Morning Markets Brief 6-19-2020

Summary and Price Action Rundown

Global risk assets are broadly higher this morning as signs of cooling US-China tensions and the prospect of more economic stimulus, this time by the EU, are helping support sentiment despite underlying concerns that the Covid-19 resurgence will impede reopening plans. S&P 500 futures indicate a 0.8% higher open after the index struggled for direction over the past two sessions, holding its year-to-date downside at 3.6%. Equities in the EU are outperforming as regional leaders discuss historic stimulus and Asian stocks were mostly higher overnight. The dollar is flat, while longer-dated Treasury yields are also little changed, with the 10-year yield at 0.72%. Crude oil prices are continuing higher after yesterday’s OPEC compliance review.

US-China Trade Deal Reaffirmation Buoys Market Spirits

After months of rising tensions between the two superpowers, headlines overnight indicating that China has agreed to accelerate its US farm goods buying to align with its Phase One trade deal commitments are easing investor concerns. Beijing’s pledge to accelerate the purchases is reportedly a result of the meeting between Secretary of State Pompeo and his Chinese counterpart in Hawaii on Wednesday. The renewed commitments are said to encompass a wide range of US agricultural products, including soybeans, corn, and ethanol. For context, China’s purchases of US farm goods had not been tracking the levels set out in the Phase One trade deal, with statistics showing that in the first four months of 2020, the buying was only 13% of the $36.5 billion target, which lagged even the pre-trade war pace of 2017. The Chinese side has yet to explicitly affirm this recommitment but had issued a broadly positive statement following the meeting, characterizing it as “constructive.” This comes after analysts have noted reports detailing passages from forthcoming book by former White House national security advisor John Bolton relating to President Trump’s posture toward Chinese trade negotiations, in particular with regard to US farm goods purchases. Specifically, Bolton alleges in the book that President Trump asked Chinese President Xi to help him win reelection by increasing buying of US farm products. Regardless, analysts expect that being “tough on China” will remain a key election issue in the runup to November polls. Earlier this week, President Trump signed into law a bill that would target Chinese entities and officials involved in the suppression of Muslim minorities in western China with sanctions, drawing threats of retaliation from Beijing.


Barrage of Stimulus News Continues with EU Fiscal Package Negotiations

EU leaders are beginning to wrangle in earnest today over the historic €750 billion pandemic relief plan, which features an unprecedented degree of budget-sharing. Early reports indicate that German Chancellor Merkel and European Central Bank President Lagarde are pushing strongly for the package and warning of the adverse consequences of failure to agree, but that various countries are holding out for concessions. EU assets are broadly stable amid the dispatches from the negotiations. This rounds out a week that featured a daily cadence of headlines signaling an immediate or impending augmentation of major fiscal or monetary stimulus. On Monday, the Federal Reserve announced that its Main Street Lending Program was finally up and running and then enhanced its corporate liquidity facility by moving to individual corporate bond buying rather than less targeted credit ETF purchases. This was followed by two days of determinedly dovish testimony by Fed Chair Powell in front of Congressional committees. Also this week, headlines indicated that the Trump administration is looking for another $2 trillion pandemic relief bill later this summer and will push a $1 trillion dollar infrastructure package. Meanwhile, the Bank of Japan and Bank of England announced additional accommodation at their meetings, alongside a €1.3 trillion concessionary loan disbursement from the European Central Bank on Thursday.

Additional Themes

Coronavirus Developments Remain in Focus – Single-day coronavirus case increases hit new highs in California and Florida yesterday while hospitalizations continued to rise in Texas. Oklahoma is among those worsening hotspots, which has raised concerns about President Trump’s upcoming campaign rally in Tulsa that is scheduled for tomorrow in a 20,000 seat indoor arena. Thus far, no mass lockdowns have been re-imposed in the US.

Looking Ahead – Next week’s economic calendar features some key data and begins over the weekend with a decision by the People’s Bank of China, which is expected to hold rates steady but to continue with easing measures in the second half of the year. The focus early in the week will be on preliminary global Purchasing Managers’ Indexes (PMIs) for June, which are projected to show continued improvement in manufacturing and service sector activity in the US, EU, and Japan. US personal income and spending figures for May are also due and are forecast to echo May retail sales figures showing a rebound in consumer demand, though income is expected to relapse to the downside.