Morning Markets Brief 6-17-2020

Summary and Price Action Rundown

Global risk assets are continuing this week’s rebound today as bouncing US retail sales, central bank accommodation, and the prospect for additional fiscal stimulus help offset worries over a possible reacceleration in Covid-19 infections amid US economic reopening. S&P 500 futures indicate a 0.5% higher open after the index extended its ongoing rally for a third day yesterday, paring its year-to-date downside to 3.3% on the parade of supportive developments. May US retail sales joined nonfarm payrolls as bright spots amid a muddled economic picture (more below). Equities in the EU are higher while Asian stocks were mixed overnight. The dollar is flat, as are longer-dated Treasury yields, with the 10-year yield at 0.75%. Crude oil is giving back some recent gains, with Brent slipping back toward $40 per barrel.

US Retail Rebound Stands Out Amid Muddled Global Recovery Signals

US consumption evidenced a burst of pent-up demand in May but other economic datapoints show less vigorous recovery. US retail sales surged 17.7% month-on-month (m/m) in May, easily beating expectations of an 8.4% jump and recovering from the record 14.7% fall in April. This is the largest monthly increase on record, as states eased restrictions and many stores and restaurants reopened from the coronavirus lockdown. This figure pushed the overnight rally in US equity futures even higher before yesterday’s opening bell. US industrial production was less impressive, advancing only 1.4% m/m in May after falling a record 12.5% in April and missing consensus expectations of a 2.9% rebound. Meanwhile, Japan’s exports fell 28.3% year-on-year (y/y) in May, undershooting expectations for -26.1% and worsening from April’s -21.9%, with shipments to the US down by 50.6% y/y. Imports declined 26.2% y/y, suggesting continued weakness in domestic Japanese demand, while a gauge of manufacturer sentiment also deteriorated further in June.

Extraordinary Fiscal and Monetary Stimulus Continues to Underpin Market Sentiment

Yesterday’s news that the White House is preparing a $1 trillion national infrastructure proposal and more ultra-accommodative messaging from Fed Chair Powell are adding fuel to this week’s US equity rebound. On the infrastructure front, the Transportation Department is said to be working on the draft plan that focuses on traditional projects (i.e. bridges, roads) but allocates a portion of the funds to the buildout of 5G infrastructure and rural connectivity. Although this news attracted a degree of skepticism from some reporters, Caterpillar and Aecom gained 5.3% and 3.9%, respectively, yesterday while Nucor steel jumped 6.4% and an ETF of infrastructure stocks gained 3.0%. Also yesterday, Federal Reserve Chair Powell reiterated his assessment of predominant downside risks in his testimony before to the Senate Banking Committee as part of his semiannual monetary policy report to Congress. Chair Powell remarked that “significant uncertainty remains about the timing and strength of the recovery,” and although the US economy is beginning to rebound, he reiterated the Fed’s commitment to using “the full range of policy tools” available. For context, the Fed announced earlier this week that it would be expanding its corporate credit support program to buy individual company bonds and is finally launching its long-awaited Main Street Lending Program. However, Chair Powell continued to make the case that fiscal spending may provide a more appropriate form of support in these circumstances. Today is his second and final day of testimony on Capitol Hill, this time appearing before a House Financial Services Panel.

Additional Themes

Mixed Covid-19 Developments – According to reports earlier this week, Dexamethasone, a cheap and widely-used steroid, appears set to become the first drug treatment yielding life-saving results among Covid-19 patients, and is now being referred to as a “major breakthrough” by some scientists. This positive development helped offset concerns about a secondary outbreak in Beijing after weeks of relative normalcy, as well as a further infection increases in various US states that have engaged in economic reopening, such as Texas and Florida. Yesterday, White House public health advisor Dr. Fauci indicated that the rising cases could not be explained by increased testing, adding that this is still the “first wave” and not a secondary spike in infections. Thus far, no mass lockdowns have been re-imposed in the US.

Rising Risks Around Geopolitical Flashpoints – After North Korean forces demolished a liaison office on their side of the border yesterday and moved to occupy areas of the buffer zone near the border, South Korea has warned that it will not tolerate further provocation from Pyongyang. South Korean assets, which tend to be resilient in the face of North Korean bluster, have been choppy this week, with the South Korean won (KRW) down 0.8% versus the dollar since the weekend, though the benchmark Kospi index is slightly higher over the past three sessions. Meanwhile, tensions are ebbing at the disputed India/China border after recent clashes between the two sides resulted in reports of casualties, with signs of détente emerging.