Category: Briefings

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as investors noted continuing unrest in US cities but focused on economic reopening and recovery prospects, though oil prices paused their rally amid OPEC intrigue. S&P 500 futures point to a 0.4% higher open, which would extend yesterday’s 0.6% gain that put the index’s year-to-date downside at 4.6% and the decline from February’s record high at 9.0%. Equities in the EU are continuing to outperform while Asian stocks extended their gains as well. Longer-dated Treasury yields are edging higher within their narrow range, with the 10-year yield at 0.70%. Meanwhile, the dollar is deepening its ongoing decline as the euro continues to rally, though the renminbi slipped lower overnight. Crude oil had reached a new multi-month high earlier this morning but is retreating amid doubts over the OPEC meeting that was provisionally scheduled for this week (more below).

EU Assets Continue to Rally

Better-than-anticipated data and moves toward reopening more of the regional economy are extending the outperformance of EU stocks and the rebound in the euro against the dollar. The final reading of the May service sector purchasing managers’ index (PMI) for the EU printed 30.5 versus an initial reading of 28.7, which still reflects sharp contraction of activity but at an easing pace and is the best level since February. May’s composite PMI, which combines services and manufacturing gauges, registered 31.9 versus a preliminary reading of 30.5, which is also the highest level since February and well below the deep abyss of April. Importantly, the PMI readings for Italy, which has been the EU country hardest hit by the pandemic, showed some of the steepest improvement from the initial reading for May and April’s historic lows. For context, PMI readings below 50 denote a slowing of activity in the sector. Meanwhile, unemployment for EU only edged higher to 7.3% in April from the prior month’s 7.1%, bettering consensus expectations of 8.2%. Adding to the positive tone in regional markets are reports that Germany’s government is preparing to downgrade its travel warnings and restrictions this week. These developments are helping extend the outperformance of EU assets that has been largely underwritten by hopes for additional stimulus, with German Chancellor Merkel pushing for additional fiscal support for the EU’s largest economy and member nations negotiating a historic €750 billion pan-EU pandemic relief budget that represents a vital step towards fiscal unionization. Since May 18th, when France and Germany unveiled their plans for this relief budget, the Euro Stoxx index is up 16.3%, handily outpacing the 7.6% gain for the S&P 500 over that period, while the euro is 3.6% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, continue to converge toward German bund yields. – MPP view: To be fair, the recent outperformance of EU assets does represent a degree of catch-up after lagging on this rebound, but if the EU looks set to emerge from the pandemic with stronger internal bonds than before, that stands in sharp contrast to most everywhere else.

Questions Mount Ahead of OPEC+ Meeting

Oil prices are wavering this morning following reports that Saudi Arabia is threatening to suspend the meeting of OPEC and its allies (collectively known as OPEC+) this week barring firm commitments from countries like Iraq and Nigeria to honor output cut commitments. As traders awaited official confirmation of the virtual meeting of OPEC+, which had been provisionally schedule for tomorrow, headlines this morning put the cartel summit in doubt. Saudi’s reported hardline approach to overproduction among some members is threatening consensus expectations for a one-month extension through July of the 9.7 million barrels per day output cuts, which is being pushed by Russia and its allies. Saudi’s position on this proposal has remained unclear, though the Kingdom had reportedly been looking to push the May-June output cut levels through the end of the year to further support supply rebalancing. Another unknown is whether Saudi, Kuwait, and the UAE would extend their volitional additional cuts of 1.2 million barrels per day alongside any broader extension. Crude prices have retreated this morning from their highest levels since early March, even as a report from the American Petroleum Institute pointed to a further drawdown of US crude stockpiles this week. – MPP view: Commitments to cartel supply cuts were always going to get wobbly as prices rise and now reports indicate that shale patch shut-ins are slowing. If tomorrow’s Baker Hughes US active drill rig count indicates that shale production may be bottoming, it will mean that OPEC+ will have a steeper uphill climb over the coming months even if it does manage to agree on a short output cut extension. The oil price rally has been impressive and has gone farther than we anticipated, but this OPEC+ episode will be a key test.

Additional Themes

US Unrest Draws Scant Market Reaction – Reports indicated a relatively more peaceful overnight in US cities after a string of nights marked by violence. – MPP view: Wall Street is not alone in its confusion over the potential significance of the whipping political winds in the US, but generally speaking it is hard to trade the election until after Labor Day.

