Morning Markets Brief 7-22-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors monitor the latest US-China friction and incoming corporate earnings reports while awaiting signals on progress toward the next US pandemic relief package. S&P 500 futures indicate a 0.2% lower open after the index edged further into positive for the year yesterday despite giving up most of its intraday gains as the tech-heavy Nasdaq retreated from yesterday’s fresh record high. Equities in the EU are lower while Asian stocks were varied overnight. The dollar is continuing its downtrend, which accelerated yesterday, while longer-dated Treasury yields are also lower, with the 10-year yield at 0.59%. Brent crude prices are falling back below $44 ahead of US oil stockpile data.


US-China Tensions Back in the Headlines

In the latest flare-up in this fraught relationship, Beijing is vowing retaliation against the abrupt US order to close the Chinese consulate in Houston. Reports of fires in the courtyard of the Chinese consulate in Houston, to which local police and firefighters responded, were followed by a US State Department announcement that it had ordered the closure of the Chinese consulate in Houston citing the need to “protect American intellectual property… and private information.” This comes after the US Justice Department yesterday named two hackers it claims are sponsored by Beijing who stole sensitive data and attempted to access coronavirus research. As has been the motif in recent US actions against China, Beijing has decried the move, calling it “unprecedented” and “political provocation,” while vowing unspecified retaliation. Analysts expect that a US consulate in China will be closed in response, with speculation centering on Wuhan. The offshore renminbi weakened abruptly on the news but the downside is moderate at 0.3% and it remains near its strongest levels versus the dollar since mid-March, while an ETF of Chinese stocks is down 1.0% in pre-market trading.

Earnings Season Features More Upside Surprises

Alongside a series of positive second quarter (Q2) results for some traditional US corporate bellwethers yesterday, midsized banks also issued generally better-than-expected figures. The second week of Q2 earnings season took an increasingly positive tone yesterday as releases from Coca-Cola, Lockheed Martin, IBM, and Philip Morris proved broadly supportive of their stock prices, though management guidance for the coming quarters remained highly uncertain. Meanwhile, midsized financial companies also posted encouraging headline numbers yesterday, mirroring the trend from the megabank reports last week. Comercia and Synchrony Financial beat earnings-per-share (EPS) estimates and revenue projections by considerable margins, though revenue plunged 15.8% and 17.9%, respectively, year-over-year (y/y). Though both suffered a reduction in net interest income and added $88 million and $475 million, respectively, to loan loss reserves, offsetting growth in areas such as loans and deposits helped cushion the blow. However, results turned more mixed after yesterday’s closing bell, with Capital One, United Airlines, Snap, and Texas Instruments among the companies reporting. Among these, Snap is the biggest laggard in pre-market trading, with losses of 8.3%. Today, KeyCorp and Northern Trust report before the opening bell, while results from Microsoft, Tesla, Chipotle, CSX, and Discover Financial are due after markets close. Of the 62 S&P 500 companies that have issued results, a lofty 80.7% have topped earnings-per-share (EPS) estimates while 71.0% have beaten revenue projections. Still, the growth of sales and earnings remains down year-on-year, with declines of 6.3% and 20.7%, respectively, thus far.

Additional Themes

Japan’s July PMI Shows Continued Contraction – The preliminary July reading of the Jibun Bank Japan Composite purchasing managers’ index (PMI) rose to 43.9 from a final 40.8 a month earlier, as activity in both the manufacturing and services sectors continued to retrench, though at a more moderate pace. For context, PMI readings below 50 denote contraction in the sector. The manufacturing PMI increased to 42.6 in July from a final 40.1 in June, while the services PMI edged up to 45.2 in July from a final 45.0 in the prior month, with the relaxed of emergency measures providing some relief. The latest readings marked the 15th and 6th straight months of contraction in manufacturing and services, respectively. The rates of contraction for output, new orders, and new export orders all declined. On the inflation front, input prices were broadly unchanged while selling prices declined less than in June. Looking ahead, sentiment deteriorated in manufacturing but remained positive in services. Preliminary July PMIs for the US and EU are due on Friday.

Oil Prices Whipsaw Near Multi-Month Highs – After hitting a nearly $45 peak for the pandemic yesterday, spurred by hopes of improving demand amid another burst of fiscal stimulus by the EU, with a weakening dollar providing another boost, Brent crude prices are turning lower again after the American Petroleum Institute forecast a sizeable build in US oil inventories last week.