Category: Briefings

Summary and Price Action Rundown

Global risk assets are extending their ongoing rally morning as investors take an upbeat posture into tomorrow’s start of second quarter corporate earnings reporting season despite continually rising US Covid-19 cases and simmering US-China tensions. S&P 500 futures indicate a 0.7% higher open after the index advanced 1.8% last week to pare its year-to-date downside to 1.4%, while the tech-heavy Nasdaq is poised to register another new record high. Equities in the EU are posting solid gains ahead of a key regional summit this week and a European Central Bank meeting on Thursday, while Asian stocks are continuing to outperform. The dollar is steady and longer-dated Treasury yields are hovering above recent lows, with the 10-year yield at 0.65%. Brent crude prices are retreating below $43 on OPEC+ headlines.

China’s Recovery Remains in Focus as Mainland Equities Soar

Upbeat commentary from China’s central bank, improving economic data, and continued upside for Chinese stocks support global sentiment despite incremental escalation of US-China tensions. An official at the People’s Bank of China told reporters last week that stimulus measures had run their course given that the economy will “return to normal” in the second half of this year. This comes ahead of China’s release of second quarter (Q2) GDP on Thursday, along with monthly readings for fixed asset investment, industrial output, and retail sales for last month, all of which are expected to show improvement. Regarding GDP, the consensus is for a rebound following the prior quarter’s historic 6.8% collapse, with estimates of a 2.5% expansion in the three months through June. There have been numerous signals of accelerating recovery in China after the depths of the pandemic. Overnight, South Korea’s report on exports for the first ten days of July was upbeat, showing a year-on-year (y/y) contraction of 1.7% after a -11% y/y reading for June, with exports to China outperforming with a 9.4% y/y increase to start this month. Nevertheless, Premier Li conveyed caution over the rebound, saying that conditions remain “severe.” Meanwhile, US lawmakers, including Republican Senators Rubio and Cruz, House Representative Chris Smith and Ambassador Brownback, are being sanctioned by China in retaliation for the Trump administration last week sanctioning senior Chinese party leaders over their involvement in repression of Uighur Muslims in the Xinjiang province. These escalatory moves have largely been interpreted as symbolic and scant details were provided. Price action indicates that investors are focused on China’s upside potential rather than friction with the US. Foreign capital flowed into locally denominated Chinese government bonds in Q2 at the fastest pace since late 2018, according to data from CEIC, an economic data provider, topping 4.3 trillion renminbi ($619 billion), the highest on record. Also, local equities remain exceptionally buoyant, with the Shanghai Composite rising another 1.8% overnight to put month-to-date gains for benchmark index at 15.4%. Lastly, the renminbi is stable at its strongest level versus the dollar since mid-March, having appreciated 2.3% since late May.

OPEC+ Set to Taper Supply Curbs

Oil is not participating in today’s broad risk asset price gains following headlines indicating that coordinated output cuts that have been instrumental in supporting crude prices will start to be dialed back next month. OPEC’s technical committee will meet this Wednesday to review ongoing compliance with agreed curbs but will also reportedly discuss the approach to easing those commitments over the coming months. Russia is said to be preparing to lift its production in August absent any agreement to extend the current level of cuts. For context, 9.6 million barrels per day (bpd) of potential are being held back by the cartel and its allies, and reports suggest that delegates are pressing for a reduction of that amount to 7.7 million bpd for August and progressively lower thereafter. Oil prices are moderately lower on the news, with renewed threats to supply from Libya helping provide some upside support. After rallying sharply in May, international benchmark Brent crude has struggled to make headway above the low $40 per barrel range, while US benchmark WTI has been similarly stalled in the high $30’s per barrel.

Additional Themes

Vaccine News Overbalances Grim Covid-19 Outbreak News – After US equities recouped early losses and closed higher on Friday after drugmaker Gilead announced positive results for its coronavirus therapeutic Remdesivir, market spirits are being lifted again today by news that possible vaccines developed by Pfizer and BioNTech have been granted “fast track” status by the FDA. Shares of Pfizer and BioNTech are up 2.0% and 5.5% in pre-market trading. Analysts note that accelerating cases in US hotspots like Florida are no longer weighing on sentiment to the extent they did in June as mortality rates are rising are a proportionately slower pace.

US Banks in the Spotlight – After an index of bank stocks gained 5.3% on Friday, analysts are pondering whether the momentum can continue ahead of earnings reports for the sector, which kick off tomorrow with Citigroup, JPMorgan, Wells Fargo, and First Republic reporting.

