Morning Markets Brief 5-28-2020

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.