Zooming Earnings – Yesterday after the market closed, Zoom Video Communications reported its triumphant Q1 earnings report, topping estimates by $0.10 with an earnings-per-share (EPS) value of $0.20. Revenue of $328.2 million beat projections by $124.6 million and exceeded last year’s amount by 169%. As Covid-19 quarantine measures were strictly instated, many business operations and social interactions have moved to online platforms resulting in soaring growth for companies like Zoom. Counter to the trend of the recent earnings season, Zoom has proudly declared its 2021 forward guidance expecting Q1 2021 to be between $495 million and $500 million. The stock price is 0.4% higher pre-market, furthering its climb of 205% for the year.

Summary and Price Action Rundown

Global risk assets continued to rise overnight despite simmering US-China tensions and continuing unrest in US cities, as investors remain focused on the prospects of additional fiscal and monetary stimulus and hopes for economic recovery over the coming months. S&P 500 futures indicate a 0.5% higher open, which would extend yesterday’s 0.4% gain that put the index’s year-to-date downside at 5.4% and the decline from February’s record high at 9.8%. Equities in the EU are soaring as Germany pivots toward additional stimulus while Asian stocks posted gains, with Hong Kong stocks outperforming amid continued relief over the measured US retaliatory policies announced on Friday. Longer-dated Treasury yields are edging higher within their narrow range, with the 10-year yield at 0.67%. Meanwhile, the dollar is extending its ongoing decline while the renminbi posted gains overnight. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent above $39 per barrel.

Investors Attempt to Look Past US Unrest

Ongoing protests in numerous US cities against racial inequality, which in some cases have turned violent, drew unprecedented threats of domestic military intervention from President Trump yesterday, though financial markets are evidencing scant reaction. Market participants are pondering the extent to which the economic recovery will be impacted either directly, by keeping people at home and hurting consumer confidence, or indirectly, though a possible resurgence in Covid-19 infections given the heightened potential for transmission amid the chaotic and crowded scenes. Counterbalancing this added uncertainty is the heightened expectation that these disturbing developments in major US economic centers, including New York, Los Angeles, and Chicago will spur the Fed to enhance their already enormous stimulus programs and push Congress and the Trump administration to redouble their efforts pass another significant pandemic relief bill. For context, Congress is set to restart negotiations over the coming round of pandemic relief this month after the House Democrats’ $3 trillion draft plan failed to garner support from the Trump administration or Senate Republicans last month. With Friday’s release of May nonfarm payroll data expected to show an unemployment rate approaching 20%, the sources of discontent among the protestors are surely not limited to racial injustice.

EU Stimulus Prospects Continue to Brighten

With German Chancellor Merkel pushing for additional fiscal support for the EU’s largest economy and a historic pan-EU pandemic relief budget currently being negotiated, EU assets have been posting notable outperformance. Reports this morning indicate that Chancellor Merkel is working toward a second German fiscal stimulus plan of up to €100 billion to follow the initial relief program of €156 billion, which was passed in March under the government’s special emergency powers. With one of the stimulus options on the table being cash incentives for car purchases, EU automaker stocks are soaring this morning, rising between 6% and 8% on the day. This comes amid increasingly forceful and consequential EU steps toward both economic stimulus and fiscal burden-sharing. Specifically, the European Commission (EC) published a €750 billion coronavirus recovery plan last Wednesday in a historic step towards fiscal unionization. Like the Franco-German plan published the prior week, the EC proposal would allow significant new transfers of wealth among members, funded by €750 billion in commonly issued EU debt for the recovery plan. All EU countries must approve the plan, which includes €500 billion in grants and €250 billion in loans to hard-hit members, and negotiations are likely to drag on for weeks. Since the Franco-German plan was published on May 18^th, the Euro Stoxx index is up 14.0%, handily outpacing the 6.7% gain for the S&P 500 over that period, while the euro is 3.2% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, continue to converge toward German bund yields.

