Morning Markets Brief 7-8-2020

Summary and Price Action Rundown

Global risk assets are choppy and mixed this morning as a renewed focus on US-China tensions and dampened hopes for EU fiscal stimulus kindle a degree of investor caution. S&P 500 futures point to a slightly higher open after the index slid 1.1% yesterday, breaking its five-day uptrend and taking year-to-date downside to 2.7%, while the tech-heavy Nasdaq retreated from a record high. Equities in the EU are underperforming amid downbeat signals for upcoming negotiations on the proposed regional stimulus package (more below) while Asian stocks were mixed overnight as mainland Chinese stocks maintained their ongoing uptrend despite more signs of friction with the US. The dollar and longer-dated Treasury yields are both flat, with the 10-year yield hovering near recent lows at 0.65%. Brent crude prices are fluctuating around $43 per barrel ahead of US crude stockpile data.

Hong Kong Peg Threat Puts US-China Friction Back in Focus

A report last evening revealing that the US State Department is reviewing the option of disrupting the Hong Kong’s fixed currency regime raised investor concerns of escalating tensions with China. The Bloomberg report, which was published yesterday after US markets closed, cited anonymous sources who indicated that the aggressive proposal by unnamed “top advisors” of President Trump had been raised as an option for retaliating against Beijing for the imposition of its new security law in the territory. However, those sources noted that it was “raised as part of broader discussions” and had not been “elevated to senior levels of the White House, suggesting that it hasn’t gained serious traction yet.” The article goes on to note that there is considerable pushback on the idea from other administration officials on the understanding that such an approach, even if successful, would disproportionately punish Hong Kong. Analysts expressed skepticism that such a strategy would even be feasible, given the inability for the US government to deny dollars to Hong Kong banks to a degree sufficient to break the longstanding peg, particularly given the vast dollar holdings of the People’s Bank of China, which would presumably step in to backstop the arrangement, at least in the short term. Price action evidenced scant concern among investors overnight, though official precautionary moves to steady the peg were reported in Hong Kong. The Hong Kong dollar was placid overnight, as were the onshore and offshore renminbi and other regional currencies. Asian equities were mixed, with mainland Chinese and Hong Kong stocks outperforming their peers. However, HSBC Bank, which has garnered attention over an expression of loyalty to Beijing from one of its senior officials in Hong Kong, fell 4.3% overnight.

EU Stimulus Package Negotiations Set to Drag On

Hungarian Prime Minister Orban dampened the mood in EU equity markets this morning, indicating that the region’s historic pandemic relief package proposal is unlikely to be agreed at next week’s summit. This comes after representatives of the so-called “Frugal Four” (Netherlands, Denmark, Sweden, and Austria) protested the size and composition of the €750 billion-euro fiscal stimulus package at June’s EU summit. Where the Franco-German-supported plan calls for €500 billion in grants, Frugal Four countries continue to insist the package consist entirely of loans. Austrian Chancellor Kurz reiterated the conservative North’s position on calling for clear time limits and linkages to pandemic recovery to avoid “an entry into a permanent debt union.” German Chancellor Merkel, French President Macron, and European Central Bank (ECB) President Lagarde all strenuously pushed for approval at last month’s summit, warning EU leaders that the failure to come to an agreement on stimulus would result in additional market shocks. Merkel suggested that finalizing the budget by the end of July would be critical given the region’s ongoing economic challenges but PM Orban’s remarks this morning suggested that talks would extend through the end of the summer. EU equities are moderately underperforming though the euro and regional sovereign bond markets are stable. For context, the euro is holding near 12-month highs versus the dollar.

Additional Themes

Oil Prices Hold Gains Despite Demand Doubts – Both international benchmark Brent crude and US benchmark WTI have been exceptionally steady over recent weeks, even as US and global economic data have suggested a continued growth recovery, as resurgent Covid-19 cases in various hotspots around the world darken the demand outlook. Oil prices are steady this morning as traders await weekly US inventory data, which the American Petroleum Institute estimates will show an unanticipated buildup after the prior week’s drawdown.

Chinese Stocks Extend Steep Rally – Amid signals that Beijing is intent on spurring a bull market in previously somnambulant mainland equities, the Shanghai Composite posted its seventh straight day of gains, rising 1.7% to put its upside over this span to 14.9%. Reports indicated that margin debt at speculative accounts is rising quickly.