Category: Briefings

Summary and Price Action Rundown

Global risk assets are moving higher this morning as investors remain focused on economic reopening and the prospects for additional fiscal and monetary support. S&P 500 futures indicate a 0.2% higher open after yesterday’s flat close left year-to-date downside at 9.3% and the decline from February’s record high at 13.5%. Equities in the EU and Asia were mixed and muted overnight. Longer-dated Treasury yields are hovering above recent lows as investors focus on Fed policy signals and impending debt auctions, with the 10-year yield at 0.71%. The dollar remains in the middle of its recent range as the renminbi holds up despite heighted US-China tensions. Crude oil is re-approaching one-month highs amid more Saudi supply cuts.

Markets Send Mixed Messages on Reopening as Congress Ponders Another Relief Bill

Financial markets continue to send mixed signals on the outlook for the recovery, as share price outperformance of sectoral “winners” from the pandemic like tech and healthcare becomes ever starker. Yesterday, in a familiar trend, the S&P 500 closed in positive territory as the health care and IT sectors, which gained 1.7% and 0.6%, respectively, again propped up the index while most other sectors posted losses on the day. Although the buoyancy of US equity indexes is consistent with a degree of investor optimism over the prospects for economic reopening, the growing disparity in performance among sectors that are less impacted by (or even benefit from) the pandemic and those that are adversely impacted suggests skepticism on a return to normalcy over the medium term. Treasury markets, meanwhile, remain consistent with a lengthy economic trough, though yields edged higher as Fed officials downplayed the odds of policy rates going negative (more below) and market participants prepare for upcoming Treasury auctions. As the feel-good factor of easing lockdowns is tempered by indications that reopening will be uneven and challenging, analysts are monitoring signals from Capitol Hill that the next round of fiscal relief may be back on track. Yesterday, New Jersey Senator Menendez indicated that a $500 billion support bill for states and municipalities was gaining traction, though White House officials have conveyed mixed messages on the administration’s stance.

Fed Policy in Focus Over Negative Interest Rates and Credit ETF Purchases

Ahead of Fed Chair Powell’s remarks tomorrow, FOMC members yesterday talked down growing speculation over negative interest rate policy (NIRP) and the Fed will begin purchasing credit ETFs today. With an ex-Fed official and prominent Harvard economist both recently making the case for the Fed to follow the European Central Bank and Bank of Japan in imposing NIRP, and December 2020 and January 2021 fed fund futures both briefly reflecting negative interest rate expectations last week, FOMC members downplayed the likelihood of such a move. Chicago Fed President Evans indicated that he does not foresee the need for negative policy rates, though he expects them to remain at zero for “quite some time.” Meanwhile, Atlanta Fed President Bostic said he is “not a big fan” of NIRP, suggesting it is less effective than other policy tools. Correspondingly, fed fund futures have shifted out of negative territory on the late 2020/early 2021 contracts. Analysts expected Fed Chair Powell to echo his colleagues’ skepticism on NIRP in his remarks on Wednesday. Meanwhile, the New York Fed announced yesterday that it will begin to buy corporate credit, some of it below investment grade, though exchange-traded funds (ETFs). Reports suggest an initial amount of $250 billion among the Fed’s overall purchase programs will be allocated to corporate credit ETFs.

Additional Themes

Tensions with China Continue to Simmer – Despite last week’s improving atmospherics in the trade relationship, friction between China and the US, as well as some of its allies, continued overnight. In a move that had been floated by the White House previously and has some backing on Capitol Hill, President Trump is reportedly set to issue an executive order blocking the US government employee retirement savings plan from investing in Chinese equities. Still, the move is not being directly cast as retaliation for China’s handling of the Covid-19 outbreak nor is it as impactful as hiking tariffs, which President Trump had also threatened. Meanwhile, Australian stocks fell but the Aussie dollar recouped early losses after China suspended a significant portion of beef imports, a decision that may be tied to a spat over the pandemic.

Energy Earnings Slump – Last evening’s earnings reports highlighted the challenges to the energy sector. Sunoco and Energy Transfer both released downbeat reports missing earrings and revenue projections for the quarter, with their shares already -19.4% and -40.1% year-to-date, respectively. Meanwhile, Saudi oil giant Aramco also released dismal profit figures for last quarter but retained its dividend. Energy is the worst performing major US equity sector so far this year, though the week-long bounce in oil prices, which is continuing this morning, has provided some support. Oil prices have been fluctuating around one-month highs since Sunday after Saudi announced an additional unilateral output cut of 1 million barrels per day.