Additional Themes

OPEC+ Set to Extend Output Cuts – Ahead of the official meeting of OPEC and its allies (known as OPEC+) on Thursday of this week, reports indicate that Russia and a few other producers are pushing for only a one-month extension to the output cuts. Saudi’s position on this proposal is unclear, though they had been looking to push the May-June output cut levels through the end of the year to further support supply rebalancing. A one-month extension would be the shorter end of the range and would take the 9.7 million barrels per day output reduction through July, though it is unclear whether Saudi, Kuwait, and the UAE would extend their volitional additional cuts of 1.2 million barrels per day as well. Crude prices have extended their recent gains this week to their highest levels since early March.

RBA Holds Rates – The Reserve Bank of Australia held rates steady at 0.25% as expected, but the more upbeat commentary has lifted the Australian dollar 0.8% versus its US peer.

Summary and Price Action Rundown

Global risk assets were mixed overnight as US-China tensions continue to percolate despite relatively restrained policy response from President Trump over Hong Kong, while investors ponder potential economic fallout from ongoing US protests. S&P 500 futures point to a flat open after a choppy overnight session, while last week’s powerful 3.0% gain pared the index’s year-to-date downside to 5.8% and the decline from February’s record high to 10.1%. Equities in the EU are higher while Asian stocks outperformed overnight amid relief that President Trump appeared to stop short of major escalation with his measured retaliatory policies on Hong Kong. Longer-dated Treasury yields remain steady within their narrow range, with the 10-year yield at 0.66%. Meanwhile, the dollar is continuing to decline while the renminbi was steady overnight, though the offshore-traded renminbi is slightly weaker. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent at $38 per barrel.

President Trump Strikes a Balance on Hong Kong Response but Tensions Remain High

Markets evidenced a degree of relief after President Trump announced a relatively restrained policy response to China’s clampdown on Hong Kong but reports this morning that China is suspending some US farm goods purchases rekindled concerns of further escalation. Chinese state firms have reportedly been instructed by Beijing to pause purchases of US soybeans and pork as China’s leaders ponder their response to US actions on Hong Kong. For context, President Trump’s commentary on Hong Kong was forceful at his press conference on Friday but the policy actions he announced were more moderate than some investors had feared, given the wide-ranging policy options available. Notably, the Phase One trade deal was left untouched and no additional tariffs or major sanctions were imposed or threatened, while the withdrawal of Hong Kong’s preferential trade status was characterized as a process rather than an abrupt revocation. Still, the President announced he will be removing US funding from the World Health Organization, suspending visas for Chinese nationals in the US with ties to the People’s Liberation Army, and eliminating policy exemptions afforded to Hong Kong ranging from extradition to export controls and dual use technologies with “few exceptions,” though the carve-outs remained unspecified. Additionally, he called for an executive investigation into “the differing practices of Chinese companies listed on US markets.”

US Unrest Casts Shadow Over Economic Reopening Hopes

The cautious and uneven process of gradually restarting more normal activities has been upended in many areas across the US over the weekend by spiraling protests against racial inequality. With demonstrations turning violent in a number of major US cities this weekend, market participants are pondering the extent to which the economic recovery will be impacted either directly, by keeping people at home and hurting consumer confidence, or indirectly, though a possible resurgence in Covid-19 infections given the heightened potential for transmission amid the chaotic and crowded scenes. New York Mayor de Blasio said that plans for reopening the city would proceed despite the unrest, with most metropolitan areas taking a similar approach. With Friday’s release of May nonfarm payroll data expected to show an unemployment rate approaching 20%, the sources of discontent among the protestors are surely not limited to racial injustice. Meanwhile, Congress is set to restart negotiations over the coming round of pandemic relief this month after the House Democrats’ $3 trillion draft plan failed to garner support from the Trump administration or Senate Republicans last month.

Additional Themes

Fitful Chinese Economic Data – Over the weekend, China released its purchasing managers’ indexes (PMIs) for May, with the various gauges reflecting moderate degrees of expansion but with both upside and downside surprises. The official government PMI reading for the manufacturing sector was slightly below expectations of 51.1, printing a slower 50.6, down from 50.8 in April, while the service sector was broadly in line with expectations at a perkier 53.6. For context, PMI readings above 50 denote expansion of activity in the sector. Importantly, the employment components of both readings slipped back into contraction, hinting at potential backsliding in the recovery. Meanwhile, external demand clearly remains a headwind, with the sub-index of new export orders in sharp contraction at 35.3.

OPEC+ Debates Output Cut Extension – Ahead of the official meeting on Thursday of this week, which was moved up from the original June 9-10 dates, OPEC and its allies (known as OPEC+) are reportedly set to consider an extension of coordinated supply cuts of between one and three months. For context, headlines have suggested that the Saudis were looking to extend the May-June output cut levels through the end of the year to further support supply rebalancing but Russia has been advocating a for relatively shorter period and a “wait-and-see” approach to the potential demand recovery. Oil prices are mixed this morning.

Summary and Price Action Rundown

Global risk assets were mixed overnight ahead of today’s White House press conference on China, which could serve to either escalate or ease already heightened US-China tensions. S&P 500 futures indicate a 0.3% lower open after yesterday’s 0.2% decline shaved week-to-date gains to 2.5%, putting the index’s year-to-date downside at 6.2% and the decline from February’s record high at 10.5%. Before yesterday’s announcement of President Trump’s Friday press conference on China, the S&P 500 had been over 1% higher amid continued optimism over economic reopening, with jobless claims data suggesting hints of improvement. Equities in the EU are trading lower while Asian stocks were directionless overnight amid continued underperformance by Hong Kong’s benchmark Hang Seng index. Longer-dated Treasury yields remain unable to move higher, with the 10-year yield slipping back to 0.67%. Meanwhile, the dollar is lower as the euro extends its recent bounce despite stagnating inflation and the renminbi remained stable. Crude oil has been struggling to make headway this week, with Brent sinking below $35 per barrel as traders look ahead to June’s OPEC+ meeting.

Investors Await President Trump’s Press Conference on China

After the Chinese leadership ushered the controversial Hong Kong security bill into law earlier this week, news yesterday afternoon that President Trump is set to announce the US response sometime today introduced a hint of caution into ebullient US equities. Although the timing of the press conference remains unclear, President Trump is set to lay out his administration’s response to China’s clampdown on Hong Kong. For context, China’s legislature passed the measure in a characteristically one-sided vote after the US State Department declined to certify Hong Kong’s autonomy from China on Wednesday. By doing so, Secretary of State Pompeo opened the door to executive action against preferential trade status of the territory under the Hong Kong Human Rights and Democracy Act that was signed into law last year. Reports suggest that the White House is considering removing Hong Kong’s preferential tariff rate applied to its US exports and cancelling certain Visas for Chinese students and researchers with military ties, which would fall short of a full cancellation of the territory’s special trading status. Meanwhile, the House is expected to consider the bill that passed the Senate last week that would sanction Chinese entities and individuals taking part in enforcing the new security law in Hong Kong and punish banks that do business with them. Relatedly, President Trump is expected to sign a bill to sanction Chinese entities over their suppression of Muslim minorities in western China. Meanwhile, China upped its bellicose rhetoric against Taiwan overnight, increasing the sense of geostrategic tension.

Glimmers of Hope in US Data Ahead of Fed Chair Powell’s Remarks

With US markets conveying mixed signals on the growth outlook, incoming data is displaying some improvement though Fed communications are likely to stay focused on the downside risks. Last week, 2.123 million Americans filled for unemployment benefits, the lowest level since the coronavirus crisis began. However, filings came in slightly above market expectations of 2.1 million and lifted the total reported since March 21^st to 40.7 million. Most notably in the report, continuing jobless claims decreased by 3.86 million to 21 million in the week ended May 16^th from a record 24.9 million in the week ended May 9^th. This is an indication that as states have lifted stay at home orders, the process of returning to work has slowly begun. Meanwhile, first quarter (Q1) US GDP was revised down from -4.8% to -5.0%, the second estimate from the BEA showed. This is the largest drop in GDP since the fourth quarter of 2008. However, the Atlanta Fed GDPNow estimates that Q2 GDP will have contracted 41.9%. In April, US Durable Goods Orders plunged 17.2% month-on-month (m/m), following a downwardly revised 16.6% slump in March, but were above market expectations of a 19% drop. April’s US consumer spending and income data is due today, alongside a key inflation metric, as well as May consumer confidence. Also, Fed Chair Powell’s remarks later this morning are likely to remain consistently cautious.

