alongside a €1.3 trillion concessionary loan disbursement from the European Central Bank on Thursday.

Additional Themes

Coronavirus Developments Remain in Focus – Single-day coronavirus case increases hit new highs in California and Florida yesterday while hospitalizations continued to rise in Texas. Oklahoma is among those worsening hotspots, which has raised concerns about President Trump’s upcoming campaign rally in Tulsa that is scheduled for tomorrow in a 20,000 seat indoor arena. Thus far, no mass lockdowns have been re-imposed in the US.

Looking Ahead – Next week’s economic calendar features some key data and begins over the weekend with a decision by the People’s Bank of China, which is expected to hold rates steady but to continue with easing measures in the second half of the year. The focus early in the week will be on preliminary global Purchasing Managers’ Indexes (PMIs) for June, which are projected to show continued improvement in manufacturing and service sector activity in the US, EU, and Japan. US personal income and spending figures for May are also due and are forecast to echo May retail sales figures showing a rebound in consumer demand, though income is expected to relapse to the downside.

Summary and Price Action Rundown

Global risk assets are mostly lower this morning as investors continue to weigh the prospects for economic recovery, aided by ongoing fiscal and monetary stimulus, against the risks that areas of Covid-19 resurgence will impede reopening plans. S&P 500 futures point to a 0.4% lower open after the index broke a three-day streak of gains yesterday, taking its year-to-date downside to 3.6%. Equities in the EU are also slipping this morning and Asian stocks were mixed overnight. The dollar is flat, while longer-dated Treasury yields are edging lower amid the cautious tone in markets, with the 10-year yield at 0.72%. Crude oil, however, is finding support ahead of today’s OPEC supply cut compliance review, with Brent at $41 per barrel.

Central Banks Remain in the Spotlight

After two days of dovish testimony from Fed Chair Powell and augmented accommodation measures from both the Federal Reserve and the Bank of Japan earlier this week, today has featured more easing by the Bank of England (BoE) and an announcement of €1.3 trillion in concessionary funding by the European Central Bank (ECB). This morning, the BoE announced its latest monetary policy maneuvers, meeting consensus expectations for an increase in quantitative easing (QE) measures by £100 billion to a total of £745 billion while holding interest rates steady at 0.10%. Some analysts had expected the BoE to be more aggressive and increase QE by £200 billion and/or cut the policy rate to zero today, with a view toward negative rates later this year. A more proactive approach to easing would not have been particularly surprising given statements from the BoE that “the economy may be heading for the worst downturn in three centuries” after UK GDP shrank by more than 20% in April alone, while the nation is grappling with the worst Covid-19 outbreak in Europe, protests over racial inequality, and the risk of a hard Brexit at year-end. Also, the consumer price index (CPI) for May was up just 0.5% from a year earlier, dramatically undershooting the BoE’s 2% target rate. UK assets are broadly stable thus far following the decision. Meanwhile, the ECB announced that today’s offer of cheap loans with three-year terms to regional banks (TLTRO’s) was tapped by 742 institutions for a total of €1.3 trillion, which was in the middle of the range of estimates for uptake. EU markets are broadly steady this morning, having rallied significantly over recent weeks, with the euro close to 12-month highs versus the dollar and the spread between 10-year Italian and German debt yields (a key market-based indicator of Italian creditworthiness) near its most favorable level since early March, though equities are down from early June highs.

Covid-19 Data Suggests Resurgence Risk

After last week’s selloff was spurred in part by an acceleration of the outbreak in US states that were forging ahead with economic reopening, investors remain wary this week of the continuing rise in cases and are monitoring reports from Beijing’s surge in infections. One of China’s top virologists stated that the secondary spike in Beijing is under control, helping bolster risk sentiment overnight. However, reports indicate that the re-imposed restrictions have taken traffic in the Chinese capital to 29% of normal levels during today’s morning rush hour. Meanwhile, single-day coronavirus case increases hit new highs in Florida yesterday, with Texas, Arizona, and other southern states that had been spared the worst of the outbreak to this point also showing an accelerating spread. Earlier this week, White House public health advisor Dr. Fauci indicated that the rising cases could not be explained by increased testing, adding that this is still the “first wave” and not a secondary spike in infections in these states. Oklahoma is among those worsening hotspots, which has raised concerns about President Trump’s upcoming campaign rally in Tulsa that is scheduled for Saturday in a 20,000 seat indoor arena. Thus far, no mass lockdowns have been re-imposed in the US.