 

Summary and Price Action Rundown

Global risk assets are pausing last week’s rally this morning as investors monitor news and data for indications of progress on economic reopening. S&P 500 futures point to a 0.7% lower open, which would pare last week’s 3.5% rally that put year-to-date downside at 9.3% and the decline from February’s record high at 13.5%. Equities in the EU and Asia were mixed overnight. Longer-dated Treasury yields are hovering above recent lows despite troubling jobless data and cautious Fed communications, with the 10-year yield at 0.69%. Meanwhile, the dollar is rebounding this morning but remains near the middle of its recent trading range. After rebounding sharply last week, crude oil is backsliding but remains near one-month highs.

Investors Ponder Reopening Efforts Amid Depressed Economic Data

With financial markets conveying mixed signals on the outlook for the recovery, market participants will be more reactive to contemporaneous indicators than traditional economic data, which is considered backward-looking. On Friday, the nonfarm payroll report indicated that the US economy lost 20.5 million jobs in April, below consensus estimates of 22 million, and following 870K losses in March. This was the largest drop ever, and job losses were widespread, with 7.7 million lay-offs in leisure and hospitality and 5.5 million in food services and drinking places. The unemployment rate jumped to 14.7%, the highest in the history of the series and compared to market expectations of 16.0%. The number of unemployed persons rose by 15.9 million to 23.1 million. However, the real rate is another 5% higher, as the official figures does not include people who are not looking for a job as unemployed. 18.1 million of the newly unemployed characterized themselves as only temporarily laid off and expect to return to work once restrictions are loosened. Despite these deeply depressed figures, US equities closed the week on a high note, with the S&P 500 rising 1.7% for a 3.5% weekly gain to cut year-to-date losses under 10%. Treasury markets, on the other hand, remained consistent with a lengthy economic trough. Notably, fed fund futures for December 2020 and January 2021 for the first time last week moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. With traditional economic data viewed as stale, investors will be highly attuned to signs of progress or slippage on economic reopening. News over the weekend covered Shanghai Disneyland reopening but also Seoul closing bars and nightclubs after a secondary outbreak, lockdown of another Chinese city, and infections among White House staff, suggesting that economic reopening is likely to be uneven and challenging.

Earnings Season Wraps Up as Optimism is Tempered by Uncertainty

With the bulk of first quarter (Q1) earnings reports in the books, equity investors took a “glass half full” approach to uneven results and widely withdrawn guidance. With just around 86% of the S&P 500 companies having reported their Q1 earnings, the results so far have marked one of the most challenged earnings seasons in the past decade, and the signs are pointing to an even more difficult Q2. Nevertheless, equity markets continued their ongoing uptrend amid some upbeat management commentary and hopes of a summer rebound. As of Friday, 66% of reporting companies have beaten earnings estimates, led by consumer staples and materials while 58% have topped revenue estimates, led by the health care and information technology sectors, which are the lowest ratios since the 2008 financial crisis. The blended earnings growth for the S&P 500, the mix between the earnings that have released and the projections for those that have not, is at -13.6% year-over-year, which represents the largest quarterly year-over-year earnings loss since Q3 2009. The blended revenue growth of 0.6% would be the lowest since Q2 2016. Headline results for the current quarter are expected to be considerably worse, as lockdowns became more widespread in April and carried into May, but investors will be expecting evidence of a recovery to feature prominently in Q2 results.

Additional Themes

China in Focus – Despite threats of retaliation against China from the White House for alleged malfeasance over the Covid-19 outbreak, the atmospherics of the US-China trade relationship improved last week after the Office of the US Trade Representative (USTR) and the Chinese Ministry of Commerce both characterized a conference call early Friday as positive. President Trump has indicated that more details of Beijing’s trade deal compliance will be released perhaps as early as this week. Meanwhile, China published April aggregate financing figures, which showed credit extension and broad money supply outpacing estimates. Later this week, retail sales, industrial production, and fixed asset investment data for last month are due.

Fed Policy Uncertainty – After fed fund futures briefly reflected NIRP by year-end, the announcement of a speech this Wednesday by Fed Chair Powell had traders guessing that he would use the opportunity to tamp down any such expectations. Still, fed officials have been unanimous in emphasizing downside economic risks and the need for more monetary easing.

