Morning Markets Brief 6-4-2020

Summary and Price Action Rundown

Global risk assets are pausing for breath this morning after a brisk multi-week rally as investors await today’s European Central Bank decision and key US economic data. S&P 500 futures indicate a 0.5% lower open, which would pare week-to-date gains of 2.6% that has narrowed the index’s year-to-date downside to 3.3% and the decline from February’s record high to 7.8%. Equities in the EU moderately lower while Asian stocks were mixed overnight. Longer-dated Treasury yields are steady near the top of their range, with the 10-year yield at 0.74%. Meanwhile, the dollar is retracing a portion of its recent decline as the euro gives back some of its rally, though the renminbi was steady overnight. Crude oil is falling further below its recent multi-month high as OPEC struggles to extend supply cuts (more below).

EU Asset Rally Pauses Ahead of the ECB

European assets are consolidating a portion of their recent and substantial gains as investors await a key decision by the European Central Bank (ECB) later this morning. At 7:45am ET, the ECB will issue its much-anticipated decision for its June meeting. Growth prospects for the euro area are grim, and the ECB expects a 5%-12% GDP contraction this year. Still the ECB is expected to leave interest rates unchanged as it did at its April meeting, holding the main refinancing rate at 0% and its deposit interest rate at -0.5%. Instead, the ECB is widely expected to expand its Pandemic Emergency Purchase Program (PEPP) and estimates for the upsizing range between €500 billion and €750 billion alongside expectations for extension to year-end. This could be the extent of what the ECB can do unilaterally in terms of asset purchases, given rising German opposition, without rallying support from national governments for further action. Meanwhile, overnight, German Chancellor Merkel secured agreement for additional fiscal support for the EU’s largest economy worth €130 billion, though direct support for the German auto industry through cash incentives to purchase cars was not included in the final version. Shares of German automakers are retracing a portion of their recent rally this morning, declining between 2% and 4%. This comes as the bloc continues to negotiate a draft for a €750 billion pan-EU pandemic relief budget that represents a vital step towards fiscal unionization and is based on a Franco-German plan released on May 18th. Since that date, the Euro Stoxx index is up 17.3%, outpacing the 9.1% gain for the S&P 500 over that period, while the euro is 3.6% stronger versus the dollar and the yields on peripheral EU debt, like Italian and Spanish bonds, have converged swiftly toward German bund yields. Though EU risk assets have begun to reflect a more upbeat view of the recovery amid the ample stimulus, regional economic data remains deeply depressed. April retail sales registered -19.6% year-on-year, only slightly better than estimates of -20.6% and down from the prior month’s -8.8% pace of contraction.

Investors Await Further Signs of Improvement in US Data

With growing signs of recovery in May helping fuel US stock market euphoria over the prospect of a solid summer growth rebound, today’s weekly jobless data is expected to show continued easing in layoffs. For the week ending May 30th, economists estimate that initial jobless claims will decline to 1.8 million from the prior week’s tally of 2.1 million new filings, which would mark a new weekly low since the coronavirus crisis began. Improvement aside, these tallies are grim, and the total of new unemployment benefits reported since March 21st is set to rise above 42 million. However, the continuing jobless claims decreased by 3.9 million to 21.1 million in the week ended May 16th from a record 24.9 million in the week ended May 9th. This is an indication that as states lifted stay at home orders, the process of returning to work has slowly begun. Today’s data for the week ending May 23rd is expected to show a further decline to 20.0 million, though reporting issues, particularly in California and Florida, may be skewing these numbers. For context, yesterday featured some relatively upbeat jobs data as payroll company ADP estimated that in May private businesses laid off 2.8 million workers, after shedding a downwardly revised 19.6 million in April, which was much better than market forecasts of a 9.0 million job loss. On Friday, the BLS will release the official May Employment Report, where expectations are for 8.0 million job losses and an Unemployment Rate of 19.8%.

Additional Themes

China Moves on Air Travel – News yesterday afternoon that the US would block Chinese airlines in a tit-for-tat exchange for China’s restrictions on US carriers was largely overlooked by market participants, who have dialed back concerns of a significant rupture in US-China relations after President Trump’s restrained reaction to the situation in Hong Kong. China announced overnight that it would lift restrictions on foreign carries beginning next week.

OPEC Meeting Pushed – Crude oil prices are stumbling below multi-month highs as this week’s OPEC+ meeting looks set to slide to mid-month amid drama over supply cut non-compliance by Iraq and others. Russia and Saudi Arabia are said to demand full adherence before the meeting.