Morning Markets Brief 6-26-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight as investors monitor US financial sector regulatory maneuvers and await more economic data. S&P 500 futures have been choppy again overnight but indicate a 0.2% higher open after yesterday’s late session rally pared the index’s year-to-date downside to 4.5% following Wednesday’s 2.6% drop. After their steep rally from the April trough, US stocks have struggled for direction over recent weeks as concerns over resurgent coronavirus cases in various hotspots in the US and overseas cloud recovery hopes. Equities in the EU are climbing as the European Central Bank pledges more stimulus, while Asian stocks were mostly higher as well. The dollar is flat while longer-dated Treasury yields are lower, with the 10-year yield at 0.67%. Brent crude prices are back above $41 per barrel as supply cuts and economic recovery hopes continue to provide support for oil prices.

US Bank Stocks Set for Choppy Trading Amid Regulatory Crosscurrents

Shares of major US financial institutions rallied after that announcement early yesterday that certain financial regulations would be loosened but are reversing those gains in pre-market trading after conservative Fed stress test results. US financial stocks gained yesterday on the news of easing restrictions on risk exposure ahead of the Federal Reserve’s stress test results, which were released after markets closed. Regulators finalized the latest revisions of the so-called Volcker rule, imposed under the 2010 Dodd-Frank Act, to let banks increase their dealings with venture capital funds. The regulators also scrapped a requirement that lenders hold margin when trading derivatives with their affiliates. The reversal of the inter-affiliate margin requirement for swaps trades could free up an estimated $40 billion for Wall Street banks, though regulators added a new threshold that limits the scale of margin that can be forgiven. The FDIC board passed the new rule in a 3-1 vote, along party lines. At the same time, the CFTC barred exchanges from disclosing cleared swap participants, so banks will lose the ability to learn the identities of counterparties in cleared swaps transactions. Overall, these expected rule changes helped boost sentiment on the sector ahead of the release of Fed stress test results, which were announced after markets closed and featured a more conservative approach than some investors had hoped. The Fed’s “most high-profile stress test since the financial crisis” this year included an extra coronavirus “sensitivity analysis” that resulted in a cap on dividends at the level of the second quarter and a extends the prohibition on stock buybacks until at least the end of the third quarter. Individual banks will reveal their specific figures on Monday. Although analysts suggest that this result is not surprising, shares of major banks are giving back a portion of yesterday’s rally in pre-market trading.

US Economic Data in Focus

After yesterday’s US economic data sent mixed signals, investors will closely parse today’s releases for any additional clarity on the trajectory of the recovery. May data has been noisy but better than expected for key gauges such as nonfarm payrolls and retail sales. Yesterday, May durable goods orders dramatically outpaced expectations, though weekly jobless figures remained worryingly high. Today, personal income and personal spending readings for May are due, with expectations for the April trends to flip, with income forecast to decline 6.0% but spending to rise 9.2% from the prior month’s respective prints of 10.5% and -13.6%. Also due is the Fed’s favored inflation metric, the Personal Consumption Expenditure (PCE) Price Index. In April Headline PCE decreased 0.5% month-on-month (m/m) and is projected to improve to 0%.

Additional Themes

Retail Rebound Re-Examined – Nike shares are down 3.4% in pre-market trading after management announced disappointing fiscal fourth quarter (Q4) results. Online sales for the athletic giant provided less of a cushion for the lost sales due to store closures than analysts had hoped. Both earnings and revenue deeply undershot estimates, with the former posting an unexpected loss. This comes after Nike stock had recouped all of its year-to-date losses while an ETF of consumer discretionary stocks is similarly trading 1.0% higher on the year.

Looking Ahead – The coming holiday-shortened week in the US, with the 4th of July being observed on Friday, is still going to feature major economic data as the US nonfarm payrolls for June will be released on Thursday. The US economy unexpectedly added 2.5 million jobs in May, the most on record, beating expectations of an additional 8 million job losses after a record high of 20.7 million in April. Estimates are for the US economy to have added 3 million new jobs and for the unemployment rate to drop from 13.3% to 12.5%. Additionally, minutes from the June FOMC meeting will provide more insight on the views of Fed officials as they held policy rates steady but maintained a downbeat outlook and projected zero interest rates for an extended period. Overseas, China’s June purchasing managers’ indexes will be in focus as economists ponder the trajectory of their recovery from the pandemic