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors grapple with intertwined concerns over the Covid-19 resurgence and the economic outlook ahead of next week’s start to second quarter corporate earnings reporting season. S&P 500 futures point to a 0.3% lower open after the index lost 0.6% yesterday, continuing this week’s sawtooth trading pattern and taking its year-to-date downside to 2.4%, thought the tech-heavy Nasdaq registered a new record high. Equities in the EU are trading higher while Asian stocks retraced some of their recent outperformance as state pension funds reportedly took profits after a steep rally in Chinese stocks. The dollar is steady and longer-dated Treasury yields are back to recent lows, with the 10-year yield at 0.59%. Brent crude prices are retreating below $42 amid demand worries.

Questions Mount Over the Recovery Ahead of Earnings Season

As outbreaks in US coronavirus hotspots continue to worsen, alongside some resurgences overseas, investors are facing deep uncertainty over the economic outlook and second quarter corporate earnings season, which begins in earnest on Tuesday. With US daily cases topping 60,000 for the first time yesterday and the closely-watched mortality rate beginning a grim ascent in certain areas, prospects for the ongoing economic rebound are increasingly cloudy. Yesterday, JPMorgan Chase joined Bank of America in flagging a deterioration in credit card spending over the past few weeks amid the spike in US Covid-19 infections. A roster of Fed officials this week also referenced a backsliding in high-frequency economic data, although the traditional readings, generally lagged a month or more, have still been registering upside surprises. More companies are announcing layoff plans, with this week bringing warnings from Wells Fargo, the largest employer among US banks, and United Airlines, which notified about half of its workforce that their jobs are at risk as well, amounting to 36,000 employees. Some economists are forecasting a return to negative nonfarm payroll figures in July after two months of record gains totaling 7.5 million jobs. This comes as analysts are bracing of a second quarter (Q2) earnings reporting season shrouded in unprecedented uncertainty. Currently only 49 S&P 500 have issued any sort of earnings guidance for the quarter (27 giving negative guidance and 22 positive), well below the five-year running average of 106 companies. Profit guidance has been even more sparse with just 17 companies issuing Q2 profit guidance, making it difficult to assess any sort of trend ahead of the announcements. Q2 earnings are expected to decline by more than 43% from Q2 2019, a drop that if realized would represent the largest year-over-year decline since Q4 2008 during the Global Financial Crisis.

Investors Mull Biden Economic Plans

With his presidential campaign shifting into a higher gear yesterday, Former Vice President Biden released an outline of his economic platform and delivered a speech emphasizing the pro-labor aspects of his plan. Ahead of his scheduled speech, Biden released his “Build Back Better” Economic Vision designed to spur the US rebound from the pandemic-induced recession. The most important component involves Biden’s “Buy American” initiative, which includes his a 4-year, $400 billion government procurement initiative focused on US-based goods and services to modernize infrastructure and national security, alongside $300 billion for research and development in US technology concerns, half of which would be dedicated towards clean-energy initiatives. Initial reports on the funding source for the budgetary expansion show Biden is focused on repealing the large tax breaks received by the wealthiest Americans and US corporations that have continued to move jobs overseas. Biden’s subsequent speech in Pennsylvania also focused heavily on supporting the working class through a $15/hour minimum wage, stronger protections for labor organization, and strengthening benefits and paid leave conditions. Other provisions included the inclusion of the public option for healthcare, tripling funding towards Title I schools, universal pre-school, and several other provisions previously outlined in the Biden/Sanders Unity Plan that seeks to unite the Democratic Party. Wall Street analysts are noting in particular Biden’s statement that the era of “shareholder capitalism” is over, as he stated that US corporations should “pay their fair share of taxes” and realign their priorities to support their workers and country.

Additional Themes

Tech Tax Fight Heats Up – Reports indicate that the US is preparing to levy tariffs on a range of $500-700 billion of French products in retaliation for the so-called “digital tax” that France is set to enact, which will disproportionately impact US tech giants. The euro is steady on the news.

Looking Ahead – In addition to the kick-off of Q2 earnings reporting season on Tuesday, next week features of dense calendar of economic releases, including US retail sales and industrial production for June, China’s Q2 GDP and June economic figures, and EU industrial product for last month. The European Central Bank, Bank of Japan, and Bank of Canada also have meetings.