Additional Themes

Trump/Twitter Spat Continues – Overnight, Twitter flagged one of President Trump’s tweets regarding the situation in Minneapolis as running afoul of its rule against glorifying violence. For context, after Twitter took the step of appending fact-checking links to some of his tweets, President Trump yesterday followed through on his pledge take aim at social media with an executive order to loosen liability protections for the content of third party posts. Facebook CEO Zuckerberg made conciliatory remarks in an interview yesterday, suggesting that social media should not attempt to be the “arbiters of truth.” Shares of Twitter and Facebook sank 4.5% and 1.6%, respectively, yesterday with year-to-date performance of -1.4% and 9.9%.

Looking Ahead – The US nonfarm payrolls report for May will be in the spotlight next week, as will purchasing managers’ indexes for the US, EU, Japan, and China. The European Central Bank has a meeting, as do the Bank of Canada and Reserve Bank of Australia.

Summary and Price Action Rundown

Global risk assets are turning mixed this morning, as investors continue to monitor rising US-China tensions and divergent signals from financial markets on the economic recovery outlook. S&P 500 futures point to a flat open after yesterday’s 1.5% gain, which pared year-to-date downside to 6.0% and the decline from February’s record high to 10.3%. Rising optimism over economic reopening amid ever-increasing monetary and fiscal stimulus around the world has lifted even the most battered sectors this week (more below). Equities in the EU and Asia posted gains overnight, with Hong Kong shares again underperforming as China enacted a new security law for the territory. Longer-dated Treasury yields remain broadly unmoved despite increasing equity ebullience, with the 10-year yield at 0.68%, while the dollar is steady as the renminbi recouped some of its recent downside overnight. Crude oil is pausing its recovery uptrend, with Brent hovering below $35 per barrel ahead of next month’s OPEC meeting.

Chinese Legislature Approves Controversial Security Law for Hong Kong

After the US State Department declined to certify Hong Kong’s autonomy from China yesterday, opening the door for executive action on preferential trade status for the territory, the Chinese leadership ushered the controversial security bill into law overnight. China’s legislature passed the measure in a characteristically one-sided vote while President Trump is still mulling a response that he says will be announced this week. Reports suggest that the White House is considering removing Hong Kong’s preferential tariff rate applied to its US exports and cancelling certain Visas for Chinese students and researchers with military ties. For context, Secretary of State Pompeo stated yesterday that Hong Kong could no longer be certified as broadly autonomous from China, which opened the door to executive action against preferential trade status of the territory under the Hong Kong Human Rights and Democracy Act that was signed into law last year. Relatedly, a bill to sanction Chinese entities over their suppression of Muslim minorities in western China passed the House yesterday, though President Trump has not indicated whether he will sign it. Meanwhile, concerns over a violent crackdown in Hong Kong have been eased by reports that the renewed protests have featured relatively smaller crowds than prior rounds of demonstrations and have drawn only a standard police response. Chinese officials are downplaying the impact of the law on the territory.

Markets Send Increasingly Divergent Signals on Reopening Prospects

US equities remain buoyant, with outperformance rotating this week into sectors that are more sensitive to the growth outlook, suggesting an even more optimistic posture on the recovery, though Treasury yields and commodities prices remain consistent with dismal economic prospects. Yesterday, the S&P 500 powered above its 200-day moving average, a level closely-watched by traders, and gains were led for a second straight session by the beaten-down cyclical stocks that are more sensitive to the growth outlook than the technology and defensive sectors that have led to the upside so predominantly since this rally began in March. Week-to-date, the tech-heavy Nasdaq’s decent gain of 0.9% has lagged the 2.7% climb for the S&P 500, though year-to-date (ytd) it retains significant outperformance with 4.9% upside versus a loss of 6.0% for the broader benchmark index. With Amazon, Facebook, and Netflix all registering new record high share prices over the past week and sporting ytd gains of 30.4%, 11.6%, and 29.8%, respectively, investors have been booking some profits this week and rotating into sectors aligned with the more traditional economy, with an ETF of large US bank stocks up 15.9% over the past two days alone, though it retains a ytd loss of 30.5%. While these developments suggest rapidly rising optimism over economic reopening in the US and overseas among equity investors, Treasury markets remain unmoved as 10-year yields languish at 0.68% and commodity prices, while off their lows, remain far below recent highs.

