Summary and Price Action Rundown
Global risk assets were mixed overnight ahead of today’s White House press conference on China, which could serve to either escalate or ease already heightened US-China tensions. S&P 500 futures indicate a 0.3% lower open after yesterday’s 0.2% decline shaved week-to-date gains to 2.5%, putting the index’s year-to-date downside at 6.2% and the decline from February’s record high at 10.5%. Before yesterday’s announcement of President Trump’s Friday press conference on China, the S&P 500 had been over 1% higher amid continued optimism over economic reopening, with jobless claims data suggesting hints of improvement. Equities in the EU are trading lower while Asian stocks were directionless overnight amid continued underperformance by Hong Kong’s benchmark Hang Seng index. Longer-dated Treasury yields remain unable to move higher, with the 10-year yield slipping back to 0.67%. Meanwhile, the dollar is lower as the euro extends its recent bounce despite stagnating inflation and the renminbi remained stable. Crude oil has been struggling to make headway this week, with Brent sinking below $35 per barrel as traders look ahead to June’s OPEC+ meeting.
Investors Await President Trump’s Press Conference on China
After the Chinese leadership ushered the controversial Hong Kong security bill into law earlier this week, news yesterday afternoon that President Trump is set to announce the US response sometime today introduced a hint of caution into ebullient US equities. Although the timing of the press conference remains unclear, President Trump is set to lay out his administration’s response to China’s clampdown on Hong Kong. For context, China’s legislature passed the measure in a characteristically one-sided vote after the US State Department declined to certify Hong Kong’s autonomy from China on Wednesday. By doing so, Secretary of State Pompeo 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. 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, which would fall short of a full cancellation of the territory’s special trading status. Meanwhile, the House is expected to consider the bill that passed the Senate last week that would sanction Chinese entities and individuals taking part in enforcing the new security law in Hong Kong and punish banks that do business with them. Relatedly, President Trump is expected to sign a bill to sanction Chinese entities over their suppression of Muslim minorities in western China. Meanwhile, China upped its bellicose rhetoric against Taiwan overnight, increasing the sense of geostrategic tension.
Glimmers of Hope in US Data Ahead of Fed Chair Powell’s Remarks
With US markets conveying mixed signals on the growth outlook, incoming data is displaying some improvement though Fed communications are likely to stay focused on the downside risks. Last week, 2.123 million Americans filled for unemployment benefits, the lowest level since the coronavirus crisis began. However, filings came in slightly above market expectations of 2.1 million and lifted the total reported since March 21st to 40.7 million. Most notably in the report, continuing jobless claims decreased by 3.86 million to 21 million in the week ended May 16th from a record 24.9 million in the week ended May 9th. This is an indication that as states have lifted stay at home orders, the process of returning to work has slowly begun. Meanwhile, first quarter (Q1) US GDP was revised down from -4.8% to -5.0%, the second estimate from the BEA showed. This is the largest drop in GDP since the fourth quarter of 2008. However, the Atlanta Fed GDPNow estimates that Q2 GDP will have contracted 41.9%. In April, US Durable Goods Orders plunged 17.2% month-on-month (m/m), following a downwardly revised 16.6% slump in March, but were above market expectations of a 19% drop. April’s US consumer spending and income data is due today, alongside a key inflation metric, as well as May consumer confidence. Also, Fed Chair Powell’s remarks later this morning are likely to remain consistently cautious.
Trump/Twitter Spat Continues – Overnight, Twitter flagged one of President Trump’s tweets regarding the situation in Minneapolis as running afoul of its rule against glorifying violence. For context, after Twitter took the step of appending fact-checking links to some of his tweets, President Trump yesterday followed through on his pledge take aim at social media with an executive order to loosen liability protections for the content of third party posts. Facebook CEO Zuckerberg made conciliatory remarks in an interview yesterday, suggesting that social media should not attempt to be the “arbiters of truth.” Shares of Twitter and Facebook sank 4.5% and 1.6%, respectively, yesterday with year-to-date performance of -1.4% and 9.9%.
Looking Ahead – The US nonfarm payrolls report for May will be in the spotlight next week, as will purchasing managers’ indexes for the US, EU, Japan, and China. The European Central Bank has a meeting, as do the Bank of Canada and Reserve Bank of Australia.