Summary and Price Action Rundown
Global risk assets are mixed this morning as investors grapple with intertwined concerns over the Covid-19 resurgence and the economic outlook ahead of next week’s start to second quarter corporate earnings reporting season. S&P 500 futures point to a 0.3% lower open after the index lost 0.6% yesterday, continuing this week’s sawtooth trading pattern and taking its year-to-date downside to 2.4%, thought the tech-heavy Nasdaq registered a new record high. Equities in the EU are trading higher while Asian stocks retraced some of their recent outperformance as state pension funds reportedly took profits after a steep rally in Chinese stocks. The dollar is steady and longer-dated Treasury yields are back to recent lows, with the 10-year yield at 0.59%. Brent crude prices are retreating below $42 amid demand worries.
Questions Mount Over the Recovery Ahead of Earnings Season
As outbreaks in US coronavirus hotspots continue to worsen, alongside some resurgences overseas, investors are facing deep uncertainty over the economic outlook and second quarter corporate earnings season, which begins in earnest on Tuesday. With US daily cases topping 60,000 for the first time yesterday and the closely-watched mortality rate beginning a grim ascent in certain areas, prospects for the ongoing economic rebound are increasingly cloudy. Yesterday, JPMorgan Chase joined Bank of America in flagging a deterioration in credit card spending over the past few weeks amid the spike in US Covid-19 infections. A roster of Fed officials this week also referenced a backsliding in high-frequency economic data, although the traditional readings, generally lagged a month or more, have still been registering upside surprises. More companies are announcing layoff plans, with this week bringing warnings from Wells Fargo, the largest employer among US banks, and United Airlines, which notified about half of its workforce that their jobs are at risk as well, amounting to 36,000 employees. Some economists are forecasting a return to negative nonfarm payroll figures in July after two months of record gains totaling 7.5 million jobs. This comes as analysts are bracing of a second quarter (Q2) earnings reporting season shrouded in unprecedented uncertainty. Currently only 49 S&P 500 have issued any sort of earnings guidance for the quarter (27 giving negative guidance and 22 positive), well below the five-year running average of 106 companies. Profit guidance has been even more sparse with just 17 companies issuing Q2 profit guidance, making it difficult to assess any sort of trend ahead of the announcements. Q2 earnings are expected to decline by more than 43% from Q2 2019, a drop that if realized would represent the largest year-over-year decline since Q4 2008 during the Global Financial Crisis.
Investors Mull Biden Economic Plans
With his presidential campaign shifting into a higher gear yesterday, Former Vice President Biden released an outline of his economic platform and delivered a speech emphasizing the pro-labor aspects of his plan. Ahead of his scheduled speech, Biden released his “Build Back Better” Economic Vision designed to spur the US rebound from the pandemic-induced recession. The most important component involves Biden’s “Buy American” initiative, which includes his a 4-year, $400 billion government procurement initiative focused on US-based goods and services to modernize infrastructure and national security, alongside $300 billion for research and development in US technology concerns, half of which would be dedicated towards clean-energy initiatives. Initial reports on the funding source for the budgetary expansion show Biden is focused on repealing the large tax breaks received by the wealthiest Americans and US corporations that have continued to move jobs overseas. Biden’s subsequent speech in Pennsylvania also focused heavily on supporting the working class through a $15/hour minimum wage, stronger protections for labor organization, and strengthening benefits and paid leave conditions. Other provisions included the inclusion of the public option for healthcare, tripling funding towards Title I schools, universal pre-school, and several other provisions previously outlined in the Biden/Sanders Unity Plan that seeks to unite the Democratic Party. Wall Street analysts are noting in particular Biden’s statement that the era of “shareholder capitalism” is over, as he stated that US corporations should “pay their fair share of taxes” and realign their priorities to support their workers and country.
Tech Tax Fight Heats Up – Reports indicate that the US is preparing to levy tariffs on a range of $500-700 billion of French products in retaliation for the so-called “digital tax” that France is set to enact, which will disproportionately impact US tech giants. The euro is steady on the news.
Looking Ahead – In addition to the kick-off of Q2 earnings reporting season on Tuesday, next week features of dense calendar of economic releases, including US retail sales and industrial production for June, China’s Q2 GDP and June economic figures, and EU industrial product for last month. The European Central Bank, Bank of Japan, and Bank of Canada also have meetings.