Morning Markets Brief 8-3-2020

Summary and Price Action Rundown

Global risk assets were mostly higher overnight with some solid economic data supporting sentiment despite ongoing US-China tensions, while last week’s strong earnings from IT giants look set to extend US equity gains despite uncertainty over the latest US pandemic stimulus bill. S&P 500 futures point to a 0.5% higher open after the index rose 0.8% on Friday to put gains for the week at 1.7%, moving further into positive territory for the year but staying just shy of mid-July’s peak for the pandemic. The tech-heavy Nasdaq is poised to extend its outperformance. Equities in the EU and Asia posted gains overnight. The dollar downtrend is pausing again this morning and longer-dated Treasury yields are rising from their lowest levels since early March, with the 10-year yield at 0.55%. Brent crude prices are turning lower toward $43 per barrel as traders remain wary of rising OPEC output amid ongoing demand weakness.

Agreement on US Pandemic Relief Bill Remains Elusive

Congressional leaders and Trump administration officials continued negotiations over the weekend, but the sides remain stalemated over the issues of enhanced unemployment benefits. With the additional $600 per week in jobless benefits mandated by the CARES Act officially expiring on Friday, apparent urgency on both sides of the aisle to find a deal has not yet borne fruit. The need for extending some degree of augmentation is widely acknowledged but Treasury Secretary Mnuchin over the weekend continued to reiterate the position of Congressional Republicans and the White House that $600 is too generous and disincentives beneficiaries to return to work, while Speaker Pelosi indicated on Sunday that Democrats are united in pushing to retain that amount. Late last week, White House officials offered an extension of the $600 benefits for one week, and again suggested separating this issue from the larger stimulus package, a proposal that Democrats rejected, in keeping with their ongoing resistance to a piecemeal approach to the relief bill. House Speaker Pelosi, Senate Minority Leader Schumer, Secretary Mnuchin, and White House Chief of Staff Meadows are reportedly set to meet again today. House Majority Leader Steny Hoyer has canceled the House’s August recess until an agreement is reached, while the Senate is set to enter recess on August 7th. Meanwhile, Senator Romney and a group of other Republican Senators have proposed a 3-month extension to the expanded benefits that would allow states the option of a gradually decreasing flat rate ($500 in August, $400 in September, etc.) or replace 80% of a worker’s usual wages. States would also be allotted $2 billion to update unemployment insurance systems to facilitate the targeted wage replacement.

US-China Tensions Flare Over Social Media

After President Trump indicated that he would move to ban a Chinese-owned social media platform from the US, investors are pondering the ramifications of the decision. In the latest escalation of friction between Washington and Beijing, President Trump ordered ByteDance, the Chinese owners of popular but controversial video-sharing app TikTok, to exit its US operations on Friday. Over the weekend, amid expressions of interest by Microsoft to purchase TikTok’s business lines in the US, Canada, Australia, and New Zealand, the White House set an unofficial deadline until September 15th for the deal to be finalized. For context, TikTok has been criticized by US officials and a number of its US competitors for censorship, alongside allegations of ties to the Chinese military. Its 2017 purchase of another app that helped launch its popularity in the US is still under review by the Committee on Foreign Investment in the United States (CFIUS), which is Chaired by Treasury Secretary Mnuchin.  TikTok has 165 million users in the US and 2 billion worldwide. Regarding potential retaliation, