Summary and Price Action Rundown
Global risk assets are higher this morning amid upside surprises in key global economic data following some volatility overnight induced by a miscommunication over the US-China Phase One trade deal. S&P 500 futures indicate a 0.7% higher open after the index recouped Friday’s losses yesterday to pare its year-to-date downside to 3.5%. Equities in the EU and Asia were mostly higher overnight after White House officials and President Trump scrambled to clarify the administration’s position on the US-China trade deal (more below). The dollar is continuing lower, while longer-dated Treasury yields edging higher, with the 10-year yield at 0.73%. Crude oil prices are advancing to new multi-month highs amid OPEC supply cuts and demand hopes.
Miscommunication on US-China Trade Roils Markets Overnight
White House trade advisor Navarro’s remark last evening that the Phase One trade deal was “over” sent global risk assets into a tailspin, prompting swift clarifications from President Trump and National Economic Council Director Kudlow. In answering a question on the President’s posture toward the US-China Phase One trade deal last night during an interview on Fox News, Navarro stated that “It’s over,” which was seized upon by traders as signaling a White House repudiation of the deal. S&P 500 futures fell precipitously, losing 1.9% as the news reverberated across global financial markets. Shortly thereafter, NEC Director Kudlow disputed Navarro’s statement and reaffirmed the US commitment to the Phase One trade deal, after which President Trump tweeted that the accord is “fully intact” and expressed his hope that China would honor its commitments thereunder. Navarro later walked back his comment, stating that his answer was “taken wildly out of context” and that he was not referring to the Phase One trade deal, indicating that he was instead trying to make a point about the lack of trust between Washington and Beijing.
Global Growth Indexes for June Outperform Expectations
With investors focused on the prospects for a near-term rebound in the global economy, today’s broadly upbeat preliminary June purchasing managers’ indexes (PMIs) are fueling more optimism this morning. The initial readings of June manufacturing and service PMIs in Australia, Japan, France, Germany, the EU, and UK were all released overnight and painted a generally more positive picture than economists had anticipated. US readings are due later this morning. While the gauges were expected to show continued improvement from April’s historical depths of contraction, most were expected to stay in retrenchment mode, which is consistent with PMI readings below 50. However, France moved into expansionary territory in both the services and manufacturing components of its June PMIs, registering 50.3 and 52.1, respectively, versus estimates of 45.2 and 46.0. Germany’s rebound was not as robust but still outpaced forecasts, with services and manufacturing at 45.8 and 44.6 whereas consensus expectations had been 42.3 and 42.5. The EU-wide readings of 47.3 for services and 46.9 for manufacturing similarly topped estimates. In the UK, manufacturing surprisingly edged into expansionary mode at 50.1 and beat expectations of 45.0 while services jumped to 47.0 versus the 40.0 forecast. Overnight, Australia’s PMI readings also leapt higher, with services hitting 53.2 and manufacturing at 49.8 though Japan’s figures were less impressive, with manufacturing stagnating further from the prior month at 37.8 and services improving from May but remaining deeply depressed at 42.3.
Additional Themes
Coronavirus Hotspots Remain a Concern – Analysts are awaiting today’s testimony before Congress by White House public health advisor Dr. Fauci, who has made cautious statements on the current state of the pandemic, contrasting with the more upbeat tone from other Trump administration officials. Meanwhile, the governor of Texas yesterday called the current Covid-19 outbreak in his state “unacceptable” and that it “must be corralled” but said a return to lockdowns were the “last option.” Governor Abbott, however, did concede that “additional measures” could be needed if the adverse trends continue, and he urged residents to wear masks in public and abide by social distancing guidelines. For context, investor optimism over the process of economic reopening has been clouded by surging cases in states like Florida, Texas, and Arizona, which have moved swiftly ahead with reopening plans. However, the unwillingness of state leaders to re-impose significant additional restrictions has helped boost market spirits in spite of the public health consequences.
Oil Prices Extend Their Uptrend – After OPEC and its allies (known collectively as OPEC+) reaffirmed their commitment to the ongoing supply cuts and laggards signed on for compensatory reductions, reports this morning indicate that more cartel members are submitting details to show compliance. For context, the total coordinated output curbs of 9.7 million barrels per day are set to run through the end of next month.