Summary and Price Action Rundown

Global risk assets are fluctuating mildly this morning ahead of more US jobs data, though China’s ongoing equity rally supported risk appetite overnight. S&P 500 futures indicate a slightly lower open after the index gained 0.8% yesterday, retracing most of Tuesday’s loss and paring year-to-date downside to 1.9%, while the tech-heavy Nasdaq registered a new record high. Equities in the EU are moderately higher while Asian stocks outperformed overnight as mainland Chinese stocks extended their steep rally. The dollar is steady and longer-dated Treasury yields are edging back to recent lows, with the 10-year yield at 0.65%. Brent crude prices are fluctuating around $43 per barrel.

US Jobs Data in Focus Amid Fed Caution on Recovery

After an array of Federal Reserve officials have offered sobering views on the trajectory of the US economic rebound this week, analysts will parse this morning’s release of new and continuing jobless claims. The consensus estimate is for 1.375 million new jobless claims in the week ending July 4^th, which would continue the trend of improvement, though the rate of decline has been leveling off. Analysts will be highly attuned to whether this data suggests a renewed wave of layoffs due to the rollback of reopening measures in various US Covid-19 hotspots, such as Texas, Florida, and California. In the prior reading, the number of Americans filling for unemployment benefits eased slightly to 1.427 million in the week ending June 27^th, topping expectations of 1.355 million. For context, jobless claims have been steadily falling since hitting a record high of 6.86 million in the week ending March 28^th but have been consistently coming in above consensus forecasts, while the monthly nonfarm payrolls suggest a somewhat rosier picture of the US labor market. Meanwhile, continuing jobless claims for the week ending June 27^th are projected to decline to 18.750 million, down from 19.290 million the prior week. This comes after Fed speakers this week have emphasized the downside risks to the US recovery, citing some high frequency data showing a leveling or backsliding of activity in various segments of the economy. Atlanta Fed President Bostic reiterated the concerns he expressed earlier this week in further remarks yesterday, noting that the new data requires the Fed to “think about whether more [stimulus] is necessary.” Cleveland Fed President Mester noted that “troubling” coronavirus infection data is clouding the recovery outlook.

Chinese Equities Continue to Soar While Economic Data Remains Subdued

The Shanghai Composite extended its steep and abrupt uptrend overnight though China’s economic data continues to be less exciting. Amid signals that Beijing is intent on spurring a bull market in previously somnambulant mainland equities, the Shanghai Composite posted its eighth straight day of gains, rising 1.4% to put its upside over this span to 16.5%. Reports indicated that margin debt at speculative accounts is rising quickly. On the economic front, consumer prices unexpectedly dropped by 0.1% month-on-month (m/m) in June, after a 0.8% decline in May and compared with forecasts of a flat reading. Year-on-year (y/y), China’s inflation rate rose to 2.5% in June from a 14-month low of 2.4% in the prior month and in line with market expectations. China’s National Bureau of Statistics caused mild confusion when by appearing to release year-old inflation and producer price data for June, it had initially reported that consumer prices increased to 2.7%, before revising to 2.5%. Food inflation accelerated to 11.1% y/y from 10.6% in May as pork prices continued to rise (81.6% versus 81.7%). Also, non-food prices increased further (0.3% versus 0.4% in May). Overall, Chinese economic data has been slightly tilted toward upside surprises, but the pace of recovery has been rather muted.

Additional Themes

US Auto Sales Improve – Total Vehicle Sales in the US increased to 13.05 million in June from 12.21 million in May but this still represent double-digit annual declines across the industry. US vehicle sales in the second quarter for General Motors, Toyota Motor, and Fiat Chrysler plunged by more than 30%, in line with market expectations. Year-over-year, GM reported a 34% decline in sales in the second quarter, while Fiat Chrysler said vehicles sold fell 38.6%. Toyota said sales dropped 34.6% during the three months ended Tuesday compared with a year ago. On a positive note, US auto heavyweight Ford said Wednesday that its China vehicle sales rose 3% between April and June this year from a year earlier to 158k units. Even after the recent rebound, shares of Ford and GM remain 34.5% and 31.9% lower on the year, respectively, in sharp contrast to market-leading tech stocks, like Amazon and Netflix, which are sporting year-to-date gains of 66.7% and 55.4%.

Biden Economic Plan in Focus – Joe Biden will outline his economic platform and priorities in a speech today. Analysts suggest that his proposals, which steer clear of contentious reforms like Medicare-for-All and focus on revitalizing US manufacturing, are designed to attract centrist voters and compete directly with President Trump’s economic policies.