 

Summary and Price Action Rundown

Global risk assets are continuing this week’s upbeat trend ahead of what is expected to be a historically dire US jobs report for April, as the focus remains firmly on recovery prospects, with positive earnings and better US-China atmospherics also boosting the market mood. S&P 500 futures indicate a 1.0% higher open, which would extend yesterday’s 1.2% gain that put year-to-date downside at 10.8% and the decline from February’s record high at 14.9%. Equities in the EU and Asia were higher overnight as well. Treasury yields are sinking back toward recent lows amid more troubling jobless data and cautious Fed communications, with the 10-year yield at 0.62% and longer-dated Fed fund futures projecting negative interest rates for the first time (more below). This has dented the dollar, which is falling back to the middle of its recent trading range. After rebounding sharply earlier this week, crude oil is fluctuating around three-week highs as traders weigh an improving demand outlook against the ongoing supply glut.

US Labor Market Pain Continues as Markets Reflect Negative Interest Rates

In contrast to increasingly exuberant US equity markets, real economic data remains dismal, Fed speakers are conveying deep concerns, and Treasury markets remain consistent with persistent economic doldrums. This morning, the April nonfarm payroll report is expected to reflect a historic level of job losses, with a consensus forecast of 22 million jobs lost and an understated 16.0% unemployment rate. This follows yesterday’s latest jobless claims figures which showed that 3.2 million Americans filled for initial unemployment benefits last week, compared to 3.8 million in the prior week and above market expectations of 3.0 million. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 million, equivalent to a 22% unemployment rate. For context, the nonfarm payroll report lags the weekly unemployment claims data. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.6 million. Amid these deeply depressed figures, Fed speakers yesterday continued to highlight concerns over the outlook for the economy, Treasuries staged a robust rally, and fed fund futures for December 2020 and January 2021 for the first time moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. This price action in Treasury and fed fund futures markets is consistent with a lengthy economic trough.

Earnings Season Generally Better Than Feared but the Outlook Remains Uncertain 

With the bulk of first quarter (Q1) earnings reports in the books, a preponderance of upside surprises has bolstered investor optimism in the face of low visibility into the coming quarters. Being one of the final household names left to report, Uber released its quarterly figures after yesterday’s market close, missing earnings estimates but beating revenue projections. Uber’s business has been impacted by the pandemic, to which the company attributed a $19 million revenue loss in the Rides segment. As the shelter-in-place policies were instituted, Uber’s demand for rides fell 3%. Conversely, demand for food delivery through Eats increased 54%. During the Q1 earnings call, Uber management stated that rides have experienced week-over-week growth for the past three weeks. Notably, last week alone saw a 12% increase. Uber shares soared 11% yesterday to put year-to-date upside at 4.0% and are extending gains by 7.9% in pre-market trading. With 426 of the S&P 500 companies having reported, 60% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.7% above estimates thus far, while earnings growth is -7.1% y/y. This week marks the end of peak Q1 earnings reporting season.

Additional Themes

Positive Signals on US-China Trade – The Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call overnight 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.” This comes after President Trump has referenced the potential breakdown of the Phase One US-China trade deal in recent days, indicating that more details of Beijing’s compliance will be released over the next few weeks. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are reportedly mulling retaliatory options.

Looking Ahead – With Q1 earnings reporting season past its peak, the focus will shift back toward economic data, which features US retail sales and industrial production for April. Both are naturally expected to reflect significant downside, but market participants have been taking historically impaired economic data in stride over the past month. Consumer sentiment for May will provide a more contemporaneous datapoint as analysts ponder prospects for recovery. Key Chinese economic data for April is also due and is forecast to show a moderate rebound.

Summary and Price Action Rundown

Global risk assets are rebounding from yesterday’s slide this morning as rising oil prices again provide support for sentiment ahead of more dismal US unemployment data. S&P 500 futures point to a 1.4% higher open, which would erase yesterday’s 0.7% loss that put year-to-date downside at 11.8% and the decline from February’s record high at 15.9%. Asian stocks were mixed overnight but EU stocks are rallying. This week’s crude oil rebound, which stalled yesterday and capped the broader rally in risk assets, is resuming this morning on Saudi pricing news (more below). After climbing moderately earlier this week, longer duration Treasury yields are stable this morning, with the 10-year yield at 0.70%, while a broad dollar index is consolidating its recent gains as the renminbi steadies and oil-dependent currencies gain.

