Morning Markets Brief 7-24-2020

Summary and Price Action Rundown

Global risk assets retreated overnight as US-China friction remained in the headlines, while investors await more key US economic data and corporate earnings. S&P 500 futures point to a 0.2% lower open after the index retreated 1.2% yesterday to erase nearly all the year-to-date upside it had accumulated earlier this week, which had marked a new high for the pandemic. The tech-heavy Nasdaq posted rare underperformance as high-flying IT shares reversed from lofty levels. Equities in the EU and Asia are lower, with Chinese stocks falling sharply (more below). The dollar is down despite the cautious tone in markets, while longer-dated Treasury yields are steady, with the 10-year yield at 0.58%. Brent crude prices are holding above $43.

US-China Tensions Weigh on Sentiment

In the latest cycle of escalation in the ongoing and multi-faceted confrontation between Washington and Beijing, China announced that it had ordered the US consulate in Chengdu to cease operations in retaliation for the US closure of the Chinese consulate in Houston. Analysts had expected China to respond in kind, though initial speculation had been that Beijing would shutter the US consulate in Wuhan. The US diplomatic presence in Chengdu is considered the more strategic of the two, as it is where the State Department monitors Tibet and the Western China region in general, which is a hotbed of human rights issues. Therefore, by choosing Chengdu, analysts suggest that Beijing is taking a more aggressive retaliatory approach, while President Trump has hinted that more Chinese consulates could be closed. Reports earlier this week noted that federal prosecutors are accusing the Chinese consulate in San Francisco of sheltering a Chinese scientist accused of visa fraud for concealing her ties to the Chinese military. Meanwhile, Secretary of State Pompeo delivered hawkish remarks yesterday on the Chinese Communist Party (CCP). Though he did not go so far as to advocate regime change, Pompeo’s rhetoric toward the CCP was harsh and he appealed to the Chinese people to seek change and called upon the international community to aid in that process. The Shanghai Composite fell 3.9% overnight, while the Hong Kong Hang Seng lost 2.2%, as market participants cited the further deterioration in US-China relations as weighing on sentiment.
US Labor Market Data Raises Questions on the Recovery

After yesterday’s disappointing weekly jobless claims data suggested a degree of economic backsliding, analysts await today’s preliminary purchasing managers’ index (PMI) figures for July. The flash readings of July PMI are expected to reflect a transition from contraction to expansion for both US manufacturing and service sectors, with consensus forecasts of 52.0 and 51.0, respectively, after June’s readings of 49.8 and 47.9. For context, PMI readings over 50 denote expansion in the sector. Analysts are wary of setbacks to the US growth recovery amid the resurgence of Covid-19 cases in key regional hotspots, with yesterday’s upside surprise in new jobless claims for the week ending July 18th adding to the concerns. Notably, this reading was the first weekly increase in unemployment claims since late March. Meanwhile, the EU posted better-than-expected preliminary July PMIs, which registered 51.1 for manufacturing and 55.1 for services versus forecasts of 50.1 and 51.0, respectively, representing marked improvement from the prior month’s 47.4 and 48.3 prints. The first readings of UK PMIs for July also meaningfully surprised to the upside and reflected expansion across the board. Nevertheless, the euro and pound are slightly weaker versus the dollar this morning, though the former is close to a two-year peak while the latter is at multi-month highs.

Additional Themes

Slow Progress Toward US Pandemic Relief Bill – Though portions of the Republican’s draft $1 trillion stimulus plan have trickled out, reports indicate that the official release will be delayed until next week. Among the available details, the most notable is the new unemployment insurance scheme to replace the current $600/week benefits that are set to expire in a few days. The GOP unemployment insurance plan will focus instead on a 70% wage replacement benchmark. Additionally, the plan is said to include direct payments of $1,200 and $2,400 to individuals and families, $105 billion for reopening schools, targeted additional funds for the Payroll Protection Plan (PPP), $16 billion in additional funding for coronavirus testing, tax breaks for businesses to retain workers and retool for new safety protocols, and provisions for flexibility on state use of previous funding. The Trump administration has also backed off its demands for payroll tax cuts. Democrats will contest the absence of additional funding for state and local governments, as well as the lack of support measures for housing and rent, and have rejected suggestions of a piecemeal approach to passing the bill.

Earnings Fail to Stem Tech Stock Selloff – Microsoft and Tesla, which have posted dramatic stock price outperformance this year, topped earnings and revenue projections, but shares of both companies fell yesterday as high-flying IT stocks suffered broad losses.