Summary and Price Action Rundown

Global risk assets are choppy and mixed this morning as a renewed focus on US-China tensions and dampened hopes for EU fiscal stimulus kindle a degree of investor caution. S&P 500 futures point to a slightly higher open after the index slid 1.1% yesterday, breaking its five-day uptrend and taking year-to-date downside to 2.7%, while the tech-heavy Nasdaq retreated from a record high. Equities in the EU are underperforming amid downbeat signals for upcoming negotiations on the proposed regional stimulus package (more below) while Asian stocks were mixed overnight as mainland Chinese stocks maintained their ongoing uptrend despite more signs of friction with the US. The dollar and longer-dated Treasury yields are both flat, with the 10-year yield hovering near recent lows at 0.65%. Brent crude prices are fluctuating around $43 per barrel ahead of US crude stockpile data.

Hong Kong Peg Threat Puts US-China Friction Back in Focus

A report last evening revealing that the US State Department is reviewing the option of disrupting the Hong Kong’s fixed currency regime raised investor concerns of escalating tensions with China. The Bloomberg report, which was published yesterday after US markets closed, cited anonymous sources who indicated that the aggressive proposal by unnamed “top advisors” of President Trump had been raised as an option for retaliating against Beijing for the imposition of its new security law in the territory. However, those sources noted that it was “raised as part of broader discussions” and had not been “elevated to senior levels of the White House, suggesting that it hasn’t gained serious traction yet.” The article goes on to note that there is considerable pushback on the idea from other administration officials on the understanding that such an approach, even if successful, would disproportionately punish Hong Kong. Analysts expressed skepticism that such a strategy would even be feasible, given the inability for the US government to deny dollars to Hong Kong banks to a degree sufficient to break the longstanding peg, particularly given the vast dollar holdings of the People’s Bank of China, which would presumably step in to backstop the arrangement, at least in the short term. Price action evidenced scant concern among investors overnight, though official precautionary moves to steady the peg were reported in Hong Kong. The Hong Kong dollar was placid overnight, as were the onshore and offshore renminbi and other regional currencies. Asian equities were mixed, with mainland Chinese and Hong Kong stocks outperforming their peers. However, HSBC Bank, which has garnered attention over an expression of loyalty to Beijing from one of its senior officials in Hong Kong, fell 4.3% overnight.

EU Stimulus Package Negotiations Set to Drag On

Hungarian Prime Minister Orban dampened the mood in EU equity markets this morning, indicating that the region’s historic pandemic relief package proposal is unlikely to be agreed at next week’s summit. This comes after representatives of the so-called “Frugal Four” (Netherlands, Denmark, Sweden, and Austria) protested the size and composition of the €750 billion-euro fiscal stimulus package at June’s EU summit. Where the Franco-German-supported plan calls for €500 billion in grants, Frugal Four countries continue to insist the package consist entirely of loans. Austrian Chancellor Kurz reiterated the conservative North’s position on calling for clear time limits and linkages to pandemic recovery to avoid “an entry into a permanent debt union.” German Chancellor Merkel, French President Macron, and European Central Bank (ECB) President Lagarde all strenuously pushed for approval at last month’s summit, warning EU leaders that the failure to come to an agreement on stimulus would result in additional market shocks. Merkel suggested that finalizing the budget by the end of July would be critical given the region’s ongoing economic challenges but PM Orban’s remarks this morning suggested that talks would extend through the end of the summer. EU equities are moderately underperforming though the euro and regional sovereign bond markets are stable. For context, the euro is holding near 12-month highs versus the dollar.

Additional Themes

Oil Prices Hold Gains Despite Demand Doubts – Both international benchmark Brent crude and US benchmark WTI have been exceptionally steady over recent weeks, even as US and global economic data have suggested a continued growth recovery, as resurgent Covid-19 cases in various hotspots around the world darken the demand outlook. Oil prices are steady this morning as traders await weekly US inventory data, which the American Petroleum Institute estimates will show an unanticipated buildup after the prior week’s drawdown.

Chinese Stocks Extend Steep Rally – Amid signals that Beijing is intent on spurring a bull market in previously somnambulant mainland equities, the Shanghai Composite posted its seventh straight day of gains, rising 1.7% to put its upside over this span to 14.9%. Reports indicated that margin debt at speculative accounts is rising quickly.