Oil Price Bounce Supports Growth Optimism Ahead of Dire US Labor Figures

Crude prices remain in focus this week as investors grope for forward-looking indicators of the anticipated global economic recovery while monitoring labor market data for any hints of improvement. In keeping with the pattern from the first three days of this week, crude oil prices have helped set the tone for broader risk assets overnight. Both international benchmark Brent crude and US benchmark WTI are soaring this morning amid reports that Aramco, the Saudi oil giant, is slashing discounts for its customers in Asia and Europe. Analysts indicate that this move signals an intent by Saudi officials to support prices but is also indicative of improving demand in Asian and EU markets. For context, crude oil prices staged a sharp rebound from multi-decade lows on Monday and Tuesday as traders focused on the prospects for rising demand due to economic reopening, but relapsed to the downside yesterday amid more dispiriting stockpile data showed a brimming US surplus. With oil prices suggesting a brighter economic outlook, investors are poised to take another week of dismal US initial jobless claims numbers in stride this morning, as has been the trend in recent weeks. New unemployment filings for the week ending May 2 are forecast to ebb to 3 million, down from 3.8 million the prior week. This comes after yesterday’s ADP private payrolls figures registered 20.2 million layoffs in April, after shedding an upwardly revised 149k in March, which was in-line with a forecast of 20 million. This was the largest single-month decline ever in employment. Friday’s nonfarm payrolls are expected to show similar job losses, with consensus of 21.3 million.

Peak Earnings Reporting is Winding Down on a Generally Optimistic Note

With first quarter (Q1) earnings season entering its later stages, yesterday evening’s releases fit the broader pattern of unevenness and uncertainty, but with a cautiously optimistic outlook. PayPal released its earnings report last evening after the market closed, with the downside surprises in earnings and revenue overbalanced by encouraging signs of a rebound. Specifically, PayPal noted a 17% revenue increase in April and 135% increase of new users during the month. Shares are up 9.0% in the pre-market. Like many other companies, PayPal also withdrew its full-year guidance. Ahead of earnings, PayPal stock was down 18.6% year-to-date (ytd). T-Mobile, Hyatt Hotels, and Lyft also released their earnings reports last evening. Although T-Mobile missed on revenue and Hyatt missed on earnings, the three otherwise beat consensus estimates. Though T-Mobile shares are lower in early trading, Hyatt is flat and Lyft is up 14.1%, though both Hyatt and Lyft remain in deeply negative territory at -44.0% and -39.3% ytd, respectively. Hyatt’s revenue fell 20% year-over-year (y/y), and as of April 30 roughly 35% of the company’s hotels were closed. Hyatt has raised capital through a bond sale, cut costs by closing hotels, and began furloughing its employees. Lyft followed suit, reducing its more than 5,000-person workforce by 17% and furloughed nearly another 300. The company stated it expected to “cut its annualized fixed costs by $300 million by the end of the year.” The outlook for both Hyatt and Lyft hinges upon the lifting of shelter-in-place orders and peoples’ comfort in returning to using their services. With 388 of the S&P 500 companies having reported, 61% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.3% above estimates thus far, while earnings growth is -8.2% y/y.

Additional Themes

US-China Trade Deal in Focus – Yesterday, President Trump again referenced the potential breakdown of the Phase One US-China trade deal, indicating that more details of Beijing’s compliance will be released over the next few weeks. Reports indicate that US Trade Representative Lighthizer and Chinese Vice Premier Liu will participate in a call next week. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are mulling retaliatory options.

Commerce Set to Soften Huawei Stance – There are reports that the Department of Commerce is close to signing off on a new rule that will allow US companies to work with China’s Huawei Technologies on setting standards for next generation 5G networks.

Summary and Price Action Rundown

Global risk assets are extending this week’s rally this morning despite mixed earnings as efforts around the world to restart economic and social activities, alongside rising oil prices, undergird recovery optimism. S&P 500 futures indicate a 0.7% higher open, which would extend the index’s two-day gain of 1.3% that put year-to-date downside at 11.2% and the decline from February’s record high at 15.3%. EU and Asian stocks were mixed. The oil price rebound has taken center stage this week, with its conspicuous surge from recent multi-decade lows lifting energy sector stocks, nudging longer duration Treasury yields higher, with the 10-year yield at 0.68%, and spilling over into broader risk sentiment. The dollar is extending gains.