Additional Themes

Investors Note US-China Headlines – Some analysts are pondering whether yesterday’s late-day selloff in US stocks was spurred by headlines relating to the forthcoming book by former White House national security advisor John Bolton. The reports detail Bolton’s claims in the book that President Trump asked Chinese President Xi to help him win reelection, among other untoward overtures to Xi and other global leaders. Meanwhile, Secretary of State Pompeo met with his Chinese counterpart in Hawaii yesterday amid simmering tensions between the two superpowers. Both sides issued positive statements after the meeting but were short on specifics. Also, President Trump signed into law a bill that would target Chinese entities and officials involved in the suppression of Muslim minorities in western China with sanctions, drawing threats of retaliation from Beijing.

US Jobless Claims Data Due – Later this morning, initial jobless claims for the week ending June 13^th are expected to decline to 1.3 million from 1.5 million the prior week. Continuing claims for the week ending June 6^th are forecast to fall to 19.9 million from 20.9 million.

Summary and Price Action Rundown

Global risk assets are continuing this week’s rebound today as bouncing US retail sales, central bank accommodation, and the prospect for additional fiscal stimulus help offset worries over a possible reacceleration in Covid-19 infections amid US economic reopening. S&P 500 futures indicate a 0.5% higher open after the index extended its ongoing rally for a third day yesterday, paring its year-to-date downside to 3.3% on the parade of supportive developments. May US retail sales joined nonfarm payrolls as bright spots amid a muddled economic picture (more below). Equities in the EU are higher while Asian stocks were mixed overnight. The dollar is flat, as are longer-dated Treasury yields, with the 10-year yield at 0.75%. Crude oil is giving back some recent gains, with Brent slipping back toward $40 per barrel.

US Retail Rebound Stands Out Amid Muddled Global Recovery Signals

US consumption evidenced a burst of pent-up demand in May but other economic datapoints show less vigorous recovery. US retail sales surged 17.7% month-on-month (m/m) in May, easily beating expectations of an 8.4% jump and recovering from the record 14.7% fall in April. This is the largest monthly increase on record, as states eased restrictions and many stores and restaurants reopened from the coronavirus lockdown. This figure pushed the overnight rally in US equity futures even higher before yesterday’s opening bell. US industrial production was less impressive, advancing only 1.4% m/m in May after falling a record 12.5% in April and missing consensus expectations of a 2.9% rebound. Meanwhile, Japan’s exports fell 28.3% year-on-year (y/y) in May, undershooting expectations for -26.1% and worsening from April’s -21.9%, with shipments to the US down by 50.6% y/y. Imports declined 26.2% y/y, suggesting continued weakness in domestic Japanese demand, while a gauge of manufacturer sentiment also deteriorated further in June.

Extraordinary Fiscal and Monetary Stimulus Continues to Underpin Market Sentiment

Yesterday’s news that the White House is preparing a $1 trillion national infrastructure proposal and more ultra-accommodative messaging from Fed Chair Powell are adding fuel to this week’s US equity rebound. On the infrastructure front, the Transportation Department is said to be working on the draft plan that focuses on traditional projects (i.e. bridges, roads) but allocates a portion of the funds to the buildout of 5G infrastructure and rural connectivity. Although this news attracted a degree of skepticism from some reporters, Caterpillar and Aecom gained 5.3% and 3.9%, respectively, yesterday while Nucor steel jumped 6.4% and an ETF of infrastructure stocks gained 3.0%. Also yesterday, Federal Reserve Chair Powell reiterated his assessment of predominant downside risks in his testimony before to the Senate Banking Committee as part of his semiannual monetary policy report to Congress. Chair Powell remarked that “significant uncertainty remains about the timing and strength of the recovery,” and although the US economy is beginning to rebound, he reiterated the Fed’s commitment to using “the full range of policy tools” available. For context, the Fed announced earlier this week that it would be expanding its corporate credit support program to buy individual company bonds and is finally launching its long-awaited Main Street Lending Program. However, Chair Powell continued to make the case that fiscal spending may provide a more appropriate form of support in these circumstances. Today is his second and final day of testimony on Capitol Hill, this time appearing before a House Financial Services Panel.

Additional Themes

Mixed Covid-19 Developments – According to reports earlier this week, Dexamethasone, a cheap and widely-used steroid, appears set to become the first drug treatment yielding life-saving results among Covid-19 patients, and is now being referred to as a “major breakthrough” by some scientists. This positive development helped offset concerns about a secondary outbreak in Beijing after weeks of relative normalcy, as well as a further infection increases in various US states that have engaged in economic reopening, such as Texas and Florida. Yesterday, White House public health advisor Dr. Fauci indicated that the rising cases could not be explained by increased testing, adding that this is still the “first wave” and not a secondary spike in infections. Thus far, no mass lockdowns have been re-imposed in the US.