Summary and Price Action Rundown

Global risk assets are reversing a portion of their recent gains this morning as investors note cautious official statements in the US and EU regarding the growth outlook and refocus on the adverse trends in pandemic containment efforts. S&P 500 futures indicate a 0.8% lower open after the index gained 1.6% yesterday, extending its blistering five-day rally to 5.7% and paring its year-to-date downside to 1.6%, while the tech-heavy Nasdaq posted another new record high. Analysts have expressed surprise at the newfound resilience of global equities to the ongoing resurgence of Covid-19 in much of the US and certain locations overseas, which continues to impede reopening efforts. Equities in the EU are posting losses while Asian stocks were mixed overnight as mainland Chinese stocks maintained their ongoing uptrend. The dollar is rising amid the cautious market mood, while longer-dated Treasury yields are steady near recent lows, with the 10-year yield at 0.68%. Brent crude prices are descending below $43.

Officials Warn on the Economic Outlook

Market sentiment is cooling this morning as investors assess the growth outlook amid warnings from EU and US officials and continued re-imposition of pandemic related restrictions in certain global hotspots. Analysts are noting Atlanta Fed President Bostic’s statement in an interview with the Financial Times that, in contrast with the traditional datapoints for May and June that are evidencing a sharp rebound in activity, higher frequency data sources are now reflecting a “leveling off” of business openings and mobility. Bostic called the data “troubling” and suggestive of a recovery that is “a bit bumpier” in areas of coronavirus resurgence where “V-shaped recoveries are morphing into W’s.” This comports with weekly Bank of America credit card spending data, which pointed to a degree of consumer retrenchment in the second half of June. Recent polling shows a darkening of US attitudes toward the outlook for pandemic containment. This comes after Fed Chair Powell’s testimony before Congress last week seemed to convey a more upbeat assessment of the economic recovery than previously. Meanwhile, the European Commission downgraded its growth outlook for the region to a GDP contraction of 8.7% this year from their prior estimate of -7.7%, emphasizing risks that remain “exceptionally high and mainly to the downside.” Finally, regions within Australia are also experiencing a resurgence of coronavirus infections, with Melbourne and parts of regional Victoria ordered back into lockdown after the state reported 191 new cases of Covid-19. In the US, Miami is the latest metropolitan area to rollback some of its reopening efforts, with curbs on nightlight being re-imposed.

Australian Central Bank Holds Steady

The Reserve Bank of Australia (RBA) retained its policy settings but expressed a cautious posture on the recovery. At its July meeting overnight, the RBA decided to maintain current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points (bps), as widely expected. The bank’s board noted that the nature and speed of the growth recovery remains highly uncertain and pointed to signs of a gradual improvement in retail sales though the services sector remains in deep recession. The RBA stated that Australian government bond markets are operating effectively and the yield on 3-year Australian Government Securities is at the target of around 25bps. Given these developments, the Bank has not purchased government bonds for some time, with total purchases to date of around A$50 billion (US$34.3 billion). It added that RBA market operations are supporting a high level of liquidity, “authorized deposit-taking institutions are continuing to draw on the Term Funding Facility, with total drawings to date of around A$15 billion.” The central bank reiterated its call for extensive fiscal and monetary stimulus. Market participants eyed the Australian dollar (AUD) after Governor Philip Lowe said in a June 22^nd speech that the RBA would like to see the currency lower at some point, but it was hard to argue it was overvalued. Neither the RBA’s June nor July statements mentioned the AUD and the meeting minutes only noted that it had recovered. The AUD is trading 0.6% lower on the day.

Additional Themes

Tech Companies Act on Hong Kong – Facebook and other US tech companies are suspending their practice of data sharing with the Hong Kong government after Beijing has begun enforcing its restrictive new security law in the territory. Chinese-owned video sharing platform TikTok is also taking steps to limit use in Hong Kong. Meanwhile, Secretary of State Pompeo indicated that the US was considering a ban on the app, given concerns about privacy and the suspected ties of its owner, ByteDance, to the Chinese government.

Novavax Achieves “Warp Speed” – Shares of the biotech company are up 35.6% in pre-market trading following news of $1.6 billion in government funding as part of President Trump’s so-called “Warp Speed” program designed to accelerate Covid-19 vaccine development

Summary and Price Action Rundown

Global risk assets are extending recent gains this morning, led by a surge in Chinese equities overnight, as medium-term hopes for recovery and a continued focus on stimulus continue to overbalance the worrisome infection rates in US coronavirus hotspots. S&P 500 futures point to a 1.1% higher open after the index gained another 0.5% last Thursday, extending its four-day rally to 4.0% and paring its year-to-date downside to 3.1%, while the tech-heavy Nasdaq posted a string of new record highs last week. After driving a period of elevated stock market volatility last month, the ongoing resurgence of Covid-19 in much of the US, which continues to impede reopening efforts, no longer appears to be as much of a concern for market participants (more below). Equities in the EU are also solidly higher while Asian stocks outperformed overnight as Chinese stocks soared. The dollar is weakening as safe-haven demand ebbs, while longer-dated Treasury yields are only slightly higher, with the 10-year yield at 0.69%. Brent crude prices are also reflecting optimism, rising above $43 per barrel.

