Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets are advancing this morning after Russia’s announcement that a domestically-produced vaccine has been approved for use, while President Trump mulls additional options for stimulus amid deadlocked talks with Congress over the pandemic relief bill. point to a 0.5% higher open after yesterday’s gains extended the index’s year-to-date upside to 4.0%, registering a new high for the pandemic and coming within 1% of February’s all-time high. Equities in the EU are jumping on the vaccine news and encouraging economic data, while Asian stocks were mostly higher overnight. The dollar is turning back toward nearly two-year lows while longer-dated Treasury yields are finding support on vaccine hopes, with the 10-year yield at 0.61%. Brent crude prices are rising above $45 per barrel.

Optimism Over Russian Vaccine News

Russia’s announcement that a Covid-19 vaccine has been approved is providing further impetus for the ongoing rally in global equity markets. Earlier this morning, global risk asset prices lurched higher following news that Russia’s Health Ministry has issued the world’s first approval for a Covid-19 vaccine, which has been developed by the Gamaleya Institute. President Putin declared that it provides lasting immunity, with the Health Ministry estimating a two-year period of effectiveness, and that his daughters have each received a dose. Reports have registered a degree of skepticism from the global medical community, with concerns that the standard Phase 3 trial period had been radically shortened or skipped entirely in an effort to rush the vaccine to market. With a profusion of potential vaccines in various stages of development, investors have been poised for a series of vaccine announcements beginning roughly around now, though there continues to be deep uncertainty over their effectiveness as well as the ability to produce and distribute them widely enough to achieve herd immunity in a timely fashion.

White House Eyes Tax Cuts Amid Congressional Deadlock on Stimulus

After President Trump moved to circumvent Congress over the weekend with stopgap pandemic relief measures through executive order, his remarks last evening revealed a pivot to prospective tax cuts. At a press conference yesterday, President Trump indicated that he is revisiting the idea of reducing capital gains tax rate, which tops out at 20%, and will seek to deliver a middle-class tax cut, noting that details would follow shortly. However, analysts point out that his ability to enact these measures without Congressional assent is limited, though an executive order could in theory be used to require capital gains to be indexed to inflation, thereby effectively reducing the rate paid. Such an approach has been considered previously and is deemed likely to face legal challenges. This comes as questions mount over the efficacy of President Trump’s executive orders issued in lieu of a pandemic relief deal. Amid mixed messages from the White House regarding the payroll tax holiday, businesses must assume that they will to have to pay back the deferred amounts later this year, while more states are pushing back regarding their obligation under the President’s unemployment relief to pay a quarter of the $400 additional benefit. Meanwhile, House Democrats and administration officials remain at loggerheads over key negotiating points, particularly the amount of unemployment benefit support and aid to states and municipalities.

Additional Themes

Australian Business Confidence Slips – The National Australia Bank’s (NAB) index of business confidence plunged to -14 in July from a downwardly revised 0 in the prior month, amid uncertainties surrounding the Covid-19 resurgence that led to renewed restrictions in Victoria. Confidence fell across all industries, led by a decline in mining. The survey was conducted prior to the stage 4 lockdown in Melbourne but confidence had already deteriorated for fear of the spread of the coronavirus. The NAB Group Chief Economist said, “while the improvement in conditions is very welcome, capacity utilization and forward orders point to ongoing weakness overall. Therefore, with confidence still fragile there is some risk that conditions lose some of their recent gains in coming months.”

EU Economic Outlook Brightens – The closely-followed ZEW economic expectations survey showed improvement in August for both Germany and the EU as a whole. The German reading jumped to 71.5 from July’s reading of 59.6, handily topping consensus estimates of 55.8, while the regional gauge advanced to 64.0 from 59.6. For context, recent upside surprises in EU economic data have contributed to gains for euro, sending the single currency to its highest level versus the dollar since spring of 2018.

US Small Business Confidence Dips – The NFIB small business optimism index undershot expectations in July, declining to 98.8 from June’s multi-month high of 100.6 versus estimates of only a slight tip to 100.5. The NFBI chief economist noted the difficulties that small businesses faced last month in attempting to reopen amid a widespread Covid-19 resurgence.

