Summary and Price Action Rundown
Global risk assets are extending recent gains this morning, led by a surge in Chinese equities overnight, as medium-term hopes for recovery and a continued focus on stimulus continue to overbalance the worrisome infection rates in US coronavirus hotspots. S&P 500 futures point to a 1.1% higher open after the index gained another 0.5% last Thursday, extending its four-day rally to 4.0% and paring its year-to-date downside to 3.1%, while the tech-heavy Nasdaq posted a string of new record highs last week. After driving a period of elevated stock market volatility last month, the ongoing resurgence of Covid-19 in much of the US, which continues to impede reopening efforts, no longer appears to be as much of a concern for market participants (more below). Equities in the EU are also solidly higher while Asian stocks outperformed overnight as Chinese stocks soared. The dollar is weakening as safe-haven demand ebbs, while longer-dated Treasury yields are only slightly higher, with the 10-year yield at 0.69%. Brent crude prices are also reflecting optimism, rising above $43 per barrel.
Chinese Stocks Spurred Higher by State Media
After languishing in multi-year doldrums and continuing to lag rebounding US and global equity markets, the Shanghai Composite has stormed higher over the past week, with a front page editorial in a state media newspaper today highlighting the importance of a strong Chinese equity uptrend to the mainland economy. With analysts pointing to the overtly bullish signal from China’s state-linked Securities Times newspaper, as well as last week’s easing of margin financing rules, the 5.7% leap in the Shanghai Composite last night brought gains for the index over the past week alone to 12.5%. The overnight upsurge was led by financial stocks, which powered 8.8% higher as shares of some of China’s largest banks, like ICBC, kept pace with the broader sectoral rally. For context, outperformance of mega-cap Chinese banks is typically associated with institutional buying rather than speculative retail activity, suggesting that mainland money managers are responding to the government’s prompting to pile into equities, though some brokers pointed to short-covering as adding to the upside impetus. Before this one-week sprint higher, the Shanghai Composite had been conspicuously subdued despite China’s evident success in Covid-19 containment and increasingly positive economic signals over the past few months. Despite a return to relative normalcy in many major cities including Beijing (before the more recent outbreak), China’s benchmark stock index still had not recovered from its coronavirus-related downside until late last week. Even after this stunning runup, the Shanghai Composite remains below its highs of 2018 and is currently trading at a level it first attained back in March of 2007.
Global Growth Outlook Remains Cloudy Beyond the Near-Term Rebound
Last week’s broadly encouraging US economic data, including a new record increase in monthly nonfarm payrolls, represent a good start to the recovery but visibility remains limited for the months ahead. The BLS released the June employment report on Thursday due to Friday’s holiday, showing the economy added 4.8 million jobs, the most on record, and beating expectations of 3 million. The data follows an upwardly revised 2.7 million rise in May. June represents the second straight month of gains after employment fell by a total of 22.2 million over March and April. The unemployment rate data declined in June to 11.1%, further easing from 13.3% in May and a high of 14.7% reached in April, bettering market expectations of 12.3%. Somewhat less encouraging was the new jobless claims data, which showed 1.427 million applications for unemployment benefits for the week ending on June 27. Over the weekend, Goldman Sachs pared their estimates for the third quarter rebound, now estimating an annualized pace of 25% growth from 33% previously due to the resurgence of coronavirus cases in much of the US. This takes their estimate for 2020 US GDP down to -4.6% from -4.2%. Meanwhile, overseas data was mixed, with German factory orders for May rising 10.4% month-on-month (m/m), reflecting an improvement from -26.2% in April but undershooting projections of 15.4%. EU-wide retail sales for May topped forecasts though, posting a 17.8% m/m gain, outpacing the expected 15.0%, though they remain 5.1% lower over the prior year.
Concerning US Covid-19 Data – Infection rates remained elevated over the holiday weekend in hotspots like Florida, California, and Arizona, though analysts suggest that the relatively subdued mortality rates may be soothing investor fears. Meanwhile, attendees to President Trump’s rally this Saturday in New Hampshire will be “strongly encouraged” to wear masks.
Copper Lifted by Supply Disruptions – Though prices of the red metal are traditionally seen as a proxy for global (and particularly Chinese) economic growth, Chile’s suspension of work at a major copper mine is being cited as a key driver this morning. Copper prices have nearly recouped their year-to-date downside, though 3-month futures suggest lower prices to come.