Morning Markets Brief 7-31-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight after strong earnings reports from US tech giants, though investors note mixed economic data and uncertainty over the latest US pandemic stimulus bill. S&P 500 futures indicate a 0.3% higher open as this week’s meandering price action continues, with the index holding in slightly positive territory for the year but remaining below last Wednesday’s peak for the pandemic. Equities in the EU and Asia mostly gained overnight. Ongoing dollar weakness is pausing this morning, but longer-dated Treasury yields are still sinking, with the 10-year yield at 0.54%, its lowest level since early March. Brent crude prices continue to hover above $43 per barrel as demand concerns remain a headwind.

Tech Stocks Lead Higher After Strong Earnings

Amid the busiest stretch of second quarter (Q2) earnings season, tech outperformance keeps rolling following yesterday afternoon’s strong results from IT giants. After the market close, Apple, Amazon, Google, and Facebook all reported impressive earnings and revenues, beating estimates across the board and their shares are mostly higher in pre-market trading. Amazon topped expectation for massive revenue growth from e-commerce, while Apple outpaced revenue and iPhone sales estimates. Analysts were focused on how a reduction in ad spending affected Facebook and Google in Q2 and the initial stock reactions are positive for Facebook, though Google is lagging this morning. While the S&P 500 index has been struggling to remain within positive year-to-date territory, the outperformance of tech stocks has remained near recent extremes despite some modestly corrective activity in recent weeks. Shares of Amazon, Apple, Facebook, Netflix, Google, and Microsoft are up 65.2%, 31.0%, 14.3%, 50.1%, 14.5%, and 29.3%, respectively, year-to-date. By contrast, indexes of US financials, industrials, and materials stocks are -23.1%, -10.3%, and -4.2% on the year. Thus far, aside from spurring more lopsided gains for IT giants, Q2 earnings has provided little overall direction to the broader indexes despite a high degree of upside surprises over sales and profit forecasts. With 305 of S&P 500 companies having reported, 84.4% of results have featured a positive earnings-per-share (EPS) surprise and 66.9% have topped revenue estimates. However, aggregate growth of sales and earnings are down 9.7% and 11.2%, respectively, thus far year-on-year.

Global Economic Data Reflects Uneven Recovery

After yesterday’s release of US Q2 GDP, which showed a historically steep contraction, and further deterioration in labor market indicators, economic data from around the world showed a mixed picture overnight. Chinese manufacturing surprised with yet another month of growth in July over expectations of a minor softening. The manufacturing PMI in China unexpectedly rose to 51.1 from 50.9 in the previous month, compared with market estimates of 50.7. A total of 17 out of the 21 industrial sectors recorded PMIs above the 50 threshold for expansion, compared with only 14 sectors recording growth in June. This was the fifth straight month of increase in factory activity and the strongest since March, as the mainland economy continues to recover after the government lifted strict lockdowns and ramped up investment. Meanwhile non-manufacturing PMI edged down to 54.2 from 54.4, the fifth consecutive month of growth in the service sector as sentiment strengthened markedly. Also in Asia, Japan’s consumer confidence index rose slightly in July, improving for a third straight month to its best level since March, but a recent surge in coronavirus cases suggest a murky outlook for the economy. In the EU, GDP contracted sharply in Q2, underperforming the US with a decline of 12.1% over the prior quarter and down 15.0% year-on-year (y/y). Regional inflation for July remained soft at 0.4% y/y but above forecasts of 0.2%. The euro is slightly lower this morning but remains near its strongest level versus the dollar in over two years. Later this morning, June US personal spending and income data, along with the Fed’s preferred inflation metric, are due.

Additional Themes

Unemployment Benefits in Focus as Congress Debates Relief Bill – Negotiations continue to drag on in Washington over the Republican HEALS Act as augmented unemployment benefits are set to expire today. The wrangling is centered around the amount of these unemployment benefits, as well as over aid for states and localities to bolster their budgets.

Looking Ahead – Next week, the calendar features potentially market-moving US economic data, with July nonfarm payrolls in the spotlight amid consensus estimates of 1.6 million jobs added after June’s 4.8 million, though estimates vary widely and even range into negative territory. Also on the calendar are US purchasing managers’ index readings for July, which will be scrutinized for signs of backsliding amid the resurgence of Covid-19 in various states around the country. The Bank of England and Reserve Bank of Australia also meet next week. The continuation of Q2 earnings season will bring reports from Tyson Foods, Clorox, Allstate, Prudential, Walt Disney, Wynn Resorts, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak, AMC Entertainment, and Norwegian Cruise Lines.