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as President Trump attempts to circumvent Congress to deliver pandemic relief through executive action, while US-China tensions continue to percolate but stop short of significant escalation. S&P 500 futures indicate a slightly higher open after last week’s gains extended the index’s year-to-date gain to 3.7%, registering a new high for the pandemic and coming within nearly 1% of February’s all-time high. Equities in the EU and Asia were mostly higher overnight. The dollar is continuing to claw higher from nearly two-year lows though longer-dated Treasury yields are settling back toward recent lows, with the 10-year yield at 0.55%. Brent crude prices are re-approaching $45.

White House Resorts to Executive Action Stimulus Stopgaps

After the administration failed to reach an agreement last week with Congressional Democrats over the magnitude and priorities of the next round of US pandemic relief spending, President Trump took executive actions over the weekend that have raised questions of enforceability and administration. President Trump issued an executive order and a series of memorandums targeted at coronavirus stimulus on Saturday, moves which some analysts characterize as bypassing Congressional authority over the purse, as stimulus talks remained at an impasse following another contentious week of negotiations. There is no apparent schedule for talks to restart today. The four orders signed provide an additional $400/week in unemployment benefits, suspend some student loan payments through the end of the year, extend a moratorium on evictions for renters, and instruct employers to defer certain payroll taxes through the end of the year for Americans earning less than $100,000. Unemployment benefits are to be mostly covered by the federal government ($300/week) with state governments providing the remaining $100/week, though some governors are expressing doubt that their threadbare budgets can bear such an obligation. The duration of these payments is also unclear, as is the timeline for disbursement of funds to eligible recipients. Meanwhile, the Trump administration has sent mixed messages on the details of the payroll tax holiday, raising confusion over its application. The breakdown in negotiations leaves several other issues, from stimulus checks to PPP funding, on hold until an agreement can be reached.

US-China Tensions Remain Elevated

In retaliation for the latest US moves to counter China, including sanctions on eleven high-ranking officials involved in oppression in Hong Kong and the impending bans on Chinese-owned apps TikTok and WeChat, Beijing announced that it would sanction eleven US officials. Senators Rubio and Cruz are two high-profile names on the list, but with China matching the US figure of eleven targeted individuals and no Trump administration officials on the list, there is a sense of proportionality and de-escalatory intent suggested in this move. For context, last week featured high-profile moves by the Trump administration targeting China and Chinese companies with alleged deep government ties. Friday morning, the US announced that it was imposing sanctions on eleven Chinese officials including Hong Kong’s Chief Executive Carrie Lam over their role in “implementing Beijing’s policies of suppression of freedom and democratic processes” according to the Treasury Department. This move followed recent executive orders from the administration that will impose a ban on Chinese-based apps TikTok and WeChat in the US amid privacy and national security concerns. Relatedly, the scramble by US companies to arrange potential bids for TikTok’s US business continues to heat up, with Twitter now in the mix along with Microsoft and other companies. Equities in Hong Kong underperformed overnight, though mainland Chinese equities rallied and both the onshore and offshore renminbi remained stable against the dollar near their strongest levels since March.

Additional Themes

Kodak Deal on Hold – The $765 million 25-year loan from the International Development Finance Corporation to expedite domestic production of drugs for several medical conditions, authorized by the Defense Production Act, has been delayed amid allegations that Eastman Kodak board members engaged in improper stock purchases ahead of the disclosure. Upon the announcement of the loan late last month, shares of the former photo giant soared over 300% and continued to rise over the ensuing days, gaining roughly 1000% over the course of that week.

Pivotal Global Economic Data This Week – This week, US retail sales figures for July offer the greatest potential for moving markets, as analysts will be attuned for signs that the resurgence of Covid-19 last month dented consumer sentiment. Meanwhile, initial jobless claims and consumer price inflation will also be in focus. Overseas data includes key Chinese growth readings for July, as well as second quarter EU and UK GDP.

Summary and Price Action Rundown

Global risk assets were mostly lower overnight amid rising US-China tensions and uncertainty over US fiscal stimulus negotiations, while investors await this morning’s key US labor market data. S&P 500 futures point to a 0.4% lower open after the index rose another 0.6% yesterday to extend its year-to-date gain to 3.7%, registering a new high for the pandemic and coming within nearly 1% of February’s all-time high. Equities in the EU and Asia were mostly lower overnight. Ahead of the pivotal US jobs number, the dollar is climbing above almost two-year lows while longer-dated Treasury yields are flat around their lowest levels since early March, with the 10-year yield at 0.53%. Brent crude prices are dipping below $45 per barrel.

US Labor Market in the Spotlight

After some mixed employment data earlier this week raised questions over the durability of the US jobs market recovery, investors are awaiting July nonfarm payroll figures. The Labor Department’s highly-anticipated July employment numbers are due later this morning, with consensus estimates for 1.48 million new jobs after June’s record 4.80 million. Following a spurt of hiring over recent months amid the selective reopening of the economy, economists are pondering a leveling-off in improvement. Yesterday’s new jobless claims data for the week ending August 1^st showed that another 1.2 million Americans filed for unemployment benefits, the least since the pandemic started, 200k less than last week and comparing favorably to consensus expectations of 1.4 million. It was also the largest weekly drop in jobless benefits applications in almost two months, but still the 20^th consecutive week of over a million claimants. Earlier this week, data showed a steep deceleration in private payrolls in July as payroll provider ADP reported that private businesses in the US hired just 167,000 workers last month, far short of market expectations of a 1.5 million rise after a revised 4.3 million increase in June. With ADP and continuing claims sending somewhat disparate signals, analysts will be particularly attuned to this morning’s nonfarm payrolls report.

US-China Tensions Ratchet Higher

In the latest move to counter China and its international companies with alleged ties to the Chinese Communist Party, President Trump banned apps TikTok and WeChat, effective in 45 days. President Trump invoked the 1977 International Emergency Economic Powers Act to justify the bans on US companies dealing with Chinese parent companies ByteDance and with Tencent specifically in connection with WeChat. The law provides a broad mechanism for the US government to impose restrictions on companies deemed to pose a threat. The TikTok order formalizes President Trump’s announcement earlier this week that app would be blocked in the US unless a US buyer completes a deal for the business within 45 days. Once the order takes effect, at the end of that period, any transactions between TikTok’s parent company, ByteDance, and US citizens will be outlawed for national security reasons. For the more than 100 million Americans who have downloaded TikTok, experts say the app may no longer be sent software updates, rendering TikTok inoperable over time. President Trump yesterday renewed calls for Microsoft to acquire the app and suggested that it should try to buy TikTok’s entire global operations. Secretary of State Pompeo signaled that the crackdown on TikTok was part of a broader campaign against Chinese tech companies with access to the data of US citizens. On Thursday, in a display of bipartisan solidarity on this issue, the Senate unanimously passed a bill to ban TikTok on government-issued devices. Trump also signed an executive order to restrict US business with China-based Tencent Holdings but narrowly in regard to its WeChat app. More than a billion people in China use WeChat, an all-in-one app used for messaging, social media and making mobile payments. Additionally, a White House working group also put forward a plan that Chinese companies with shares traded on US stock exchanges would be forced to de-list unless they comply with specific audit requirements by 2022. Chinese firms that are planning an initial public offering in the US would have to comply before they can be listed. The administration’s plan would require rule-making by the SEC, which ultimately oversees the audits of companies whose shares are traded in the US.

Additional Themes

US Stimulus Talks on the Brink – With today seen as an unofficial deadline for a deal, the atmosphere around the negotiations has turned more contentious. Speaker Pelosi and Senate Minority Leader Schumer expressed disappointment with yesterday’s talks, saying that the two sides are far apart on key issues. This dour assessment was echoed by Treasury Secretary Mnuchin and WH Chief of Staff Meadows. President Trump continues to assert that he will enact economic relief measures through various executive orders in lieu of a deal.

Earnings Feature Pandemic Impact – As earnings season winds down this week, analysts are focused on some notable reports from companies impacted by the pandemic. Shares of Uber are down 3.5% in pre-market trading after soaring Uber Eats deliveries failed to offset the steep decline in customer rides. With 441 of S&P 500 companies having reported, 84.3% of results have featured a positive earnings-per-share (EPS) surprise and 63.9% have topped revenue estimates. However, growth of sales and earnings are down 11.2% and 9.3%, respectively, thus far year-on-year.