Rising Risks Around Geopolitical Flashpoints – After North Korean forces demolished a liaison office on their side of the border yesterday and moved to occupy areas of the buffer zone near the border, South Korea has warned that it will not tolerate further provocation from Pyongyang. South Korean assets, which tend to be resilient in the face of North Korean bluster, have been choppy this week, with the South Korean won (KRW) down 0.8% versus the dollar since the weekend, though the benchmark Kospi index is slightly higher over the past three sessions. Meanwhile, tensions are ebbing at the disputed India/China border after recent clashes between the two sides resulted in reports of casualties, with signs of détente emerging.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as central bank largess and the prospect for additional fiscal stimulus help offset worries over a possible re-acceleration in Covid-19 infections due to US economic reopening. S&P 500 futures point to a 1.3% higher open after the index recovered from steep early losses yesterday to close in positive territory. The midday announcement by the Federal Reserve of enhancements to its corporate bond purchase program helped accelerate the rebound (more below). Equities in the EU and Asia posted solid gains overnight. Longer-dated Treasury yields are edging higher, with the 10-year yield rising to 0.74% this morning, while the dollar is slightly weaker. Crude oil is also bouncing, with Brent climbing above $40 per barrel.

Global Central Banks Increase Extraordinary Stimulus

Investor risk appetite continues to receive support from ever easier monetary policy around the world, with the Federal Reserve announcing yesterday that it would begin purchasing individual corporate bonds and the Bank of Japan overnight upsizing its lending program to cash-strapped businesses. Yesterday, US equities accelerated to the upside after the Fed announced updates to the $750 billion Secondary Market Corporate Credit Facility (SMCCF), thereby expanding its purchases beyond credit ETFs to include individual bonds that have remaining maturities of five years or less. For context, the SMCCF is designed to support market liquidity and the availability of credit for large employers. However, this augmentation of the program is not evidently in response to any increased stress in the market, given that the spreads on both investment grade and high yield bonds are already back at their most favorable levels since early March and companies have issued a flood of debt in recent months, with investment grade companies raising nearly as much so far in 2020 as they did all last year. This followed the Fed’s announcement earlier on Monday that the long-awaited $600 billion Main Street Lending Program (MSLP) is finally up and running after significant changes to the lending terms had been made in order to make it more attractive for businesses to borrow. Chair Powell is expected to discuss these programs, future policy options, and his somber outlook for the US economy in his biannual Humphrey-Hawkins testimony before Congress this week, which starts today with the Senate Banking Committee. Meanwhile, Governor Kuroda remained similarly focused on downside risks to Japan’s economy and the potential for a second wave of the pandemic later this year at the Bank of Japan (BoJ) meeting overnight. The BoJ beefed up its support for domestic businesses, increasing its corporate lending facility from roughly $750 billion to $1 trillion, though it retained its yield curve control settings. Governor Kuroda indicated that ultra-accommodative settings could extend until 2023.

Trump Administration Preparing to Propose Major Infrastructure Bill

Amid increasing speculation over the timing, size, and composition of the next US pandemic relief package, reports indicate that the White House is also preparing a $1 trillion proposal for national infrastructure projects. The Transportation Department is said to be working on the draft plan, which will prominently feature spending on roads and bridges, but also includes funds for 5G development and rural broadband connectivity. Analysts note that the September 30^th expiry of the current funding bill for transportation infrastructure, the Fixing America’s Surface Transportation (FAST) Act, provides a timeline for the rollout of this proposal. Meanwhile, House Democrats proposed a $494 billion replacement for the FAST Act earlier this month that met with opposition from Senate Republicans, who have their own version of a surface infrastructure bill worth $287 billion.

Additional Themes

Key US Economic Data Due – Analysts are awaiting this morning’s release of May retail sales data, with estimates pointing to an 8.4% month-on-month (m/m) rebound. In April, retail sales sank 16.4% m/m from March, undershooting expectations of a 12.0% drop and registering the sharpest decrease in monthly retail sales ever recorded. Year-on-year, April retail sales fell 21.6%, also a record drop. This will be followed by May industrial production figures, which are also expected to recovery, though more modestly at 3.0% m/m from the April slump of 11.2%, the largest monthly drop in the 101-year history of the index.