Investors Focus on Recovery Amid Grim Economic Signals

Despite the ongoing drumbeat of dismal growth figures, loosening social distancing guidelines in the US and around the globe have supported risk sentiment this week, with rising oil prices playing a key role in stoking optimism. Vice President Pence confirmed that the White House was discussing the dissolution of the coronavirus task force, though Dr. Fauci, the leading White House advisor on the pandemic, disputed this claim. Nevertheless, the task force is clearly directing its attention toward the process of loosening restrictions and California will begin its reopening process on Friday. Contemporaneous economic figures remain dire, with today’s reading of ADP private US payrolls for April expected to show the US economy shedding 21 million jobs and Friday’s nonfarm payrolls expected to show similar losses. EU data overnight was deeply depressed with the regional service sector purchasing managers’ index at 12.0 for April, rendering a composite reading of 13.6 when combined with the manufacturing PMI. March readings of German factory orders and EU retail sales sank 16.0% and 9.2% year-on-year (y/y), respectively. The European Commission downgraded their economic outlook for the year, slashing the EU’s 2020 GDP projection to -7.7%, with Italy, Spain, and Greece suffering contractions of over 9%, and warned of risks to the stability of the bloc. Nevertheless, with investors firmly focused on the prospects for recovery and groping for clues on its trajectory, the sharp rise in oil prices this week has been a frequently-cited factor in kindling hope for a decent rebound (more below).

Equities Remain Buoyant Amid Mixed Earnings

As first quarter (Q1) earnings season entering its later stages, the S&P 500 has remained supported despite decidedly uneven results, a number of high-profile misses, and low visibility into the coming quarters. Last evening, Disney released its Q1 figures, which missed consensus earnings but handily outpaced revenue projections. The pandemic hit many of Disney’s key business branches quite hard, including theme parks, cruises, and movie studios, with management estimating $1.4 billion in lost revenue, though the sharp rise in Disney+ subscriber growth provided some offset. Shares are 2.1% lower in pre-market trading, which would deepen year-to-date (ytd) losses of 30.1%. Allstate issued spotty results as well, topping earnings forecasts but missing on revenue. Earlier this quarter Allstate announced that it would issue a payback program sending money back to auto insurance payers of over $600 million and has paid $210 million. Shares are 1.8% higher in early trading, set to pare ytd downside of 9.2%. Meanwhile, the energy sector has been among the top performing segments of the S&P 500, though that has more to do with the sharp rebound in oil prices than stellar earnings from industry leaders. Still, Occidental Petroleum topped estimates for both earnings and revenue in Q1, sending its stock 6.0% higher in pre-market trading after falling 62.8% ytd. With 347 of the S&P 500 companies having reported, 61% have surprised to the upside on sales and 67% have topped earnings expectations. Aggregate earnings have come in 0.3% below estimates thus far, while earnings growth is -8.5% y/y. Today, GM, PayPal, and Lyft report.

Additional Themes

Oil Prices Extend Rally – After plumbing two-decade lows over the past month, crude oil prices have staged a sharp rebound this week as traders focus on the prospects for rising demand due to economic reopening alongside contracting supply, with falling output figures for key producers. For context, crude prices had struggled to find a floor despite the cessation of the price war between Saudi and Russia and deepening output curb commitments by OPEC and its allies, with traders focused on depressed demand and dwindling storage for the growing glut.

Partisan Divisions Deepen Ahead of CARES 2.0 – Yesterday, Senate Leader McConnell reiterated his advocacy of a “pause” in fiscal support efforts while President Trump is pushing for a payroll tax cut, and reports indicate that capital gains tax cuts as well as corporate liability limitations for operations during the pandemic are also on the White House wish-list. Meanwhile, Speaker Pelosi is working to finalize the House Democrats blueprint for the CARES Act 2.0 in an effort to focus this next round of stimulus on aid for states and localities.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning despite mixed earnings as investors focus on efforts to restart economic and social activities in various locations globally. S&P 500 futures point to a 1.1% higher open, which would extend yesterday’s 0.4% gain that put year-to-date downside at 12.0% and the decline from February’s record high at 16.1%. US equities shook off early losses yesterday as rising oil prices and rallying tech stocks led to the upside. Some overseas equity markets remain closed for holidays but EU and Asian stocks were mostly higher overnight. Longer duration Treasury yields have edged above their recent lows, with the 10-year yield at 0.65%, while a broad dollar index is stable despite euro underperformance (more below). Crude oil prices are rising more steeply from 20-year lows.

