Morning Markets Brief 6-29-2020

Summary and Price Action Rundown

Global risk assets were mixed overnight and investor sentiment remains fragile as the continued resurgence in US coronavirus cases clouds recovery hopes, while the Fed’s conservative stress test results added to the headwinds on bank shares. S&P 500 futures point to a 0.3% higher open after the index sank 2.4% on Friday to close a choppy week on a downbeat note, taking its week-to-date loss to 2.9%, month-to-date decline to 1.2% and year-to-date downside to 6.9%. 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 dampen optimism. Equities in the EU are modestly higher while Asian stocks were mostly lower overnight. The dollar is slightly weaker while longer-dated Treasury yields flat, with the 10-year yield at 0.64%. Brent crude prices are holding above $41 per barrel as ongoing supply cuts provide support despite dimming recovery hopes.

US Bank Stocks in Focus Ahead of Dividend Announcements

Shares of major US financial institutions are attempting to rally in pre-market trading after posting sharp losses on Friday as conservative Fed stress test results limited dividend payouts, while sinking interest rates and a deteriorating growth outlook compounded the pressure. Last week, the Federal Reserve released its assessment of the cohort of 33 of the largest banks in the United States with a positive outlook, with all passing their stress tests. “The banking system has been a source of strength during this crisis, and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks,” said Fed Vice Chair Randal Quarles. Despite the banks’ ability to pass loan loss provisions, the central bank said it would impose dividend caps and a restriction on share buybacks in the third quarter of this year to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event,” disappointing some investors. In its summary of the coronavirus sensitivity analyses, the Fed said third-quarter dividend payments could “not exceed an amount equal to the average of the firm’s net income for the four preceding calendar quarters.” The Board is also requiring banks to re-evaluate their longer-term capital plans. Analysts estimate the new formula would affect Wells Fargo’s third quarter dividend, and then Goldman Sachs’s fourth quarter dividend payments so it can have a ‘stress capital buffer’ when new requirements commence in October. At the Fed’s request, individual banks had held off announcing their dividend plans until today. The selloff in US financials was pronounced on Friday, with an index of major bank stocks down 6.4%, as many investors who prioritized the banks’ premium dividends as their greatest appeal exit their positions.

Worsening Coronavirus Data Puts US Growth Outlook in Focus

Investors are awaiting Thursday’s release of June nonfarm payroll data after last week’s US economic data continued to suggest a recovery trajectory, though reversals in economic reopening are dampening optimism. Last week’s reading of US personal income for May dropped 4.2%, reversing last month’s 10.8% gain but beating consensus estimates of -6.0%. The drop was the largest since January 2013 and was mainly the result of the decrease in government social benefits as pandemic response payments from federal economic recovery programs declined from April. Meanwhile, personal spending shot up a record-high 8.2% month-over-month, slightly below estimates of 9% but reversing April’s record drop of 12.6%. For context, May data has been noisy but better than expected for key gauges such as nonfarm payrolls, retail sales, and durable goods orders, though weekly jobless figures remained worryingly high. On Thursday, US nonfarm payrolls for June will be released after 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 June reading to feature 3 million new jobs and a decline in the unemployment rate from 13.3% to 12.5%. The backdrop to this positive news, however, is a progressive rollback in US economic reopening measures amid spiking Covid-19 cases in various hotspots.

Additional Themes

Boeing Up on Max News –Dow futures are being supported this morning by a pre-market rally in Boeing stock following reports that the US government is greenlighting 737 Max test flights.

Social Media Pressured Over Content – More companies are announcing an advertising hiatus on Facebook, citing hate speech and divisive content on the platform. Starbucks, PepsiCo, and Diageo are among the latest to temporarily pull their advertising. Unilever, the consumer goods giant, said on Friday that it will halt US advertising on Facebook and Twitter for at least the remainder of the year, following the likes of Verizon, Patagonia, and North Face. Unilever is one of the largest advertisers in the world, spending $42.3 million on Facebook ads alone last year. Shares of Facebook and Twitter fell 8.3% and 7.4%, respectively, on Friday following the news and are 4.4% and 3.2% lower in pre-market trading this morning.