Summary and Price Action Rundown
Global risk assets are moving higher morning as investors focus on relatively upbeat corporate earnings reports while awaiting key US labor market data. S&P 500 futures indicate a 0.4% higher open after the index climbed yesterday to a 1.4% year-to-date gain, marking a new high for the pandemic, though the tech-heavy Nasdaq lagged below Monday’s fresh record high. Equities in the EU are also rising amid positive news in the region (more below), while Asian stocks were mixed overnight. The dollar is continuing lower, while longer-dated Treasury yields are steady, with the 10-year yield at 0.60%. Brent crude prices are hovering above $44.
Earnings Remain Mixed but Broadly Supportive
Although second quarter (Q2) earnings season remains in its early stages, the emerging themes are better-than-expected headline results but cloudy guidance, with investors seemingly keen to accentuate the positive. Telsa reported another solid quarter after yesterday’s closing bell, sending its shares 5.0% higher in pre-market trading, which would add to the carmaker’s already eye-watering 280.6% year-to-date (ytd) stock price gain, which many analysts point to as evidence of a burgeoning bubble in US equities. Meanwhile, Microsoft, which has been another significant outperformer during the pandemic, also beat earnings and sales estimates with its report late yesterday afternoon, but analysts point to the softening in it key cloud business segment as weighing on its share price, which is down 2.1% before the market open. Nevertheless, Microsoft is still dramatically outperforming the wider index, closing yesterday with ytd gains of 34.3%. Today, AT&T, Blackstone, American Airlines, and Twitter are among the companies reporting before the opening bell, while Intel and E*Trade will release their figures after the close. Of the 99 S&P 500 companies that have issued results, a lofty 81.5% have topped earnings-per-share (EPS) estimates while 68.7% have beaten revenue projections. Still, the growth of sales and earnings remains down year-on-year, with declines of 7.0% and 17.0%, respectively, thus far.
US Labor Markets Data in Focus
As analysts ponder the economic ramifications of the ongoing Covid-19 resurgence in the US and the resulting rollback of reopening measures in key virus hotspots, today’s weekly jobless claims data will provide a hint as to the degree of backsliding. This morning’s release of initial jobless claims for the week ending July 18th are expected to show continued stagnation in the prior trend of improvement, with filings projected to remain steady at 1.30 million. For context, the 1.30 million new claims in the week ended July 11th was little-changed from a revised 1.31 million claims in the prior week and above expectations of 1.25 million. Last week’s tally lifted the total claims since March 21st to 51.3 million. Some economists expect labor market deterioration to be significant enough to send July nonfarm payrolls back to negative territory.
Additional Themes
Markets Take US-China Friction in Stride – After briefly weighing on sentiment yesterday, markets have steadied as the latest flare-up in tensions between Washington and Beijing looks set to remain in the diplomatic realm for now. The surprise announcement that the US had demanded closure of the Chinese consulate in Beijing and vows of retaliation from China was the latest escalation in the re-intensifying feud, which has taken on an added significance due to its prominence as a campaign issue for the upcoming US presidential election. Reports suggest that China will close the US consulate in Wuhan and perhaps seek to scale back US diplomatic activities in Hong Kong in retaliation.
Italian Debt Continues to Rally Amid Spending Plans – Yields on 10-year Italian debt have fallen below 1% for the first time since the onset of the pandemic in early March, while the 10-year yield spread to German bunds, a key metric of Italian creditworthiness, are at their most favorable level since late February. This key milestone in the ongoing rally in Italy’s sovereign bonds occurred despite news overnight that the Italian government is preparing a €25 billion special relief budget to cushion the economic blow from the pandemic, which follows two prior stimulus packages totaling €75 billion. However, among EU members, Italy stands to receive the most funds from the EU’s €750 billion pandemic relief package that was agreed earlier this week, with Italian Prime Minister Conte suggesting that the combination of grants and loans to Italy from this historic fiscal stimulus could total more than €200 billion.