Morning Markets Brief 8-18-2020

Summary and Price Action Rundown

Global risk assets are mostly higher this morning despite continued US-China friction as US retail bellwethers issue strong earnings results and OPEC meets on efforts to support oil prices. S&P 500 futures point to a 0.2% higher open after the index inched closer yesterday to February’s all-time high. Equities in the EU are outperforming while Asian stocks were mixed overnight. The dollar is breaking below its recent two-year low while longer-dated Treasury yields are retracing more of their recent upside, with the 10-year yield at 0.67%. Brent crude is hovering above $45 per barrel as OPEC and its allies (OPEC+) meet today.

US-China Tensions Remain Elevated

With a new potential suitor for TikTok’s US business and Chinese criticism of tighter restrictions on Huawei, fraught relations between the world’s two largest economies continue to make headlines but markets reflect scant concern of destabilizing escalation. A day after reports indicated that Microsoft would struggle to complete a deal for embattled Chinese social media app TikTok’s US business within the 90-day window mandated by President Trump, headlines overnight indicate that Oracle is exploring a potential offer. The reports note that this would be Oracle’s first major foray into the social media and app space and also that co-founder Larry Ellison is a supporter of President Trump. For context, the impending US bans on Chinese social media apps TikTok and WeChat were set to be raised by China in the Phase One trade deal review that was scheduled for this week but has been delayed indefinitely. This comes a day after the US Commerce Department further tightened restrictions on Chinese tech giant Huawei’s US business dealings, a move which a spokesperson for China’s Foreign Ministry decried as “bullying.” The Commerce Department had already passed restrictions in May that prevented Huawei from purchasing semiconductors developed and produced with US software and technology without first obtaining a special license. The most recent restriction will subject 38 new Huawei affiliates in 21 countries to the requirements, raising the total to 152 restricted affiliates since 2019. Meanwhile, President Trump reiterated concerns that should Huawei dominate the growing 5G market, there will be heightened concerns of Chinese spying on rival nations and companies.

Retail Giants Post Strong Earnings

Walmart and Home Depot issued impressive second quarter (Q2) figures, though analysts are pondering the US consumer outlook amid the lingering pandemic impact and stalled talks over additional federal government relief spending. Walmart issued strong second quarter (Q2) figures that beat estimates by a wide margin on sales and profit, with a 97% increase in e-commerce sales among the most impressive results for the retail bellwether. Management commentary cited the important role of fiscal stimulus in supporting consumer activity last quarter. Walmart shares had hit an all-time high yesterday and are over 5% higher in early trading. Home Depot also registered a record high for its stock price yesterday before issuing Q2 figures that handily outpaced analysts’ estimates of its key metric of same-store sales Q2, sending shares of the home improvement giant up 2.7% in pre-market trading. Year-to-date, shares of Walmart and Home Depot are up 14.1% and 32.0%, respectively. Kohl’s also reported results this morning, showing a narrower-than-expected loss, although sales fell 23%. Shares of Kohl’s are 4.4% higher in the pre-market but are down 54.0% on the year. This comes after data showed that US retail sales rose 1.2% from a month earlier in July, missing market expectations of 2.1% advance and slowing from an 8.4% month-on-month (m/m) surge in June.

Additional Themes

OPEC+ Set to Meet – Crude oil prices are holding most of yesterday’s rally, which brought Brent crude back above $45 per barrel, ahead of the meeting between the cartel and its allies today. Saudi and Russia aligned to bullish effect at the prior meeting, using compensatory cuts by laggard members like Nigeria to cushion the impact of the broader membership tapering their curbs. Meanwhile, the resurgent pandemic is crimping the demand picture, rendering their task of balancing the market more challenging, though analysts note that declining investment in production will support prices over the medium to longer term.

US Housing Market Remains Hot – The NAHB housing market index rose 6 points in August to a composite of 78, beating market expectations of a marginal rise to 73. The reading is the highest since 1998 as sentiment rebounded due to the continued easing of coronavirus lockdowns and rock bottom mortgage rates that are boosting new housing demand. The NAHB has indicated that, while the outlook remains positive, significant concerns over the future of housing prices are going to provide strong headwinds, particularly as the price of lumber has risen more than 80% since mid-April of this year. Data for July housing starts and building permits will be released this morning.