Summary and Price Action Rundown

Global risk assets are mostly lower ahead of this morning’s key US labor market data, while investors monitor halting progress toward a US pandemic stimulus bill. S&P 500 futures indicate a 0.2% lower open after the index rose 0.6% yesterday to extend its year-to-date gain to 3.0%, registering a new high for the pandemic and coming within 2% of February’s all-time high. Equities in the EU and Asia were mixed overnight. The dollar is hovering near two-year lows while longer-dated Treasury yields are sliding back toward their lowest levels since early March, with the 10-year yield at 0.52%. Brent crude prices are holding above $45 per barrel.

Uncertainty Over US Labor Market Recovery

Following yesterday’s disappointing US jobs figures for July, analysts are awaiting this morning’s release of weekly unemployment claims data and looking ahead to tomorrow’s consequential nonfarm payroll figures. According to payroll provider ADP, private businesses in the US hired just 167,000 workers in July, far short of market expectations of a 1.5 million rise after a revised 4.3 million increase in June. The labor market continued to recover from April’s record slump in employment, but a resurgence in Covid-19 infections has forced several states to scale back or pause the reopening of their economies, sending some workers back to unemployment. Businesses with between 50 and 499 employees reported an outright decline of 25,000. Big business brought back 129,000 jobs while firms with fewer than 50 workers added just 63,000. All but 1,000 of the jobs came from the services sector, as professional and business services led with 58,000 while the battered hospitality sector saw an addition of 38,000. Analysts are now awaiting today’s weekly jobless claims data, with expectations for a relatively stable 1.40 million new filings for the week ending August 1^st versus 1.43 million the prior week. This will set the stage for the Labor Department’s highly-anticipated July nonfarm payrolls figures, which will be released tomorrow morning. Consensus estimates are for 1.50 million new jobs after June’s record 4.80 million.

Bank of England Holds Policy Steady

The UK central bank deferred its decision on additional easing into the fall as it monitors the ongoing economic effects of the pandemic and eyes the risk of hard Brexit at year-end. The Bank of England (BoE) voted unanimously today to maintain the key bank rate at a record low of 0.1%, in line with analysts’ expectations as this summer meeting was generally seen as a placeholder ahead of the BoE’s likely more consequential decisions at either the September or November meetings. The Committee also voted unanimously for the BoE to continue with its existing programs of UK government bond and sterling non-financial investment-grade corporate bond purchases, maintaining the target for the total stock of these purchases at £745 billion. The Committee expressed the intention not to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably and Governor Bailey downplayed the prospect of negative interest rate policy (NIRP). Some analysts had expected the BoE to take a more proactive approach at this meeting, perhaps increasing the magnitude of asset purchases, with that option now being deferred to September or November, while futures markets are now reflecting diminished odds of NIRP. As market participants recalibrate to account for the slightly less dovish than anticipated BoE policy stance, the pound is getting a boost this morning, rising 0.5% versus the dollar to approach its 2020 high from January. Still, further easing is anticipated amid ongoing headwinds from the pandemic and the threat of a no-deal Brexit at year-end.

Additional Themes

Clock Ticks Down on US Stimulus – With tomorrow seen as an unofficial deadline for a deal before possible Congressional recess, mixed reports of progress towards a consensus continue. Speaker Pelosi, Senate Minority Leader Schumer, Treasury Secretary Mnuchin and WH Chief of Staff met again yesterday afternoon, with the Trump administration offering to extend federal unemployment insurance at $400 per week and the moratorium on evictions from federally backed housing into December, alongside $200 billion in aid for states and municipalities. Though progress was cited, no agreement was forthcoming.

Earnings Feature Pandemic Impact – As earnings season winds down this week, analysts are focused on some notable reports from companies impacted by the pandemic. Disney traded 8.9% higher yesterday after announcing a solid performance driven by impressive growth in its Disney+ streaming service that now totals 60.5 million subscribers. Meanwhile, analysts are bracing for ugly numbers from Uber after today’s closing bell. With 415 of S&P 500 companies having reported, 84.2% of results have featured a positive earnings-per-share (EPS) surprise and 64.2% have topped revenue estimates. However, growth of sales and earnings are down 11.5% and 10.3%, respectively, thus far year-on-year.

