Summary and Price Action Rundown
Global risk assets continued to rise overnight despite simmering US-China tensions and continuing unrest in US cities, as investors remain focused on the prospects of additional fiscal and monetary stimulus and hopes for economic recovery over the coming months. S&P 500 futures indicate a 0.5% higher open, which would extend yesterday’s 0.4% gain that put the index’s year-to-date downside at 5.4% and the decline from February’s record high at 9.8%. Equities in the EU are soaring as Germany pivots toward additional stimulus while Asian stocks posted gains, with Hong Kong stocks outperforming amid continued relief over the measured US retaliatory policies announced on Friday. Longer-dated Treasury yields are edging higher within their narrow range, with the 10-year yield at 0.67%. Meanwhile, the dollar is extending its ongoing decline while the renminbi posted gains overnight. Crude oil is holding its recent gains ahead of the OPEC meeting this week, with Brent above $39 per barrel.
Investors Attempt to Look Past US Unrest
Ongoing protests in numerous US cities against racial inequality, which in some cases have turned violent, drew unprecedented threats of domestic military intervention from President Trump yesterday, though financial markets are evidencing scant reaction. 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. Counterbalancing this added uncertainty is the heightened expectation that these disturbing developments in major US economic centers, including New York, Los Angeles, and Chicago will spur the Fed to enhance their already enormous stimulus programs and push Congress and the Trump administration to redouble their efforts pass another significant pandemic relief bill. For context, 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. 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.
EU Stimulus Prospects Continue to Brighten
With German Chancellor Merkel pushing for additional fiscal support for the EU’s largest economy and a historic pan-EU pandemic relief budget currently being negotiated, EU assets have been posting notable outperformance. Reports this morning indicate that Chancellor Merkel is working toward a second German fiscal stimulus plan of up to €100 billion to follow the initial relief program of €156 billion, which was passed in March under the government’s special emergency powers. With one of the stimulus options on the table being cash incentives for car purchases, EU automaker stocks are soaring this morning, rising between 6% and 8% on the day. This comes amid increasingly forceful and consequential EU steps toward both economic stimulus and fiscal burden-sharing. Specifically, the European Commission (EC) published a €750 billion coronavirus recovery plan last Wednesday in a historic step towards fiscal unionization. Like the Franco-German plan published the prior week, the EC proposal would allow significant new transfers of wealth among members, funded by €750 billion in commonly issued EU debt for the recovery plan. All EU countries must approve the plan, which includes €500 billion in grants and €250 billion in loans to hard-hit members, and negotiations are likely to drag on for weeks. Since the Franco-German plan was published on May 18th, the Euro Stoxx index is up 14.0%, handily outpacing the 6.7% gain for the S&P 500 over that period, while the euro is 3.2% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, continue to converge toward German bund yields.
OPEC+ Set to Extend Output Cuts – Ahead of the official meeting of OPEC and its allies (known as OPEC+) on Thursday of this week, reports indicate that Russia and a few other producers are pushing for only a one-month extension to the output cuts. Saudi’s position on this proposal is unclear, though they had been looking to push the May-June output cut levels through the end of the year to further support supply rebalancing. A one-month extension would be the shorter end of the range and would take the 9.7 million barrels per day output reduction through July, though it is unclear whether Saudi, Kuwait, and the UAE would extend their volitional additional cuts of 1.2 million barrels per day as well. Crude prices have extended their recent gains this week to their highest levels since early March.
RBA Holds Rates – The Reserve Bank of Australia held rates steady at 0.25% as expected, but the more upbeat commentary has lifted the Australian dollar 0.8% versus its US peer.