Morning Markets Brief 8-24-2020

Summary and Price Action Rundown

Global risk assets posted gains overnight amid the tantalizing prospect of Covid-19 treatments and easing US-China friction, while investors look ahead to Fed Chair Powell’s speech later this week. S&P 500 futures indicate a 0.9% higher open after the index extended its gains last week, increasing its year-to-date gain to 5.2% and registering another all-time high on Friday. Equities in the EU are outperforming, while Asian stocks were more muted overnight. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are slightly higher, with the 10-year yield in the middle of its recent trading range at 0.64%. Brent crude is rising back toward $45 per barrel as traders monitor storms in the Gulf of Mexico.

Covid-19 Treatment Hopes Spur Reflexive Equity Upside

Following a familiar pattern, US stocks are set to open higher following headlines regarding potential therapeutics and vaccines. In a speech on Sunday, President Trump touted a plasma-based treatment method that has been approved for wider utilization by the FDA, though the full range of clinical trials are yet to be completed. This came alongside a report that the White House is considering a fast-tracked approval of the vaccine being developed in the UK by AstraZeneca and Oxford University. Markets evidenced a similar initial reaction to news on Tuesday August 11th that the Russian Health Ministry had approved a vaccine for use, though the price reactions waned over the course of the trading day. For context, the latest vaccine trackers indicate that 17 contenders have advanced to Phase 2 trials, which move beyond individual persons testing to groups, while 7 more have made it to Phase 2/3, an accelerated hybrid step combining traits of a Phase 2 and Phase 3 trial to expedite a ready vaccine that involves large groups of people. Phase 3 is the “final phase trial” and will require 30,000 healthy participants, and follows them for infection rates over months. In June, the FDA said that a coronavirus vaccine would have to protect at least 50% of vaccinated people to be considered effective. Three leading Western-based research trials, including Moderna and NIH, Pfizer, and AstraZeneca in collaboration with University of Oxford, have each made it to testing among thousands of people in accelerated expanded trials. All are part of the US government’s Operation Warp Speed, which has set the goal of producing, manufacturing, and distributing an effective vaccine against the novel coronavirus by 2021.

Signs of Restraint in US-China Confrontation Ease Concerns

Though the White House continues to pursue a “tough on China” posture, which President Trump features as an election campaign issue, taking a softer line on WeChat evidences a continued degree of moderation. After markets closed on Friday, headlines indicated that the Trump administration has told US companies, including Apple, that they may continue to work with the WeChat app in China despite the impending ban in the US. The details of how the app will remain available to non-US users are still being finalized. This comes after news last week that China’s Commerce Ministry expects to soon participate with their US counterparts in a review of the US-China Phase One trade deal that was delayed earlier this month. Initially the cancellation had been blamed on scheduling issues but President Trump indicated that he had halted the meeting, saying “I don’t want to talk to China right now” given the grievances over Beijing’s handling of the pandemic. Still, White House officials remain broadly upbeat on the trade deal, with a focus on agricultural commodity purchases. Nevertheless, tensions continue to percolate and reports indicate that TikTok is preparing to sue the Trump administration over its upcoming US ban, even as US tech companies including Microsoft and Oracle scramble to craft a deal for the social media company’s US business.

Additional Themes

Fed Policy in Focus Again This Week – After last week’s release of the minutes from July’s FOMC meeting clouded the outlook for the Fed’s expected pivot to an incrementally more accommodative framework to guide policy, market participants await clarification from Fed Chair Powell at his speech on Thursday. His remarks will be part of the virtual 2020 version of the annual retreat in Jackson Hole, at which past Fed Chairs, most notably Chair Bernanke, have unveiled significant policy shifts.

Looking Ahead – This week’s macro calendar is varied, with Fed Chair Powell’s speech on Thursday and US economic data in focus as analysts scour reports for signs of backsliding. Initial jobless claims for the week ending August 15th will be the most potentially impactful reading, though July personal income, spending, and (most importantly) core PCE prices, the Fed’s preferred inflation metric, will also be scrutinized. Politically-minded investors will also monitor the Republican National Convention, though few surprises are expected and the election remains beyond the investable time horizon for many market participants, who prefer to wait until closer to the polling day before positioning their portfolio to account for political risks and uncertainties.