Morning Markets Brief 7-17-2020

Summary and Price Action Rundown

Global risk assets are mostly higher this morning as investors continue to parse mixed US corporate earnings while monitoring ongoing progress toward additional fiscal stimulus in the US and EU. S&P 500 futures indicate a 0.4% higher open after yesterday’s 0.3% decline held the index back from turning positive for the year. Equities in the EU and Asia were gently adrift overnight, with Chinese mainland stocks steadying after wild swings this week. The dollar is turning lower again, while longer-dated Treasury yields are back near recent lows, with the 10-year yield at 0.60%. Brent crude prices are holding above $43 despite a cloudy demand picture.

Corporate Earnings Remain Uneven

As the first week of second quarter (Q2) earnings season draws to a close, investors are weighing positive results from US megabanks against cautious management guidance for the coming months, while disappointing Netflix figures may deepen this week’s tech sector underperformance. Yesterday, Bank of America (BoA) and Morgan Stanley (MS) issued their Q2 earnings, reporting better-than-expected results but cautioning over the outlook, in keeping with the broad trends for the sector. BoA and MS topped consensus estimates on both earnings-per-share (EPS) and revenue for the quarter, with BoA’s revenue totaling to $22.3 billion, down 3.5% year-on-year (y/y). MS far surpassed revenue estimates by $3 billion, totaling to $13.4 billion for an impressive 31% gain y/y. Like its peers, BoA exhibited strong trading growth lead by a fixed income, currency and commodity (FICC) and investment-banking performance set a record quarter, but this stellar performance was also partially offset by a $4 billion addition to credit-loss reserves, exceeding expectations of $3.8 billion, attributable to an increasingly downbeat economic outlook. Amid these cloudy future expectations, BoA shares fell 2.7% yesterday. MS shares outperformed, rising 2.5%, on its gargantuan trading and investment banking figures for Q2, though some analysts question the bank’s ability to sustain such performance when volatility settles in the future quarters. Meanwhile, Netflix issued disappointing figures after yesterday’s closing bell, with subscriber projections falling short of estimates. Shares of the streaming giant are 8.0% lower in pre-market trading.

EU Leaders Continue to Wrangle Over Historic Stimulus Bill

European assets are holding their ground this morning despite German Chancellor Merkel downplaying prospects for a deal at the July EU leaders summit which begins today and runs through Saturday. Commenting on the negotiations, Chancellor Merkel characterized the remaining differences among EU members as “very, very great” and advocated a “readiness to compromise.” Dutch Prime Minister Rutte put the odds of a deal this weekend below 50%, though Austrian Chancellor Kurz is expressing optimism. For context, representatives of the so-called “Frugal Four” (Netherlands, Denmark, Sweden, and Austria) continue to push back against the size and composition of the proposed €750 billion-euro Covid-19 recovery package, which is backed by Germany and France. Where the draft plan calls for €500 billion in grants, Frugal Four countries continue to insist the package consist primarily of loans. Negotiations began a month ago at the June EU leaders summit, at which Austrian Chancellor Kurz stated the conservative North’s position on calling for clear time limits and linkages to pandemic recovery to avoid “an entry into a permanent debt union.” German Chancellor Merkel and European Central Bank (ECB) President Lagarde have warned EU leaders that the failure to come to an agreement on stimulus would result in additional market shocks. EU assets are broadly stable today as negotiations were expected to be challenging, with the euro climbing toward one-year highs against the dollar and peripheral sovereign bond yields stable. The Euro Stoxx Index, which has outperformed the S&P 500 over the past two months, with respective gains of 21.9% versus 9.2% over that span, is also steady this morning though banks are underperforming.
Additional Themes
US Pandemic Relief Bill Negotiations Heat Up – Headlines yesterday suggested that President Trump will hold firm to his demand for a payroll tax cut to be featured in this upcoming pandemic relief package, which is being drafted primarily by Senate Majority Leader McConnell. A similar demand was not met in the $2.2 trillion CARES Act, which was passed in late March. One report also indicated that National Economic Council Director Kudlow is backing the payroll tax cut while Treasury Secretary Mnuchin is advocating stimulus checks and extended unemployment benefits. The first draft is set to be released next week.

Looking Ahead – Next week is dominated by ongoing US corporate earnings reporting, with the calendar featuring results from IBM, Halliburton, Coca-Cola, Lockheed Martin, Snap, Capital One, KeyCorp, Northern Trust, CSX, Tesla, Microsoft, Southwest Airlines, AT&T, Twitter, American Airlines, Honeywell, Verizon, Schlumberger, Royal Caribbean, and Intel. On the economic data front, preliminary global purchasing managers’ indexes (PMIs) for July will be scrutinized for signals on the health of the ongoing economic recovery.