Morning Markets Brief 8-25-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight amid further signs of easing US-China friction, while encouraging German economic data is supporting EU assets. S&P 500 futures point to a 0.4% higher open after the index closed 1.0% higher yesterday, increasing its year-to-date gain to 6.2% and registering another all-time high. Equities in the EU are advancing, while Asian stocks broadly rallied overnight, though Chinese stocks lagged. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are being dragged higher by the selloff in EU sovereign debt following the solid German economic data, with the 10-year yield climbing to 0.69%. Brent crude is rallying back above $45 as storms in the Gulf of Mexico hit US output.

More Positive US-China Atmospherics Support Sentiment

US officials praised progress on the Phase One US-China trade deal following a call with their Chinese counterparts, contributing to a perception of easing tensions. US Trade Representative (USTR) Lighthizer and Treasury Secretary Mnuchin spoke with Vice Premier Liu He, the top Chinese trade negotiator, on Monday night to review the status of the Phase One trade deal, which was signed earlier this year. Although China’s purchases of US manufactured goods, energy, and agricultural products are lagging the year-one targets set forth in the accord, the statement released by the USTR struck an upbeat note, indicating that “[b]oth sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.” The USTR statement also highlights that China’s efforts toward protection of intellectual property rights, prevention of forced technology transfer, and structural reform were discussed but provided no further details. No mention is made of a Phase Two negotiation. This comes after reports late last week that that the impending US ban against a popular Chinese app is less impactful than feared. Specifically, the Trump administration has apparently told US companies, including Apple, that they may continue to work with the WeChat app in China despite the impending ban in the US, significantly easing concerns that the prohibition will put US companies at a disadvantage in Chinese markets. Meanwhile, at the Republican National Convention, President Trump aired criticism of Joe Biden’s stance on China, characterizing him as weak on Beijing (more below).

Solid EU Economic Data

The euro is finding support this morning from an upbeat German business survey, alongside a slightly upgraded GDP reading. The Ifo Institute’s closely-followed survey of German businesses for August showed a greater-than-expected improvement in confidence from the prior month. The Business Climate gauge climbed to 92.6 from 90.5 in July, topping a forecast of 92.1, with the report characterizing business sentiment as “markedly more positive.” Assessment of the current situation improved more than the outlook, but that brightened moderately as well from July. Although the trends are in a positive direction, corresponding with the economic recovery, the overall levels remain significantly depressed relative to pre-Covid readings. Also, the final print of German second quarter (Q2) GDP was revised slightly higher than expected, registering an annualized 9.7% rate of contraction versus the prior estimate of 10.1%, following a -2.0% reading for Q1. This comes after last week’s preliminary estimates of August purchasing managers’ indexes (PMIs) for the EU and its major economies generally surprised to the downside, denting the euro’s outperformance versus the dollar. Still, the single currency remains near its strongest level versus the dollar since May of 2018 and positioning data shows speculative positioning as heavily betting on more euro upside.

Additional Themes

Republican National Convention Keeps Politics in Focus – After last week’s Democratic National Convention provided investors with glimpses of the policy priorities in a potential Biden administration, the Republican National Convention has kicked off with a critical focus on the Democratic agenda, characterizing it as radical, while lauding President Trump and his accomplishments. President Trump received his party’s official nomination yesterday and the convention will conclude on Thursday evening.

Oil Advances as Storms Threaten the Gulf – Traders are citing the disruption to oil drilling and shipping in the Gulf of Mexico as helping contribute to this week’s rally in crude prices, which has also been supported by the combination of heightened Covid-19 vaccine hopes and cooling US-China friction. Although the first named storm this week, Tropical Storm Macro, lost force as it approached land, Tropical Storm Laura is building intensity with landfall expected late tomorrow or early Thursday. This comes after last week’s OPEC+ meeting failed to produce any notable new upside catalysts for oil prices, leaving additional supply from Libya and the global demand outlook as key swing factors over the coming months. For context, both international benchmark Brent crude and US benchmark WTI have been trading in a narrow $4 per barrel trading range around the low $40’s.