Morning Markets Brief 7-7-2020

Summary and Price Action Rundown

Global risk assets are reversing a portion of their recent gains this morning as investors note cautious official statements in the US and EU regarding the growth outlook and refocus on the adverse trends in pandemic containment efforts. S&P 500 futures indicate a 0.8% lower open after the index gained 1.6% yesterday, extending its blistering five-day rally to 5.7% and paring its year-to-date downside to 1.6%, while the tech-heavy Nasdaq posted another new record high. Analysts have expressed surprise at the newfound resilience of global equities to the ongoing resurgence of Covid-19 in much of the US and certain locations overseas, which continues to impede reopening efforts. Equities in the EU are posting losses while Asian stocks were mixed overnight as mainland Chinese stocks maintained their ongoing uptrend. The dollar is rising amid the cautious market mood, while longer-dated Treasury yields are steady near recent lows, with the 10-year yield at 0.68%. Brent crude prices are descending below $43.

Officials Warn on the Economic Outlook

Market sentiment is cooling this morning as investors assess the growth outlook amid warnings from EU and US officials and continued re-imposition of pandemic related restrictions in certain global hotspots. Analysts are noting Atlanta Fed President Bostic’s statement in an interview with the Financial Times that, in contrast with the traditional datapoints for May and June that are evidencing a sharp rebound in activity, higher frequency data sources are now reflecting a “leveling off” of business openings and mobility. Bostic called the data “troubling” and suggestive of a recovery that is “a bit bumpier” in areas of coronavirus resurgence where “V-shaped recoveries are morphing into W’s.” This comports with weekly Bank of America credit card spending data, which pointed to a degree of consumer retrenchment in the second half of June. Recent polling shows a darkening of US attitudes toward the outlook for pandemic containment. This comes after Fed Chair Powell’s testimony before Congress last week seemed to convey a more upbeat assessment of the economic recovery than previously. Meanwhile, the European Commission downgraded its growth outlook for the region to a GDP contraction of 8.7% this year from their prior estimate of -7.7%, emphasizing risks that remain “exceptionally high and mainly to the downside.” Finally, regions within Australia are also experiencing a resurgence of coronavirus infections, with Melbourne and parts of regional Victoria ordered back into lockdown after the state reported 191 new cases of Covid-19. In the US, Miami is the latest metropolitan area to rollback some of its reopening efforts, with curbs on nightlight being re-imposed.

Australian Central Bank Holds Steady

The Reserve Bank of Australia (RBA) retained its policy settings but expressed a cautious posture on the recovery. At its July meeting overnight, the RBA decided to maintain current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points (bps), as widely expected. The bank’s board noted that the nature and speed of the growth recovery remains highly uncertain and pointed to signs of a gradual improvement in retail sales though the services sector remains in deep recession. The RBA stated that Australian government bond markets are operating effectively and the yield on 3-year Australian Government Securities is at the target of around 25bps. Given these developments, the Bank has not purchased government bonds for some time, with total purchases to date of around A$50 billion (US$34.3 billion). It added that RBA market operations are supporting a high level of liquidity, “authorized deposit-taking institutions are continuing to draw on the Term Funding Facility, with total drawings to date of around A$15 billion.” The central bank reiterated its call for extensive fiscal and monetary stimulus. Market participants eyed the Australian dollar (AUD) after Governor Philip Lowe said in a June 22nd speech that the RBA would like to see the currency lower at some point, but it was hard to argue it was overvalued. Neither the RBA’s June nor July statements mentioned the AUD and the meeting minutes only noted that it had recovered. The AUD is trading 0.6% lower on the day.

Additional Themes

Tech Companies Act on Hong Kong – Facebook and other US tech companies are suspending their practice of data sharing with the Hong Kong government after Beijing has begun enforcing its restrictive new security law in the territory. Chinese-owned video sharing platform TikTok is also taking steps to limit use in Hong Kong. Meanwhile, Secretary of State Pompeo indicated that the US was considering a ban on the app, given concerns about privacy and the suspected ties of its owner, ByteDance, to the Chinese government.

Novavax Achieves “Warp Speed” – Shares of the biotech company are up 35.6% in pre-market trading following news of $1.6 billion in government funding as part of President Trump’s so-called “Warp Speed” program designed to accelerate Covid-19 vaccine development