Investors Focus on Easing Restrictions in Some Locations

Analysts are pointing to the loosening of social distancing guidelines in Hong Kong and encouraging signals from Dr. Fauci in the US as helping lift risk sentiment over the past day. Hong Kong’s local benchmark Hang Seng stock index rallied 1.1%, though it remains 15.3% lower on the year, after Chief Executive Lam announced earlier today that social distancing measures are being loosened in the territory. With a dwindling infection rate and the general lockdown expiring on Thursday, Hong Kong is preparing to reopen a broad array of businesses, including restaurants and gyms, but with continuing restrictions on proximity of patrons and mandated use of masks. Schools are set to reopen in phases beginning later this month. Regional examples suggest little clarity on the outcome, as South Korea has continued to keep the virus contained during its gradual reopening process, while Singapore was forced back into lockdown after a secondary spike in cases. Meanwhile, Dr. Fauci, the leading White House advisor on the pandemic, stated in an interview that certain regions and counties in the US should be able to “pull back” some of the restrictions meant to limit the spread. California will begin its reopening process on Friday.

Earnings Continue to Emphasize Stark Disparity of the Virus Impact

First quarter (Q1) earnings remain uneven, as investors ponder the ability of companies to adapt ongoing Covid-19 risks. After garnering some negative press last month by taking and then returning Payroll Protection Program money, Shake Shack released mixed Q1 results after yesterday’s market close, beating on earnings but missing on revenue. Still, its shares are trading higher as management guidance focused on reopening plans and emphasizing drive-thru options. The company reported a 12.8% drop in same-shack sales, attributable to a steep decline in dine-in areas due to the pandemic restrictions. CEO Randy Garutti stressed the company remains flexible and has started the rehiring process, but withdrew full-year guidance due to uncertainty around the pandemic. Shares are up 3.5% in pre-market trading, which would pare the year-to-date (ytd) decline of 11.4%. Meanwhile, Diamondback Energy also topped earnings estimates but undershot revenue projections in its report last evening. As a response to the oil price volatility and general uncertainty in the markets, Diamondback plans to “voluntarily curtail 10-15% of expected May 2020 oil production” where it deems efficient to do so, “reduced full year 2020 capital budget by over 40%”, and will reduce drilling rigs by half by Q4. Pre-market gains of 5.5% represent only a modest retracement of Diamondback shares’ -54.2% ytd performance. Lastly, AIG missed analysts’ projections for earnings and revenues and detailed significant investment losses, leaving its stock price unchanged in early trading against a ytd loss of -53.1%. With 299 of the S&P 500 companies having reported, 62% have surprised to the upside on sales and 67% have topped earnings expectations. Aggregate earnings have come in 0.3% below estimates thus far, while earnings growth is -8.9% y/y. This week features Disney and DuPont today, with Hilton, Prudential, CVS, GM, Uber, and PayPal later this week.

Additional Themes

German Legal Challenge to ECB Program – One of the primary monetary support measures enacted by the European Central Bank (ECB) to counteract the impact from Covid-19 is under scrutiny by Germany’s Constitutional Court. The court’s ruling held that the ECB must provide justification of its regional sovereign bond purchases under the €750 billion Pandemic Emergency Purchase Program (PEPP). Although analysts are skeptical that this ruling will have any concrete impact on the program, the uncertainty is denting the euro, pushing it 0.6% lower versus the dollar this morning toward the lower end of its recent trading range, while peripheral EU bonds are selling off moderately, with Italy a notable underperformer.

Hardening US / China Rhetoric – Chinese official media outlets pushed back on US officials’ accusations that the Covid-19 virus emanated from a lab in Wuhan. But analysts note that singling out Secretary of State Pompeo rather than President Trump suggests restraint on the part of Beijing despite an intensifying war of words.

Summary and Price Action Rundown

Global risk assets remain under pressure this morning as disappointing earnings reports and intensifying White House rhetoric against China dampen investor sentiment. S&P 500 futures indicate a 0.9% lower open, which would extend Friday’s 2.8% loss that put year-to-date downside at 12.4% and the decline from February’s record high at 16.4%. With Amazon and Apple earnings reports highlighting the challenging outlook, Warren Buffett abandoning his airline holdings, and intensifying White House rhetoric on Chinese culpability for the pandemic, the market mood is cautious. Many overseas equity markets remain closed for holidays but EU stocks reopened to a sharp selloff. Longer duration Treasury yields continue to fluctuate near their lows, with the 10-year yield at 0.60%, while a broad dollar index is turning higher. Crude oil is continuing to retrace a portion of its recent recovery from nearly 20-year lows.

