Morning Markets Brief 10-19-2020

Summary and Price Action Rundown

Global risk assets are rallying this morning amid possibly brighter US stimulus prospects and solid Chinese economic growth figures. S&P 500 futures indicate a 0.8% higher open after the index closed flat on Friday as tech stocks lagged, holding its weekly performance at 0.2% and its year-to-date gain at 7.8%, which is 2.7% below early September’s record high. Equities in the EU are modestly higher while Asian shares were mixed overnight. The dollar is sinking lower while longer-dated Treasury yields are rising within their recent range, with the 10-year yield at 0.77%. Brent crude prices remain choppy around $42 per barrel.

Fiscal Stimulus Remains in Focus Amid Last Minute Deal Push

With the prospects for post-election fiscal stimulus a key factor for investor sentiment, House Speaker Pelosi’s final offer over the weekend and President Trump’s pro-stimulus rhetoric are helping support this morning’s rally. After continuing talks with Treasury Secretary Mnuchin over the weekend, Speaker Pelosi indicated that any pre-election stimulus deal would need to approved by tomorrow and made no indication that she was altering the position of House Democrats on the $2.2 trillion package they passed into law earlier this month. President Trump, however, has shifted his rhetoric on the size of the package, stating in a campaign stop in Nevada over the weekend that he wants “a bigger number than [Pelosi] wants” and suggesting that he would be able to marshal enough GOP support on Capitol Hill to pass an upsized bill. Analysts remain skeptical, however, that Senate Republicans would agree in sufficient numbers ahead of such a high-stakes election when President Trump is meaningfully lagging in the polls. Consequently, investors remain focused on post-election scenarios for stimulus, but these latest developments still provide some slim hope of more prompt agreement and suggest that in the case that no pre-election stimulus deal is reached and President Trump wins reelection, he will push swiftly for a higher number for the bill.

Earnings Season Enters Its Second Week After a Mixed Start

Investors remain attuned to income reports after the first week of third quarter (Q3) earnings season provided upside surprises on headline numbers but elicited nuanced market reactions. Corporate earnings season thus far has provided little direction to equity markets despite a preponderance of better-than-expected earnings and sales results. Roughly 10% of S&P 500 companies issued results, the majority coming from financials including leading US banks, among which a notably high 86% exceeded earnings per share (EPS) estimates in Q3, and by a wider margin than average. Meanwhile the year-on-year decline remains the second steepest for a quarter since the 2008 Financial Crisis at -18.4% at this week’s close. Meanwhile, 82% of S&P 500 companies that have reported thus far have seen actual revenues exceed estimates by an average of 3.6%, well above the five-year average of 61% of companies. This week’s earnings feature a wider sector variation than the bank-heavy week one, including tech and consumer goods, with Halliburton and IBM reporting today and Procter & Gamble, Netflix, Snap, Tesla, AT&T, Intel, and Coca-Cola through the rest of the week.

Additional Themes

Chinese Growth Data Shows Improvement – Chinese equities were mixed overnight but the renminbi continued to strengthen versus the dollar, registering its strongest level since July 2018, after key mainland economic readings provided an encouraging picture of the ongoing recovery. The 4.9% Q3 GDP growth print was slightly lower than estimates of 5.5% but still reflected improvement from 3.2% the prior quarter, and the latest data from September was even more upbeat. Industrial production grew 6.9% year-on-year (y/y) versus 5.8% expected and 5.6% the prior month, while retail sales also surprised to the upside at 3.3% y/y versus a forecast of 1.6% and an August reading of 0.5%. Fixed asset investment for September was nearly in-line with projections at 0.8% year-to-date after the -0.3% reading for the prior month.

Oil Prices Rangebound as OPEC Meets – Today’s ministerial meeting precedes the broader summit on December 1st, when the cartel and its allies will revisit their plans for ongoing supply restrictions, which have been incrementally loosened over recent months and are expected to be reduced again at year-end. The decision to ease off the tightest level of curbs has been accompanied by the Saudis and Russians adopting a hard line on compliance with the remaining commitments, castigating members that have lagged their output cut quotas. In a feisty press conference at the mid-September monitoring committee meeting, the Saudi oil minister warned that speculators betting on lower crude oil prices would be “ouching like hell.” This comes amid reports that renewed output from Libya is already at 500K barrels per day.