Additional Themes

White House Targets Social Media – After Twitter took the step of appending fact-checking links to some of his tweets, President Trump has indicated that he will take aim at social media with an executive order to loosen liability protections for the content of third party posts. Shares of Twitter and Facebook are down 3.6% and 4.0%, respectively, in pre-market trading.

OPEC Cuts to Extend? – Oil prices have retreated this week after a three-week uptrend despite reports indicating that Russia and Saudi Arabia have agreed to align their approach to future output cuts at the upcoming June 9-10 OPEC meeting. Additionally, Energy Minister Novak’s discussion earlier this week with major Russian oil company executives set forth the prospect for extending the cuts through the end of 2020. However, uncertainty over the degree of coordination persists, with analysts noting this Russia’s plan for easing of supply cuts might be seen as premature and inflexible by Saudi. Adding to concerns, the American Petroleum Institute estimated that US stockpiles rose by nearly 9 million barrels last week.

Summary and Price Action Rundown

Global risk assets are extending their upside this morning, as investors focus on augmented stimulus measures in the EU and Japan alongside the global trend toward economic reopening, though heightened US-China tensions continue to simmer in the background. S&P 500 futures indicate a 1.2% higher open, which would extend yesterday’s 1.2% gain as rising optimism over economic reopening amid ever-increasing monetary and fiscal stimulus around the world begin to lift even the most battered sectors (more below). Year-to-date downside for the index is at 7.4% and the decline from February’s record high is 11.7%. Equities in the EU are posted solid gains while Asian stocks remained mixed overnight, with Hong Kong shares underperforming amid continued protests against China’s new security law. Longer-dated Treasury yields are begrudgingly following US equities higher, with the 10-year yield at 0.72%, while the dollar is continuing its softening trend despite notable renminbi weakness overnight. Crude oil is pausing its recovery uptrend, with Brent dipping below $36 per barrel.

EU Set to Decide on Historic Stimulus

The final version of the Franco-German pandemic relief budget is being presented at the EU Summit today, featuring an upsized total amount and a preponderance of grants over loans, which would represent an unprecedented step toward EU fiscal unity. The proposed economic stimulus plan, which is being presented by European Commission President von der Leyen today, will total €750 billion, versus the €500 billion in earlier drafts, with a split between €500 billion in grants and €250 billion in loans. Importantly, though the money will be raised as part of the EU budget process along the standard contribution formula, expenditures will be to the areas of greatest need. As such, the plan has Italy receiving €82 billion in grants, with Spain taking €77 billion and France only €38 billion. This potentially historic blueprint would represent a significant step toward addressing the lack of fiscal unity of the bloc, and the widening north-south rift this has provoked, which has proven to be a key vulnerability to regional economic stability over the years. However, the plan still requires unanimous approval by the 27 member states and negotiations are expected to take weeks. It remains to be seen whether a bloc of four “frugal states” consisting of Austria, Denmark, Sweden, and the Netherlands, will allow the passage of the proposed grants. EU assets are responding positively to the announcement of the enhanced proposal this morning. Since the plan was originally unveiled last week, the euro has jumped 1.9% versus the dollar and the spread of Italian 10-year sovereign bond spreads over German bunds has narrowed 47 basis points to their most favorable level in over a month.

Congress and the White House Ponder Hong Kong Response

Relations between Washington and Beijing have continued to deteriorate, with China’s imposition of a tightened security law in Hong Kong in focus as President Trump is set to announce the US response later this week. President Trump indicated that his administration was set to act “very powerfully” over the situation in Hong Kong and that the measures would be announced this week. Reports yesterday indicated that President Trump and Secretary of State Pompeo are discussing tightening restrictions for various types of Visas for Chinese researchers and students, as well as mulling sanctions over Hong Kong, though communications from the White House affirmed that the Phase One US-China trade deal is not in jeopardy “for the moment.” For context, White House National Security Adviser O’Brien suggested in an interview over the weekend that Beijing’s move falls afoul of the Hong Kong Human Rights and Democracy Act, which was signed into law last year and requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Two Senators have introduced an even more aggressive bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. Relatedly, another bill to sanction Chinese entities over their suppression of Muslim minorities in western China is set to pass the House today, though President Trump has not indicated whether he would sign it. Meanwhile, concerns over a violent crackdown in Hong Kong have been eased by reports that the renewed protests have featured relatively smaller crowds than prior rounds of demonstrations and have drawn a standard police response. Meanwhile, Chinese officials are downplaying the impact of the law on the territory, pledging that judicial independence will continue.