Chinese Stocks Spurred Higher by State Media

After languishing in multi-year doldrums and continuing to lag rebounding US and global equity markets, the Shanghai Composite has stormed higher over the past week, with a front page editorial in a state media newspaper today highlighting the importance of a strong Chinese equity uptrend to the mainland economy. With analysts pointing to the overtly bullish signal from China’s state-linked Securities Times newspaper, as well as last week’s easing of margin financing rules, the 5.7% leap in the Shanghai Composite last night brought gains for the index over the past week alone to 12.5%. The overnight upsurge was led by financial stocks, which powered 8.8% higher as shares of some of China’s largest banks, like ICBC, kept pace with the broader sectoral rally. For context, outperformance of mega-cap Chinese banks is typically associated with institutional buying rather than speculative retail activity, suggesting that mainland money managers are responding to the government’s prompting to pile into equities, though some brokers pointed to short-covering as adding to the upside impetus. Before this one-week sprint higher, the Shanghai Composite had been conspicuously subdued despite China’s evident success in Covid-19 containment and increasingly positive economic signals over the past few months. Despite a return to relative normalcy in many major cities including Beijing (before the more recent outbreak), China’s benchmark stock index still had not recovered from its coronavirus-related downside until late last week. Even after this stunning runup, the Shanghai Composite remains below its highs of 2018 and is currently trading at a level it first attained back in March of 2007.

Global Growth Outlook Remains Cloudy Beyond the Near-Term Rebound

Last week’s broadly encouraging US economic data, including a new record increase in monthly nonfarm payrolls, represent a good start to the recovery but visibility remains limited for the months ahead. The BLS released the June employment report on Thursday due to Friday’s holiday, showing the economy added 4.8 million jobs, the most on record, and beating expectations of 3 million. The data follows an upwardly revised 2.7 million rise in May. June represents the second straight month of gains after employment fell by a total of 22.2 million over March and April. The unemployment rate data declined in June to 11.1%, further easing from 13.3% in May and a high of 14.7% reached in April, bettering market expectations of 12.3%. Somewhat less encouraging was the new jobless claims data, which showed 1.427 million applications for unemployment benefits for the week ending on June 27. Over the weekend, Goldman Sachs pared their estimates for the third quarter rebound, now estimating an annualized pace of 25% growth from 33% previously due to the resurgence of coronavirus cases in much of the US. This takes their estimate for 2020 US GDP down to -4.6% from -4.2%. Meanwhile, overseas data was mixed, with German factory orders for May rising 10.4% month-on-month (m/m), reflecting an improvement from -26.2% in April but undershooting projections of 15.4%. EU-wide retail sales for May topped forecasts though, posting a 17.8% m/m gain, outpacing the expected 15.0%, though they remain 5.1% lower over the prior year.

Additional Themes

Concerning US Covid-19 Data – Infection rates remained elevated over the holiday weekend in hotspots like Florida, California, and Arizona, though analysts suggest that the relatively subdued mortality rates may be soothing investor fears. Meanwhile, attendees to President Trump’s rally this Saturday in New Hampshire will be “strongly encouraged” to wear masks.

Copper Lifted by Supply Disruptions – Though prices of the red metal are traditionally seen as a proxy for global (and particularly Chinese) economic growth, Chile’s suspension of work at a major copper mine is being cited as a key driver this morning. Copper prices have nearly recouped their year-to-date downside, though 3-month futures suggest lower prices to come.

Summary and Price Action Rundown

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

Nonfarm Payrolls Expected to Show Continued Improvement

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

Fed Communications Point to Continuation of Ultra-Accommodative Policy

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

Additional Themes

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

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

Summary and Price Action Rundown

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

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

Uneven Global Economic Data Paints Mixed Picture of Recovery

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

Additional Themes

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

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

Summary and Price Action Rundown

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

Powell and Mnuchin Testimony in Focus

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

China’s Growth Data Shows Steady Improvement

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

Additional Themes

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

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