Morning Markets Brief 5-7-2020

Summary and Price Action Rundown

Global risk assets are rebounding from yesterday’s slide this morning as rising oil prices again provide support for sentiment ahead of more dismal US unemployment data. S&P 500 futures point to a 1.4% higher open, which would erase yesterday’s 0.7% loss that put year-to-date downside at 11.8% and the decline from February’s record high at 15.9%. Asian stocks were mixed overnight but EU stocks are rallying. This week’s crude oil rebound, which stalled yesterday and capped the broader rally in risk assets, is resuming this morning on Saudi pricing news (more below). After climbing moderately earlier this week, longer duration Treasury yields are stable this morning, with the 10-year yield at 0.70%, while a broad dollar index is consolidating its recent gains as the renminbi steadies and oil-dependent currencies gain.

Oil Price Bounce Supports Growth Optimism Ahead of Dire US Labor Figures

Crude prices remain in focus this week as investors grope for forward-looking indicators of the anticipated global economic recovery while monitoring labor market data for any hints of improvement. In keeping with the pattern from the first three days of this week, crude oil prices have helped set the tone for broader risk assets overnight. Both international benchmark Brent crude and US benchmark WTI are soaring this morning amid reports that Aramco, the Saudi oil giant, is slashing discounts for its customers in Asia and Europe. Analysts indicate that this move signals an intent by Saudi officials to support prices but is also indicative of improving demand in Asian and EU markets. For context, crude oil prices staged a sharp rebound from multi-decade lows on Monday and Tuesday as traders focused on the prospects for rising demand due to economic reopening, but relapsed to the downside yesterday amid more dispiriting stockpile data showed a brimming US surplus. With oil prices suggesting a brighter economic outlook, investors are poised to take another week of dismal US initial jobless claims numbers in stride this morning, as has been the trend in recent weeks. New unemployment filings for the week ending May 2 are forecast to ebb to 3 million, down from 3.8 million the prior week. This comes after yesterday’s ADP private payrolls figures registered 20.2 million layoffs in April, after shedding an upwardly revised 149k in March, which was in-line with a forecast of 20 million. This was the largest single-month decline ever in employment. Friday’s nonfarm payrolls are expected to show similar job losses, with consensus of 21.3 million.

Peak Earnings Reporting is Winding Down on a Generally Optimistic Note

With first quarter (Q1) earnings season entering its later stages, yesterday evening’s releases fit the broader pattern of unevenness and uncertainty, but with a cautiously optimistic outlook. PayPal released its earnings report last evening after the market closed, with the downside surprises in earnings and revenue overbalanced by encouraging signs of a rebound. Specifically, PayPal noted a 17% revenue increase in April and 135% increase of new users during the month. Shares are up 9.0% in the pre-market. Like many other companies, PayPal also withdrew its full-year guidance. Ahead of earnings, PayPal stock was down 18.6% year-to-date (ytd). T-Mobile, Hyatt Hotels, and Lyft also released their earnings reports last evening. Although T-Mobile missed on revenue and Hyatt missed on earnings, the three otherwise beat consensus estimates. Though T-Mobile shares are lower in early trading, Hyatt is flat and Lyft is up 14.1%, though both Hyatt and Lyft remain in deeply negative territory at -44.0% and -39.3% ytd, respectively. Hyatt’s revenue fell 20% year-over-year (y/y), and as of April 30 roughly 35% of the company’s hotels were closed. Hyatt has raised capital through a bond sale, cut costs by closing hotels, and began furloughing its employees. Lyft followed suit, reducing its more than 5,000-person workforce by 17% and furloughed nearly another 300. The company stated it expected to “cut its annualized fixed costs by $300 million by the end of the year.” The outlook for both Hyatt and Lyft hinges upon the lifting of shelter-in-place orders and peoples’ comfort in returning to using their services. With 388 of the S&P 500 companies having reported, 61% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.3% above estimates thus far, while earnings growth is -8.2% y/y.

Additional Themes

US-China Trade Deal in Focus – Yesterday, President Trump again referenced the potential breakdown of the Phase One US-China trade deal, indicating that more details of Beijing’s compliance will be released over the next few weeks. Reports indicate that US Trade Representative Lighthizer and Chinese Vice Premier Liu will participate in a call next week. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are mulling retaliatory options.

Commerce Set to Soften Huawei Stance – There are reports that the Department of Commerce is close to signing off on a new rule that will allow US companies to work with China’s Huawei Technologies on setting standards for next generation 5G networks.