Additional Themes

Japan Ups Stimulus – Overnight, Prime Minister Abe announced another round of fiscal stimulus totaling ¥117 trillion (roughly $1.1 trillion), combining aid to businesses, households, and the healthcare sector, and matching the size of April’s initial economic relief package.

OPEC Cuts to Extend? – Russian media is reporting that OPEC and its allies are discussion extending output cuts to the end of year in a continuing bid to support crude oil prices.

Summary and Price Action Rundown

Global risk assets are rallying this morning despite heightened US-China tensions, as economic reopening and headlines regarding vaccine trials boost market spirits. S&P 500 futures point to a 1.9% higher open, which would extend last week’s solid 3.2% gain that was spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index is at 8.5% and the decline from February’s record high is 12.7%. Equities in the EU are moderately higher while Asian stocks jumped overnight as Hong Kong shares staged a recovery (more below). Longer-dated Treasury yields are edging higher, with the 10-year yield at 0.69%, while the dollar is depreciating as safe-haven demand wanes in today’s upbeat trading. Crude oil is resuming its recovery uptrend, with Brent back above $36 per barrel.

Hopes Over Economic Reopening and Vaccine Progress Spur Further Equity Upside

Last week’s solid US equity market rebound is set to continue today, underpinned by optimism over easing lockdowns, recovering economic activity, and more encouraging news of progress toward a vaccine. Over the weekend, biotech company Novavax announced an expansion of their vaccine trials into the first human studies. Meanwhile, Moderna released more data regarding their ongoing antibody trials. For context, White House virus expert Dr. Fauci in an interview on Friday opined that the data from biotech company Moderna on their vaccine trials “is really quite promising” and that it is a reasonable to expect, barring unforeseen setbacks, a vaccine to be ready for deployment by December 2020 or January 2021. For context, US equities were whipsawed last week as Moderna’s upbeat disclosures about their progress toward a vaccine propelled stocks higher on Monday but reports that the data was insufficient to draw any supportable conclusions set stocks back on Tuesday. And headlines this morning indicate that Merck is also engaging in efforts toward developing a vaccine. Meanwhile, reports over the weekend focused on reopening beaches and large crowds as lockdown restrictions ease unevenly nationwide.

US-China Tensions Percolate as Hong Kong Protests Resume

Relations between Washington and Beijing have continued to deteriorate over recent weeks, with Congress pushing legislation to counter China on a variety of fronts, President Trump turning up the rhetorical heat, Chinese media threatening retaliation, and pressure rising in Hong Kong. However, concerns have been tempered by reports that the protests in Hong Kong featured relatively smaller crowds than prior rounds of demonstrations and draw a standard police response. Meanwhile, Chinese officials are downplaying the impact of the law on the territory, pledging that judicial independence will continue. Hong Kong’s benchmark Hang Seng equity index steadied yesterday and gained 1.9% today. For context, the Hang Seng plunged 5.6% last Friday following the news that China will impose a stricter security regime on the territory, overriding the local legislature. Over the weekend, White House National Security Adviser O’Brien suggested that Beijing’s move falls afoul of the Hong Kong Human Rights and Democracy Act, which was signed into law last year and requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Two Senators have introduced an even more aggressive bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. Lastly, the Commerce Department placed an additional 33 Chinese entities on their trade blacklist over the weekend, drawing a stern response but no overt retaliation from China, though Chinese state media has indicated that Beijing could reciprocate by placing US firms on Beijing’s “unreliable entities” list.

Additional Themes

Boston Fed Signals Impending Start of Main Street Lending Program – In a television appearance on Sunday, Boston Fed President Rosengren indicated that the Fed’s Main Street Lending Program (MSLP) will begin buying loans within the next two weeks. The $600 billion program is designed to provide access to credit for small and medium-sized businesses, with the Fed expanding the eligibility criteria a late last month to include those with up to 15k employees and $5 billion in annual revenue. Some analysts have opined that the revisions to the program are designed to include more energy companies, which traditionally carry significant debt and are currently facing a low oil price environment. Unlike Congress’ Paycheck Protection Program, MSLP loans are not meant to be forgiven and do not have any hard requirement to spend the money maintaining headcount.