Earnings Releases Closed Last Week on a Downbeat Note

Investors await more first quarter (Q1) earnings results after some underwhelming reports on Thursday and Friday, alongside warnings from Amazon and Apple over the outlook, have rekindled a degree of caution. With Netflix, Google, Facebook, and Microsoft all posting robust Q1 results, analysts had been looking for Apple and Amazon to similarly impress after Thursday’s closing bell. Amazon, however, undershot its earnings estimates, and management provided a sobering outlook for the coming quarters. Meanwhile, Apple topped consensus but reported a decline in iPhone sales and suspended guidance amid scant visibility for the coming quarter. Shares of Amazon and Apple fell 7.6% and 1.6%, respectively, on Friday putting year-to-date performance at 23.7% and -1.6%. Tesla was another high-flier that when into reverse, with shares swooning 10.3% on Friday after CEO Elon Musk tweeted that its valuations were too high, though shares remains up 67.7% on the year. Meanwhile, ExxonMobil fell short on revenues and froze its dividends, sending its shares 7.2% lower on the day to trade -37.5% year-to-date. Colgate-Palmolive topped quarterly projections but withdrew its full 2020 forward guidance amidst the uncertainty from the pandemic. Its shares fell 2.5% on Friday to turn slightly negative for the year. Lastly, Honeywell beat earnings estimates but missed revenue projections while also suspending forward guidance plans for 2020. Honeywell stock sank 3.3% for the day for year-to-date downside of 22.5%. In other corporate news, retailer J. Crew filed for bankruptcy overnight. With 280 of the S&P 500 companies having reported, 63% have surprised to the upside on sales and 69% have topped earnings expectations. Aggregate earnings have come in 0.3% above estimates thus far, though earnings growth is -8.6% year-on-year (y/y). This week features Tyson, AIG, and Shake Shack today, with Allstate, DuPont, Disney, Prudential, Western Union, AvalonBay, CVS, GM, MetLife, and PayPal later this week.

White House Sharpens Rhetoric Against China

In remarks over the weekend, President Trump conveyed a hardening stance against China for its alleged mishandling of the outbreak. Investors are pondering yet another source of uncertainty as President Trump continues to press his case that the Chinese government is culpable for the pandemic, saying “they made a mistake” and “tried to cover it.” He has suggested that tariffs or other retaliatory measures could be applied. Meanwhile, Secretary of State Pompeo over the weekend continued to espouse the theory that the virus emanated from a Wuhan virus lab. President Trump promised a “conclusive” report on the origin of Covid-19, while reports cited a Department of Homeland Security memo alleging that Chinese officials concealed the severity of the initial outbreak in an effort to stockpile medical supplies. This comes after reports last week indicating that the White House is considering an executive order to prevent a US government employee savings plan from investing in Chinese assets.

Additional Themes

Dismal Global Growth Data – Global manufacturing purchasing managers’ indexes (PMIs) for April were broadly depressed, with the final EU reading at 33.4 after registering 44.5 in March. For context, PMI readings above 50 denote expansion in the sector. Asian factory PMIs were similarly depressed. South Korea, despite generally being cited as the most successful example of Covid-19 containment, printed a dire 41.6 for last month. In the US today, investors are bracing for a depressed March readings of factory orders and durable goods orders.

Warren Buffett Dumps Airlines – During the Berkshire Hathaway quarterly earnings call over the weekend, CEO Warren Buffett disclosed that his company had unloaded its stakes in US airlines, citing major changes for the industry. Share prices for the major US carriers are 8-10% lower in pre-market trading despite already being down significantly on the year, with Delta, United, American, and Southwest suffering year-to-date losses of 58.8%, 69.8%, 62.9%, and 45.9%, respectively, as of Friday’s close. Buffett also disclosed that Berkshire Hathaway has not made significant purchases of stocks over the past two months.

