Morning Markets Brief 6-15-2020

Summary and Price Action Rundown

Global risk assets moved sharply lower overnight as investors continue to grapple with the risk that a secondary spike in Covid-19 infections will impede economic reopening. S&P 500 futures indicate a 2.2% lower open after the index suffered its first weekly decline in a month last week, sliding 4.8%. The sharp rally for the S&P 500 in prior weeks had erased the index’s year-to-date downside as of last Monday. Equities in the EU are similarly lower while Asian stocks posted some steep declines overnight. Longer-dated Treasury yields have reverted to their previous range, with the 10-year yield descending to 0.67% this morning, while the dollar is edging higher. Crude oil is lower, with Brent dropping toward $38 per barrel.

Covid-19 Resurgence Risk Weighs on Investor Sentiment

Last week’s abrupt return of market volatility, which many analysts ascribed in part to the rising number of coronavirus cases in areas that have been in the process of economic reopening, is set to continue today as infection data continued to worsen over the weekend. Texas, Florida, Georgia, Arizona, North Carolina, and South Carolina are among the states experiencing a rise in Covid-19 cases and hospitalizations. Some analysts have argued over whether these various hotspots amount to a “secondary spike” in the US when many of these states never suffered a significant initial surge like New York, New Jersey, Washington, and elsewhere. Also, there remains uncertainty over the degree to which this apparent increase in cases might be attributable to more widespread testing rather than a true uptrend in new infections. New York Governor Cuomo issued a warning over the weekend that he will seek to shut businesses that are flouting the mandated precautions for safe reopening. Meanwhile, Beijing is also experiencing a targeted lockdown after a resurgence in infections centered around a seafood and produce market has been the source of new coronavirus cases in half the districts of the city. For context, reports indicate that life in Beijing had returned to relative normalcy in recent weeks after a 50-day period without any new reported cases. –

Chinese Data Suggests a Tepid Rebound

Despite being further along the timeline of pandemic containment and economic reopening, China’s economic data continues to suggest lingering effects of the virus. Overnight, China’s key growth readings for May generally undershot estimates and conveyed a picture of gradual resumption of economic activity rather than the V-shaped rebound that some analysts had hoped. Retail sales were -2.8% year-on-year (y/y), missing expectations of -2.3% but improving from April’s contraction of 7.5%. Industrial production registered an expansion of 4.4% y/y, accelerating from the prior month’s 3.9% growth but was still shy of the forecast pace of 5.0%. Fixed asset investment, which is quoted on a year-to-date basis, slightly topped estimates, posting -0.3% versus -0.8% consensus expectations and -3.3% in April. Commentators are citing weak demand, both domestically and overseas, for the halting progress in China’s economic recovery even months past the peak of the pandemic on the mainland. Meanwhile, the Trump administration continues to send upbeat signals on the recovery, with National Economic Council (NEC) Director Kudlow stating yesterday that he sees a “very good chance” of the US economy experiencing a V-shaped rebound over the second half of this year. Last week, the Fed’s updated projections for growth in 2020 and 2021 were consistent with lingering headwinds from the pandemic. The OECD and World Bank also issued downgraded forecasts last week and the IMF is set to follow suit.

Additional Themes

White House Officials Discuss Upcoming Stimulus Measures – Over the weekend, White House advisor Navarro indicated that President Trump is seeking at least $2 trillion for the next pandemic relief bill, which administration officials have suggested would be delayed until late July. This contrasts with the statements of Senate Majority Leader McConnell, who has stated that this next fiscal package should be closer to $1 trillion. Navarro also noted the continued White House preference for a payroll tax cut. Meanwhile, NEC Director Kudlow indicated that the White House remains committed to the end-July expiry of augmented unemployment benefits, as they represent a “disincentive” to return to work. Administration officials and GOP Senators have proposed instead a “back to work” bonus for employees.

Flaring Tensions on Korean Peninsula – Increasingly bellicose rhetoric from North Korea has featured threats to cut off communications as well as aggressive pronouncements from Kim Jong Un’s sister, who analysts speculate may be the leading candidate to succeed her brother as questions continue to swirl over his health. The South Korean government called an emergency session on Sunday to assess the situation. South Korean assets, which tend to be resilient in the face of North Korean bluster, underperformed significantly overnight, with the Kospi retreating 4.8% and the Korean won sinking 1.0% versus the dollar.