Economic Data Hints at Rebound – German exporter confidence for June missed expectations but rose from -23.1 the prior month to -18.9. Later today, the Conference Board will publish its US consumer confidence index for May, which is also expected to show improvement.

Summary and Price Action Rundown

Global risk assets are trading with a cautious tone this morning amid heightened US-China tensions, with Hong Kong in the spotlight as China prepares to clamp down on the territory. S&P 500 futures indicate a 0.2% lower open, which would further pare this week’s solid 3.0% gain, spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index is at 8.7% and the decline from February’s record high is 12.9%. Equities in the EU are also moderately lower while Asian stocks underperformed overnight as Hong Kong shares plunged (more below). Longer-dated Treasury yields are edging lower, with the 10-year yield at 0.65%, while the dollar is rising as growth concerns weigh on a number of peer currencies. Crude oil is reversing a portion of its sharp uptrend from recent lows, with Brent back below $35.

US-China Tensions Intensify Further Over Hong Kong

Relations between Washington and Beijing have deteriorated sharply this week, with Congress pushing legislation to counter China on a variety of fronts, President Trump turning up the rhetorical heat, Chinese media threatening retaliation, and pressure rising in Hong Kong. The benchmark stock index for Hong Kong plunged 5.6% overnight, falling to its lowest level since early April on the news that China will impose a stricter security regime on the territory, with the decision being finalized at this week’s National People’s Congress in Beijing. Democracy activists in the city are planning to resume street protests this weekend. President Trump made oblique comments on the impending crackdown, saying “if it happens, we’ll address that issue very strongly.” Meanwhile, two Senators introduced a bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. For context, the Hong Kong Human Rights and Democracy Act, which was signed into law last year, requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Tensions had already been rising after the US Senate passed a bill earlier this week with broad bipartisan support which could result in the eventual delisting of Chinese companies currently trading on US stock exchanges unless they pledge that they are not controlled by Beijing and submit an audit for inspection by the Public Company Accounting Oversight Board within three years. Speaker Pelosi said she would study the bill and analysts suspect that it will pass the House over the coming weeks and be signed by President Trump. Shares of US-listed Chinese tech giants sold off again yesterday despite the relatively lengthy timeline for any enforcement actions (three years at least). A report indicated that search engine giant Baidu is considering leaving the Nasdaq in favor of an Asian bourse listing.

Dollar Rises as Peer Currencies Sink on Growth Fears

After spiking higher amid the onset of the Covid-19 pandemic in March, the dollar has remained remarkably stable over the past two months, but analysts remain concerned that another leg higher could add to global deflationary pressures. Though the dollar remains in the middle of its two-month trading range against a broad basket of global currencies and a gauge of currency volatility has eased to its lowest level since early March, today’s appreciation demonstrates how weakness among its peers can lift the greenback. The renminbi declined 0.3% overnight versus the dollar, as traders cited the decision by China’s government to scrap its GDP target in light of great uncertainty due to the coronavirus. The renminbi is now at its weakest level versus the dollar since last October, during the height of US-China trade tensions. Meanwhile, the Australian dollar lost 0.5% overnight against its US counterpart as rating agency Fitch cut the country’s credit rating outlook from stable to negative, although it remains at the top tier AAA for now. Lastly, the UK pound is down 0.3% versus the dollar after April retail sales cratered 18.4% year-on-year, with futures markets continuing suggest that the Bank of England cuts interest rates into negative territory over the next year.

Additional Themes

Oil Prices Retreat Amid China Growth Concerns – Brent crude prices are retreating this morning from their highest level since early March as traders cite the Chinese government’s unexpected move to scrap its growth target, which late last year had been set at around 6%, down from 6-6.5% in 2019. The ongoing pickup in Chinese oil demand has been considered an important catalyst for the rally and an encouraging harbinger for a broader recovery in global energy usage as lockdowns ease in the US and EU, though analysts caution that high prices could also lift supply.

Looking Ahead – Next week, the holiday-shortened US calendar still features a number of major economic releases, featuring first quarter GDP and an array of April data, including new home sales, personal income and spending, durable goods orders, and PCE prices (the Fed’s preferred gauge of inflation pressure). For all our US readers, we hope you enjoy a pleasant Memorial Day weekend