Summary and Price Action Rundown
Global risk assets were mixed overnight as US-China tensions continue to percolate despite relatively restrained policy response from President Trump over Hong Kong, while investors ponder potential economic fallout from ongoing US protests. S&P 500 futures point to a flat open after a choppy overnight session, while last week’s powerful 3.0% gain pared the index’s year-to-date downside to 5.8% and the decline from February’s record high to 10.1%. Equities in the EU are higher while Asian stocks outperformed overnight amid relief that President Trump appeared to stop short of major escalation with his measured retaliatory policies on Hong Kong. Longer-dated Treasury yields remain steady within their narrow range, with the 10-year yield at 0.66%. Meanwhile, the dollar is continuing to decline while the renminbi was steady overnight, though the offshore-traded renminbi is slightly weaker. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent at $38 per barrel.
President Trump Strikes a Balance on Hong Kong Response but Tensions Remain High
Markets evidenced a degree of relief after President Trump announced a relatively restrained policy response to China’s clampdown on Hong Kong but reports this morning that China is suspending some US farm goods purchases rekindled concerns of further escalation. Chinese state firms have reportedly been instructed by Beijing to pause purchases of US soybeans and pork as China’s leaders ponder their response to US actions on Hong Kong. For context, President Trump’s commentary on Hong Kong was forceful at his press conference on Friday but the policy actions he announced were more moderate than some investors had feared, given the wide-ranging policy options available. Notably, the Phase One trade deal was left untouched and no additional tariffs or major sanctions were imposed or threatened, while the withdrawal of Hong Kong’s preferential trade status was characterized as a process rather than an abrupt revocation. Still, the President announced he will be removing US funding from the World Health Organization, suspending visas for Chinese nationals in the US with ties to the People’s Liberation Army, and eliminating policy exemptions afforded to Hong Kong ranging from extradition to export controls and dual use technologies with “few exceptions,” though the carve-outs remained unspecified. Additionally, he called for an executive investigation into “the differing practices of Chinese companies listed on US markets.”
US Unrest Casts Shadow Over Economic Reopening Hopes
The cautious and uneven process of gradually restarting more normal activities has been upended in many areas across the US over the weekend by spiraling protests against racial inequality. With demonstrations turning violent in a number of major US cities this weekend, market participants are pondering the extent to which the economic recovery will be impacted either directly, by keeping people at home and hurting consumer confidence, or indirectly, though a possible resurgence in Covid-19 infections given the heightened potential for transmission amid the chaotic and crowded scenes. New York Mayor de Blasio said that plans for reopening the city would proceed despite the unrest, with most metropolitan areas taking a similar approach. With Friday’s release of May nonfarm payroll data expected to show an unemployment rate approaching 20%, the sources of discontent among the protestors are surely not limited to racial injustice. Meanwhile, Congress is set to restart negotiations over the coming round of pandemic relief this month after the House Democrats’ $3 trillion draft plan failed to garner support from the Trump administration or Senate Republicans last month.
Additional Themes
Fitful Chinese Economic Data – Over the weekend, China released its purchasing managers’ indexes (PMIs) for May, with the various gauges reflecting moderate degrees of expansion but with both upside and downside surprises. The official government PMI reading for the manufacturing sector was slightly below expectations of 51.1, printing a slower 50.6, down from 50.8 in April, while the service sector was broadly in line with expectations at a perkier 53.6. For context, PMI readings above 50 denote expansion of activity in the sector. Importantly, the employment components of both readings slipped back into contraction, hinting at potential backsliding in the recovery. Meanwhile, external demand clearly remains a headwind, with the sub-index of new export orders in sharp contraction at 35.3.
OPEC+ Debates Output Cut Extension – Ahead of the official meeting on Thursday of this week, which was moved up from the original June 9-10 dates, OPEC and its allies (known as OPEC+) are reportedly set to consider an extension of coordinated supply cuts of between one and three months. For context, headlines have suggested that the Saudis were looking to extend the May-June output cut levels through the end of the year to further support supply rebalancing but Russia has been advocating a for relatively shorter period and a “wait-and-see” approach to the potential demand recovery. Oil prices are mixed this morning.