Markets Policy Partners 7-16-2020

Summary and Price Action Rundown

Global risk assets are moving lower this morning as investors ponder mixed US corporate earnings and Chinese growth figures ahead of key US economic data this morning. S&P 500 futures point to a 0.6% lower open after yesterday’s 0.9% rally brought the index just shy of turning positive for the year. Equities in the EU and Asia also declined overnight, with Chinese mainland stocks leading to the downside as Beijing cools the recent red-hot rally. The dollar is edging higher, while longer-dated Treasury yields are back near recent lows, with the 10-year yield at 0.62%. Brent crude prices are holding above $43 after yesterday’s OPEC+ decision.

Banks Issue Mostly Positive Results but Sober Guidance

After yesterday’s second day of second quarter (Q2) earnings season took on a somewhat more upbeat tone on strong results from Goldman Sachs, results remained broadly uneven and highlight a deeply uncertain outlook. Goldman Sachs, Bank of New York, PNC, and US Bancorp reported mostly better-than-expected results for Q2 but caution over the outlook and preparation for credit deterioration remained key themes, continuing yesterday’s trends for the sector. Leading the pack, Goldman Sachs trounced earnings and revenue expectations, fueled by impressive growth in total trading revenues, which registered its best quarterly performance in nine years. Its investment banking unit also reported record quarterly revenue on strength in equity and debt underwriting. The results are even more impressive considering the company set aside an additional $1.5 billion towards credit-loss reserves, beating expectations as well. Still, Goldman shares retreated from early gains of nearly 5% to close 1.4% higher. Meanwhile, US Bancorp topped estimates but the steep year-on-year earnings decline reflected the difficulties of this quarter. Management struck an optimistic note, however, highlighting healthy fee revenue growth and strong capital and liquidity positions moving forward, and its share rose 3.7%. PNC shares also rallied, rising 2.8%, although the bank missed earnings estimates as analysts cited solid capital positioning. Like PNC’s peers, management noted that the drop in profits was largely attributable to a higher provision for credit losses. On a more downbeat note, Bank of New York (BoNY) beat Q2 earnings and revenue expectations but stressed the risk of credit losses and “significant pressure” from low interest rates in its outlook for the coming quarters, sending its shares 5.4% lower on the day. In other major reports yesterday, UnitedHealth Group had a positive earnings surprise but missed on revenue, denting its share price by 1.8%. Today, analysts will be attuned to reports from Bank of America and Morgan Stanley, as well as Johnson & Johnson before the opening bell, with Netflix and JB Hunt Transport after markets close.

US-China Tensions Temper Chinese Growth Optimism

China’s GDP surprised to the upside and June economic data was broadly in-line with expectations, but ongoing frictions between Washington and Beijing raise risks of escalation. China’s Q2 GDP rose 3.2% year-on-year (y/y), topping estimates of 2.4% and representing a sharp rebound from the pandemic-induced 6.8% contraction in Q1. Meanwhile, June data was also consistent with broad improvement in economic activity, though retail sales lagged estimates, remaining in negative territory at -1.8% y/y versus expectations of a 0.5% increase after May’s -2.8% reading. Industrial production for last month expanded as expected at 4.8% y/y, accelerating from the prior month’s 4.4% pace, while year-to-date fixed asset investment improved slightly more than expected to -3.1% from -6.3% in May. Nevertheless, the renminbi declined moderately from its strongest level versus the dollar since early March. This mixed market reaction to broadly upbeat data comes amid additional headlines highlighting ongoing tensions between the US and China as analysts suggest that President Trump remains intent on pushing a more prominent “tough on China” policy line before the election. Recent reports are indicating that the Trump administration is mulling a travel ban on Chinese Communist Party officials, while analysts continue to speculate over the impact of the Hong Kong sanctions bill. Last night’s outsized 4.5% loss for the Shanghai Composite, however, is generally being attributed to signs that Beijing is trying to rein in the speculative equity fervor stoked by state media barely two weeks ago, during which the index flew 16% higher over eight trading days.

Additional Themes

European Central Bank (ECB) Decision Due – Later this morning, the ECB will conclude its July meeting, with analysts expecting no major policy announcements. The June meeting featured a greater-than-expected expansion of the Pandemic Emergency Purchase Program.

Key US Economic Data – This morning, analysts will parse June retail sales figures, which are expected to extend their recovery by 5.0% month-on-month (m/m) after leaping 17.7% m/m in May following a record 14.7% drop in April. Initial jobless claims for the week ending July 11th are also due, with estimates of 1.25 million new filings, down from 1.31 million the prior week.