Geopolitical Tensions Rise in Key Hotspots – After increasingly bellicose rhetoric from Pyongyang, North Korean forces demolished a liaison office on their side of the border overnight, marking a significant escalation in tensions. Still, South Korean assets, which tend to be resilient in the face of North Korean bluster, retraced Monday’s losses, with the benchmark Kospi index soaring 5.3% and the Korean won advancing 0.8% versus the dollar. Meanwhile, reports indicate that three Indian soldiers were killed in a clash with Chinese forces near the disputed border. For context, geopolitical risks tend to be difficult for investors to assess.

Summary and Price Action Rundown

Global risk assets moved sharply lower overnight as investors continue to grapple with the risk that a secondary spike in Covid-19 infections will impede economic reopening. S&P 500 futures indicate a 2.2% lower open after the index suffered its first weekly decline in a month last week, sliding 4.8%. The sharp rally for the S&P 500 in prior weeks had erased the index’s year-to-date downside as of last Monday. Equities in the EU are similarly lower while Asian stocks posted some steep declines overnight. Longer-dated Treasury yields have reverted to their previous range, with the 10-year yield descending to 0.67% this morning, while the dollar is edging higher. Crude oil is lower, with Brent dropping toward $38 per barrel.

Covid-19 Resurgence Risk Weighs on Investor Sentiment

Last week’s abrupt return of market volatility, which many analysts ascribed in part to the rising number of coronavirus cases in areas that have been in the process of economic reopening, is set to continue today as infection data continued to worsen over the weekend. Texas, Florida, Georgia, Arizona, North Carolina, and South Carolina are among the states experiencing a rise in Covid-19 cases and hospitalizations. Some analysts have argued over whether these various hotspots amount to a “secondary spike” in the US when many of these states never suffered a significant initial surge like New York, New Jersey, Washington, and elsewhere. Also, there remains uncertainty over the degree to which this apparent increase in cases might be attributable to more widespread testing rather than a true uptrend in new infections. New York Governor Cuomo issued a warning over the weekend that he will seek to shut businesses that are flouting the mandated precautions for safe reopening. Meanwhile, Beijing is also experiencing a targeted lockdown after a resurgence in infections centered around a seafood and produce market has been the source of new coronavirus cases in half the districts of the city. For context, reports indicate that life in Beijing had returned to relative normalcy in recent weeks after a 50-day period without any new reported cases. –

Chinese Data Suggests a Tepid Rebound

Despite being further along the timeline of pandemic containment and economic reopening, China’s economic data continues to suggest lingering effects of the virus. Overnight, China’s key growth readings for May generally undershot estimates and conveyed a picture of gradual resumption of economic activity rather than the V-shaped rebound that some analysts had hoped. Retail sales were -2.8% year-on-year (y/y), missing expectations of -2.3% but improving from April’s contraction of 7.5%. Industrial production registered an expansion of 4.4% y/y, accelerating from the prior month’s 3.9% growth but was still shy of the forecast pace of 5.0%. Fixed asset investment, which is quoted on a year-to-date basis, slightly topped estimates, posting -0.3% versus -0.8% consensus expectations and -3.3% in April. Commentators are citing weak demand, both domestically and overseas, for the halting progress in China’s economic recovery even months past the peak of the pandemic on the mainland. Meanwhile, the Trump administration continues to send upbeat signals on the recovery, with National Economic Council (NEC) Director Kudlow stating yesterday that he sees a “very good chance” of the US economy experiencing a V-shaped rebound over the second half of this year. Last week, the Fed’s updated projections for growth in 2020 and 2021 were consistent with lingering headwinds from the pandemic. The OECD and World Bank also issued downgraded forecasts last week and the IMF is set to follow suit.

Additional Themes

White House Officials Discuss Upcoming Stimulus Measures – Over the weekend, White House advisor Navarro indicated that President Trump is seeking at least $2 trillion for the next pandemic relief bill, which administration officials have suggested would be delayed until late July. This contrasts with the statements of Senate Majority Leader McConnell, who has stated that this next fiscal package should be closer to $1 trillion. Navarro also noted the continued White House preference for a payroll tax cut. Meanwhile, NEC Director Kudlow indicated that the White House remains committed to the end-July expiry of augmented unemployment benefits, as they represent a “disincentive” to return to work. Administration officials and GOP Senators have proposed instead a “back to work” bonus for employees.

Flaring Tensions on Korean Peninsula – Increasingly bellicose rhetoric from North Korea has featured threats to cut off communications as well as aggressive pronouncements from Kim Jong Un’s sister, who analysts speculate may be the leading candidate to succeed her brother as questions continue to swirl over his health. The South Korean government called an emergency session on Sunday to assess the situation. South Korean assets, which tend to be resilient in the face of North Korean bluster, underperformed significantly overnight, with the Kospi retreating 4.8% and the Korean won sinking 1.0% versus the dollar.

