Summary and Price Action Rundown
Global risk assets are mixed and muted this morning as investors await more US corporate earnings while monitoring ongoing progress toward additional fiscal stimulus in the US and EU. S&P 500 futures point to a slightly lower open after the indexstopped just short of turning positive for the year last week, while the Nasdaq continues to hover near record highs. Equities in the EU and Asia were mostly higher overnight, with Chinese mainland stocks returning to outperformance. The dollar is softer amid continued euro strength, while longer-dated Treasury yields are fluctuating near recent lows, with the 10-year yield at 0.62%. Brent crude prices are falling below $43 as traders shift their focus to demand after last week’s OPEC+ decision.
Corporate Earnings Season Continues After Uneven First Week
With the first week of second quarter (Q2) earnings season featuring mostly better-than-expected headline results but sober guidance from US megabanks, investors are awaiting this week’s releases, which feature regional banks and various industry bellwethers. With only 45 of the S&P 500 companies having reported, nearly all of them reported actual earnings-per-share (EPS) above estimates, while 73% reported actual revenue higher than forecast. While this is positive, earnings estimates had been significantly lowered prior to the start of the quarter, with Q2 estimated earnings residing at -44.7% last week, revised from -13.6% at the beginning of the quarter. This past week the biggest US banks and other financial sector constituents were the primary focus and though most beat EPS and revenue consensus estimates for the quarter, investors were concerned by the greater-than-expected credit-loss provisioning and cautious guidance from management amid the deep pandemic-related uncertainty. An index of major bank stocks ended the week 0.3% lower, and year-to-date performance is languishing at -35.5%. This week will feature regional banks, which are at risk of outsized losses on individual corporate loans, so credit adequacy will again be the main driver of price action. Other major companies reporting this week include IBM, Coca-Cola, Microsoft, CSX, Intel, AT&T, Amazon, Verizon, and American Express. Among these, Amazon and Microsoft have been substantial year-to-date outperformers, with gains of 60.3% and 28.7%, respectively.
EU and US Fiscal Firepower in Focus
The euro is continuing to advance against the dollar as EU leaders are reportedly nearing agreement on a historic stimulus bill that features key elements of fiscal federalism, while US negotiations for the next round of pandemic relief begin to heat up. After a weekend of apparently contentious negotiating, reports indicate that the representatives of the so-called “Frugal Four” (Netherlands, Denmark, Sweden, and Austria) are close to acceding to a compromise on the composition of the proposed €750 billion-euro Covid-19 recovery package, which is backed by Germany and France. For context, the agreement on this spending plan must be unanimous among the 27 member nations. The key concession made by the Franco-German bloc is said to be a reduction in the amount of grants in the bill to €390 billion from its original €500 billion with the rest being low interest loans. Negotiations are expected to be finalized at another meeting later this afternoon. EU assets are broadly upbeat today, with the euro tagging a new one-year highs against the dollar and peripheral sovereign bond yields moving toward their best levels relative to German bunds since February. 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. Meanwhile, in the US, reports over the weekend indicated that the Senate Republicans’ $1 trillion proposal for the next round of fiscal stimulus, which is set to be negotiated this month, is meeting some unanticipated resistance at the White House. Specifically, the Trump administration is said to be opposed to the $25 billion in additional funds in the bill for Covid-19 testing and tracing, as well as the $10 billion for the CDC. House Democrats, meanwhile, had set forth a $3.5 trillion plan and the White House has sent mixed signals on its preference for the size, scope, and substance of this bill.
US Covid-19 Outbreaks Impede Reopening – Though investor sentiment has been buoyed in recent weeks by encouraging news on progress toward developing a vaccine, the failures of coronavirus containment in the US continue to result in rising infections in key hotspots. Daily new cases in California, Texas, and Florida remained around 10,000 on average over the past week and Los Angeles Mayor Garcetti warned of another potential shutdown order. Overseas, resurgences in Hong Kong and Tokyo further highlight the uneven recovery timeline even in regions that achieve relative success in containment.
Global Data Consistent with Rebound – Taiwan’s June exports jumped 6.5% year-on-year as shipments of IT equipment rose and declines for non-tech products lessened. This is consistent with June data around the world, which has broadly surprised to the upside, though expectations for July are darkening amid the resurgence of Covid-19 in key global regions.