Summary and Price Action Rundown

Global risk assets moved higher overnight as brightening prospects for the US pandemic stimulus bill and solid economic data in China and the EU lifted spirits and depressed the dollar, while US-China tension continue to simmer in the background. S&P 500 futures point to a 0.6% higher open after the index gained 0.4% yesterday to extend its year-to-date upside to 2.3% and register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mostly higher overnight. The dollar is relapsing back toward two-year lows while longer-dated Treasury yields are edging above their lowest levels since early March, with the 10-year yield at 0.53%. Brent crude prices are jumping above $45 per barrel, buoyed by solid global growth figures and a weakening dollar.

Signs of Compromise Brighten US Fiscal Stimulus Prospects

After reports from Capitol Hill signaled further slippage in the timeline for an agreement, the Trump administration appears to be taking the initiative to push for an expedited compromise. As negotiations extend into their second week over the size and shape of the next stimulus package, mixed reports of progress towards a consensus continue. Yesterday evening, Treasury Secretary Mnuchin stated that while a deal was not imminent, there had been agreement with House Speaker Pelosi and Senate Minority Leader Schumer over the timeline to reach accord by the end of this week so that legislation can pass next week. He noted that the White House was offering a compromise on jobless benefits and an extension of an eviction moratorium to year-end. Speaker Pelosi emphasized the need for swift passage of this bill in a subsequent interview, and she and Senator Schumer both characterized last evening’s meeting as representing a step forward. This comes after some key Congressional leaders warned yesterday that talks may spill over into next week as progress remains elusive on the main sticking points, namely federal unemployment benefits and financial aid to state and local governments. The Trump administration has continued to float the idea of taking unilateral action should Congress fail to finalize a deal. Specifically, President Trump has mentioned issuing, through executive order, an eviction moratorium and perhaps more controversially the suspension of the Federal payroll tax, a proposal both parties curtly rejected in the early construction of their stimulus plans.

US-China Tensions Continue to Simmer

With the controversy over TikTok as the latest flashpoint in the fraught relations between Washington and Beijing, headlines yesterday indicated that the US would review the progress on the Phase One trade deal around mid-month. With US-China friction continuing over issues such as TikTok, Hong Kong, handling of the pandemic, and human rights in Western China, analysts noted reports that US Trade Representative Lighthizer would be meeting virtually with Chinese Vice Premier Liu He on August 15^th to review the first six months of progress since inking the Phase One trade deal. China’s US Ambassador characterized the review as a routine exercise and expressed expectations of a “positive” atmosphere. However, Chinese buying of US agricultural goods is lagging the targets set forth in the deal for a year-one increase of $77 billion worth of purchases, while progress toward the $25.3 billion energy products purchase target is even further behind the curve. For context, in early May, President Trump had mused publicly that the Phase One trade deal might break down over China’s alleged mishandling of the Covid-19 outbreak. However, on May 8^th, the Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call among US Trade Representative Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu as constructive. The USTR statement indicated “good progress” and noted that “both countries fully expect to meet their obligations… in a timely manner.”

Additional Themes

China PMIs Remain Firm – The Caixin China composite purchasing managers’ index (PMI) slipped to 54.5 in July from 55.7 a month earlier, with an easing pace of expansion in the service sector cooling the gauge, while the manufacturing sector expanded at the fastest pace in nearly a decade. China’s July services PMI eased to 54.1 from a decade high of 58.4 the prior month but that level remains consistent with solid growth. For context, PMI readings over 50 denote expansion of activity in the sector. The manufacturing PMI rose to 52.8 in from 51.2 in June, beating market consensus of 51.3. New orders kept increasing and the backlog of work also rose. Meantime, both overseas demand and employment continued to be troubled for both sectors. Both onshore and offshore renminbi hit five-month highs versus the dollar overnight.

Solid EU Data Lifts Euro – The euro is rising to its strongest level versus the dollar since spring of 2018 after the final reading of July service PMIs were slightly lower the initial estimates but remained in robustly expansionary territory, lifting the July composite reading slightly ahead of estimates to 54.9 from 48.5 in June. Meanwhile, EU retail sales for June also remained strong, rising 5.7% on the month to gain 1.3% on the year.

Summary and Price Action Rundown

Global risk assets were mixed overnight as investors monitor central bank policymaking, await additional corporate earnings, and ponder prospects for the US pandemic stimulus bill. S&P 500 futures indicate a 0.2% lower open after the index rose 0.7% yesterday to register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mixed overnight. The dollar is steady near two-year lows and longer-dated Treasury yields are turning back toward their lowest levels since early March, with the 10-year yield at 0.54%. Brent crude prices continued to hover in a narrow range around $43 per barrel.

