Morning Market Brief 6-22-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning amid ongoing concerns that the Covid-19 resurgence will impede reopening plans, while analysts are noting various China-related headlines. S&P 500 futures point to a choppy open after the index struggled for direction last week and closed Friday on a downbeat note to take its year-to-date loss to 4.1%. Equities in the EU and Asia were mixed overnight in muted trading, with the Hong Kong index underperforming on news regarding China’s impending security law for the territory (more below). The dollar is slightly lower, while longer-dated Treasury yields are flat, with the 10-year yield at 0.69%. Crude oil prices are hovering near three-month highs after last week’s OPEC compliance review reaffirmed the cartel’s commitment to supply curbs.

Coronavirus Concerns Keep Investors on Edge

A steady drumbeat of worrisome figures suggests that coronavirus resurgences could impede reopening plans. US equities surrendered early gains on Friday and then dipped into negative territory after Apple announced that it would be temporarily re-closing some of its stores in developing Covid-19 hotspots like Florida and Arizona. That ended a week of generally positive developments on a sour note, and global risk assets remain choppy this morning after the weekend brought more concerning news on the pandemic. The infection data continues to worsen in some areas, with seven states registering new record high cases, though the previous epicenter of the US outbreak, New York City, is showing low and stable transmission rates that have allowed the Phase 2 of reopening to commence this week. Oklahoma is among the burgeoning hotspots, which had raised concerns about President Trump’s campaign rally in Tulsa over the weekend that was held in an indoor arena. Also, shares of cruise lines slid on Friday as operators disclosed that they would voluntarily cease all voyages from US ports until September 15. Thus far, however, no mass lockdowns have been re-imposed in the US. Overseas, cases are continuing to rise in Germany after the EU’s largest country escaped the worst of the initial wave, while reports of another outbreak in Rome are also being noted by analysts, and Australia’s state of Victoria extended its state of emergency for another four weeks. On a more positive note, reports from China indicate that the recent outbreak that resulted in re-imposed restrictions in some areas of Beijing is slowing.

Investors Note China Headlines

Though market reactions have been modest, China-related developments are providing little cheer to investors this morning. Over the weekend, the People’s Bank of China retained its interest rates as expected and provided no indication that it is set to deviate from its current wait-and-see approach. Analysts have noted the steady climb in Chinese bond yields since their springtime low, which is in sharp contrast with most developed market sovereigns. For context, the US 10-year Treasury yield is languishing barely 15 basis points above record lows at 0.69%, whereas China’s 10-year yield is 2.92% after having risen 44 basis points since April. Meanwhile, on the US-China relations front, analysts are noting headlines that China has banned chicken imports from a particular Tyson’s plant that suffered a coronavirus outbreak, with this coming just a week after China reportedly reaffirmed its US farm good purchase commitments under the Phase One trade deal. Also, the US has rejected Beijing’s proposal on increased flight routes for Chinese carriers unless some reciprocal changes are made. Neither of these developments are considered a serious escalation of US-China tensions but keep attention on the frayed relationship. Lastly, Hong Kong’s benchmark Hang Seng stock index underperformed overnight as China confirmed that the new security law it is imposing on the territory explicitly allows Hong Kong laws to be overridden in some cases. The Hang Seng slipped 0.5% to extend its year-to-date (ytd) underperformance against regional peers to -13.1%, with the Nikkei down 8.3% ytd and the Shanghai Composite only 2.8% lower by comparison.

Additional Themes

Bank of England Policy Pivot – After meeting market expectations for additional quantitative easing but keeping interest rates on hold at last week’s BoE meeting, Governor Bailey indicated in an op-ed today that he would focus on shrinking the central bank’s balance sheet before commencing with rate hikes. Gilts and the pound are rallying on this dovish shift.

Geopolitical Tensions Remain a Backburner Issue for Markets – Concerning developments in Libya over the weekend, as Egypt threatened to intervene in that civil conflict, are having scant apparent impact on oil prices this morning. Meanwhile, investors continue to monitor the situation on the Korean peninsula after a week of bellicose rhetoric from Pyongyang, which prompted South Korea to vow retribution for continued provocation. The Korean won fell another 0.5% overnight, though disappointing export figures were another headwind, as the currency has lost 2.0% versus the dollar since North/South tensions flared.