Summary and Price Action Rundown
Global risk assets are extending yesterday’s rebound this morning as central bank largess and the prospect for additional fiscal stimulus help offset worries over a possible re-acceleration in Covid-19 infections due to US economic reopening. S&P 500 futures point to a 1.3% higher open after the index recovered from steep early losses yesterday to close in positive territory. The midday announcement by the Federal Reserve of enhancements to its corporate bond purchase program helped accelerate the rebound (more below). Equities in the EU and Asia posted solid gains overnight. Longer-dated Treasury yields are edging higher, with the 10-year yield rising to 0.74% this morning, while the dollar is slightly weaker. Crude oil is also bouncing, with Brent climbing above $40 per barrel.
Global Central Banks Increase Extraordinary Stimulus
Investor risk appetite continues to receive support from ever easier monetary policy around the world, with the Federal Reserve announcing yesterday that it would begin purchasing individual corporate bonds and the Bank of Japan overnight upsizing its lending program to cash-strapped businesses. Yesterday, US equities accelerated to the upside after the Fed announced updates to the $750 billion Secondary Market Corporate Credit Facility (SMCCF), thereby expanding its purchases beyond credit ETFs to include individual bonds that have remaining maturities of five years or less. For context, the SMCCF is designed to support market liquidity and the availability of credit for large employers. However, this augmentation of the program is not evidently in response to any increased stress in the market, given that the spreads on both investment grade and high yield bonds are already back at their most favorable levels since early March and companies have issued a flood of debt in recent months, with investment grade companies raising nearly as much so far in 2020 as they did all last year. This followed the Fed’s announcement earlier on Monday that the long-awaited $600 billion Main Street Lending Program (MSLP) is finally up and running after significant changes to the lending terms had been made in order to make it more attractive for businesses to borrow. Chair Powell is expected to discuss these programs, future policy options, and his somber outlook for the US economy in his biannual Humphrey-Hawkins testimony before Congress this week, which starts today with the Senate Banking Committee. Meanwhile, Governor Kuroda remained similarly focused on downside risks to Japan’s economy and the potential for a second wave of the pandemic later this year at the Bank of Japan (BoJ) meeting overnight. The BoJ beefed up its support for domestic businesses, increasing its corporate lending facility from roughly $750 billion to $1 trillion, though it retained its yield curve control settings. Governor Kuroda indicated that ultra-accommodative settings could extend until 2023.
Trump Administration Preparing to Propose Major Infrastructure Bill
Amid increasing speculation over the timing, size, and composition of the next US pandemic relief package, reports indicate that the White House is also preparing a $1 trillion proposal for national infrastructure projects. The Transportation Department is said to be working on the draft plan, which will prominently feature spending on roads and bridges, but also includes funds for 5G development and rural broadband connectivity. Analysts note that the September 30th expiry of the current funding bill for transportation infrastructure, the Fixing America’s Surface Transportation (FAST) Act, provides a timeline for the rollout of this proposal. Meanwhile, House Democrats proposed a $494 billion replacement for the FAST Act earlier this month that met with opposition from Senate Republicans, who have their own version of a surface infrastructure bill worth $287 billion.
Additional Themes
Key US Economic Data Due – Analysts are awaiting this morning’s release of May retail sales data, with estimates pointing to an 8.4% month-on-month (m/m) rebound. In April, retail sales sank 16.4% m/m from March, undershooting expectations of a 12.0% drop and registering the sharpest decrease in monthly retail sales ever recorded. Year-on-year, April retail sales fell 21.6%, also a record drop. This will be followed by May industrial production figures, which are also expected to recovery, though more modestly at 3.0% m/m from the April slump of 11.2%, the largest monthly drop in the 101-year history of the index.
Geopolitical Tensions Rise in Key Hotspots – After increasingly bellicose rhetoric from Pyongyang, North Korean forces demolished a liaison office on their side of the border overnight, marking a significant escalation in tensions. Still, South Korean assets, which tend to be resilient in the face of North Korean bluster, retraced Monday’s losses, with the benchmark Kospi index soaring 5.3% and the Korean won advancing 0.8% versus the dollar. Meanwhile, reports indicate that three Indian soldiers were killed in a clash with Chinese forces near the disputed border. For context, geopolitical risks tend to be difficult for investors to assess.