Summary and Price Action Rundown

Global risk assets are retreating this morning as sobering earnings reports and renewed threats of US tariffs on China weigh on sentiment, while economic data remains grim. S&P 500 futures point to a 2.2% lower open, which would extend yesterday’s 0.9% loss and pare the index’s 2.7% gain this week, which has put year-to-date downside at 9.9% and the decline from February’s record high at 14.0%. With Amazon and Apple earnings reports highlighting the challenging outlook and intensifying White House rhetoric on Chinese culpability for the pandemic, an upbeat week of trading is set to conclude on a downbeat note. Many overseas equity markets are closed for holidays. Longer duration Treasury yields continue to hover near their lows, with the 10-year yield at 0.61%, while a broad dollar index is pausing its recent decline. Crude oil is retracing a portion of its recent recovery from nearly 20-year lows.

 

High-Profile Earnings Releases and Guidance Rekindle Investor Caution

Amid mixed first quarter (Q1) earnings, solid reports from IT giants had provided support in recent days, but nuanced results from Amazon and Apple have emphasized downside risks. With Netflix, Google, Facebook, and Microsoft all posting robust Q1 results, analysts had been looking for Apple and Amazon to similarly impress after yesterday’s closing bell. Amazon, however, undershot its earnings estimates, and management provided a sobering outlook for the coming quarters. Although revenue of $75.5 billion, up 26.5% year-on-year (y/y), handily beat expectations CEO Jeff Bezos suggested that Amazon shareholders “may want to take a seat” and said that in Q2 the company will prioritize “Covid related expenses, getting products to customers, and keeping employees safe,” mostly at the expense of Q2 operating profit. While estimates trended around $4 billion for Q2 operating profit, Amazon stated it could see losses of $1.5 billion to gains of $1.5 billion, underlining the deep uncertainty over operating conditions moving forward. Amazon shares are -5.0% in pre-market trading but still retain dramatic outperformance year-to-date (ytd), with upside of 33.9% thus far in 2020. Meanwhile, Apple topped both earnings and revenue forecasts but suspended guidance amid scant visibility for the coming quarter. Despite the pandemic, Apple managed to grow in Q1, attributing its success to Wearables and Services, but sales of its flagship iPhone declined. While other companies slashed or suspended dividends this quarter, Apple issued a 6% increase of dividends to shareholders. Apple stock is down -2.9% in early trading after closing yesterday’s session flat ytd. Lastly, Visa beat consensus earnings and revenue estimates but stated that underlying business drivers slowed during the quarter as a result of the pandemic. Regarding Q2, management noted that US spending volumes contracted 19% through April 28. Shares of Visa are 3.2% lower in pre-market trading and -4.9% ytd. With 264 of the S&P 500 companies having reported, 65% have surprised to the upside on sales and 69% have topped earnings expectations. However, aggregate earnings have come in 1.8% below estimates thus far.

Economic Data Remains Dismal Ahead of Next Week’s April Jobs Figures 

Poor economic data continues, but the prospects for a second half recovery remain the more potent driver of price action and investor sentiment. Last week 3.8 million Americans filed for unemployment benefits for the first time, compared to 4.4 million in the prior week and above market expectations of 3.5 million. This brings the total reported since the beginning of the coronavirus crisis to over 30 million, suggesting layoffs have started to spread to industries that were not initially directly impacted by Covid-19. The largest increases were seen in Florida, California, Texas, Georgia and New York. Based on this data, economists are projecting an official unemployment rate around 20%. April nonfarm payroll data will be in focus next week. Meanwhile, Personal Income in the US declined by 2.0% month-on-month (m/m) in March, after a 0.6% increase in February and below market expectations of 1.5%, while Personal spending in the US dropped 7.5% m/m, after rising 0.2% and also below -5.1% consensus. This was the largest decline in personal spending on record, as the coronavirus crisis hit households’ demand. Spending on services fell 9.5% m/m while goods spending fell 2.2% m/m. The Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation metric for which it targets 2%, fell 0.1% m/m to 1.7% y/y, down from 1.8% in February.

Additional Themes

Trump Targets China – Investors are noting President Trump’s hardening posture against China, with reports that he is considering an executive order to prevent a US government employee savings plan from investing in Chinese assets. Yesterday, he mused about retaliatory tariffs and continued to suggest that Covid-19 emanated from a virus lab in Wuhan.

European Central Bank (ECB) Tweaks Policy – The ECB left rates on hold and announced modest policy enhancements yesterday. EU markets registered a degree of disappointment, with the euro turning higher against the dollar, peripheral debt selling off, and stocks falling.