Central Bank Policy in the Spotlight

The Reserve Bank of Australia (RBA) held its monetary settings steady overnight as the Federal Reserve sets the groundwork for a potential policy pivot in September. As widely expected, the RBA kept its policy rate unchanged at a record low of 0.25%, a level it first set in late March. The central bank said that a recovery from the Covid-19 crisis is now underway in most of Australia, despite Victoria’s government imposition of stage 4 restrictions across Melbourne over the weekend to contain a second-wave outbreak. Their baseline economic scenario has output falling 6% this year and then growing 5% next year with the unemployment rate increasing to around 10% by the end of the year. The RBA board reiterated that it will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be within the 2-3% target. Governor Lowe emphasized that fiscal and monetary stimulus will be required “for some time” and indicated that the RBA would start a fresh round of bond buying tomorrow to maintain its yield curve control policy (YCC), because the yield on 3-year Australian Government Securities had recently started rising above its target interest rate of 25 basis points. The RBA did not focus on the level of the Australian dollar, which is continuing its appreciation trend this morning, rising 0.2% versus its US counterpart to re-approach its strongest level since early 2019. This comes ahead of the Bank of England (BoE) meeting this Thursday, at which policy is expected to be held similarly steady, though some analysts expect an increase in asset purchase levels. Also, market participants will focus on any additional insight from the BoE regarding the prospect for negative interest rate policy (NIRP) over the coming months if the economy needs additional monetary easing. Meanwhile, Fed officials have expressed broad skepticism of NIRP and recent communications suggest little appetite for RBA-like YCC. Instead, the FOMC appears poised to enact a more subtle shift at the September meeting by adopting a form of enhanced forward guidance on interest rates, explicitly tied to their already-existing inflation and employment mandates.

Talks Grind Ahead on US Fiscal Stimulus Deal

Commentary from Capitol Hill suggested incremental progress toward agreement on this next phase of pandemic relief. Yesterday, House Speaker Pelosi characterized the day’s negotiations with Treasury Secretary Mnuchin and White House Chief of Staff Meadows as “productive” but despite “moving closer together,” she indicated that “there are a lot of issues that are still outstanding.” The main point of contention and the most urgent matter is the $600 per week unemployment benefit augmentation from the CARES Act, which expired last Friday. Meanwhile, President Trump has floated the idea of taking executive action to alleviate the economic burden caused by the coronavirus, particularly on evictions, but details are scant.

Additional Themes

US-China Frictions Over TikTok – Chinese state media likened the Trump administration’s actions regarding the controversial social media platform TikTok to thievery, though acknowledging that the sale of US operations to Microsoft or another buyer might be appealing to owner ByteDance on a business level. For context, President Trump has ordered TikTok to exit its US operations by September 15^th to allow time for a potential sale to be finalized, and further stated that the US government should collect a substantial fee for arranging the deal. Chinese state media referred to impending retaliation, though Beijing has limited options for a directly proportionate response given that it already bans Facebook, Twitter, and Google.

Earnings Season Features Final Key Reports – The busiest and most consequential period of second quarter (Q2) earnings season has concluded but this week still features some meaningful reports, including companies that have faced notable impacts from the pandemic. Insurers Allstate and Prudential along with Walt Disney and Wynn Resorts, report after today’s closing bell. Through the remainder of the week, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak,AMC Entertainment, and Norwegian Cruise Lines are among the headliners. With 338 of S&P 500 companies having reported, 84.5% of results have featured a positive earnings-per-share (EPS) surprise and 65.6% have topped revenue estimates. However, growth of sales and earnings are down 12.1% and 10.6%, respectively, thus far year-on-year.

Summary and Price Action Rundown

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

Agreement on US Pandemic Relief Bill Remains Elusive

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

US-China Tensions Flare Over Social Media

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Tech Stocks Lead Higher After Strong Earnings

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

Global Economic Data Reflects Uneven Recovery

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Federal Reserve Remains Focused on Downside Risks

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

Equities Fluctuate Ahead of Key Earnings Releases

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Federal Reserve Decision in Focus

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

Earnings Convey Mixed Messages

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

Additional Themes

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

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