Summary and Price Action Rundown

Global risk assets staging a rebound that is set to retrace a portion of yesterday’s major downside, as investors grapple with the risk that a secondary spike in US Covid-19 infections will impede economic reopening. S&P 500 futures point to a 1.6% higher open after the index suffering its worst single-session loss since March, plummeting 5.9% yesterday. This brought total losses over the past three sessions to 7.1% after Monday’s gain erased all of the S&P 500’s year-to-date downside. The Nasdaq sank 5.3% yesterday after registering a new record high the day before. Equities in the EU are similarly rebounding while Asian stocks posted moderate declines overnight. Longer-dated Treasury yields have stabilized after a round-trip over the past week, with the 10-year yield climbing back to 0.71% this morning, while the dollar is also steadying after yesterday’s burst of appreciation. Crude oil is flat, with Brent below $39.

Market Volatility Re-Intensifies Abruptly

After weeks of unrelenting equity upside premised on hopes of a swift recovery in economic activity, with tailwinds from vaccine hopes and magnanimous Federal Reserve liquidity, the upbeat trends reversed sharply yesterday amid resurgent doubts over the outlook for reopening. Analysts are pointing to various downside catalysts for yesterday’s dramatic return of volatility in stocks and global risk assets generally, chief among them the troubling data on re-intensifying Covid-19 infections in various US regions and cities that have been in the process of reopening for economic activity. Amid a resurgence of coronavirus infections, reports indicated that Houston may reopen its emergency medical facilities housed at NRG Stadium while Nashville announced a delay in its reopening plans. The downbeat tone and grim outlook communicated by the Federal Reserve at their June meeting earlier this week has also been cited as weighing on sentiment. However, this cautious messaging from Chair Powell and his FOMC colleagues has been broadly consistent for months, with the updated forecasts only adding a degree of specificity to their concerns. Lastly, the astounding speed and magnitude of the runup in equities is another factor that market participants are noting, with a technical pullback long overdue after the dizzying climb from the low of March. For context, the Nasdaq broke to new record highs on Wednesday and the S&P 500 had erased all of its 2020 downside on Monday’s rally. These stunning rebounds have placed US stocks at significantly higher valuations than earlier in the year given the impaired earnings outlook.

Trump Administration Holds the Line on Reopening and Delayed Fiscal Stimulus

Treasury Secretary Mnuchin echoed President Trump’s various pronouncements on the shifting White House policy stance toward Covid-19 yesterday, indicating that the US should not resort to lockdowns again and that another pandemic relief bill will be delayed until later in the summer. In remarks on CNBC yesterday, Treasury Secretary Steven stated that the US should not shut down the economy again even if there is a resurgence in coronavirus cases. He defended this position, which President Trump has recently espoused, by expressing confidence in the nation’s Covid-19 testing abilities, improved contact tracing, and general knowledge on the virus. Thus, Mnuchin stated, “it will not be necessary to impose restrictions again…We’ve learned that if you shut down the economy, you’re going to create more damage.” Additionally, Mnuchin applauded the bipartisan efforts to bring $6 trillion in stimulus to the economy, but he reiterated the Trump administration’s resistance to expediting another stimulus bill, preferring instead to wait until after July to negotiate the finer details of the next package. Senate Republicans have been pushing firmly for this hiatus in relief spending. “One of the things we’re going to need to be focused on is how do we help the industries that are especially impacted: hotel, travel, entertainment, restaurants,” Mnuchin said.

Additional Themes

UK Economy Contracts Sharply in April – The monthly economic GDP reading for the UK posted a 20.4% retrenchment in April from March, which had also been in negative territory but to a shallower degree at -5.8% month-on-month (m/m). Reports indicated that not only was April the sharpest UK GDP decline on record but it erased 18 years of economic expansion, shrinking the economy back to the size it was in 2002. Still, this brutal statistic was only moderately worse than the consensus forecast of -18.7% m/m and took the three-month rate to -10.4%. Industrial and manufacturing production figures for April were similarly dire. For context, the UK has the highest Covid-19 mortality rate in Europe and is facing the prospect of a no-deal Brexit at year-end. Nevertheless, the pound is steady today, holding near its highest level versus the dollar since mid-March, indicating that market participants remain focused on the recovery.

Looking Ahead – The Bank of England meets next week amid the dismal UK data, with some analysts predicting a rate cut to 0%. The Bank of Japan also has a meeting. US retail sales and industrial production for May will be in focus along with more weekly jobless claims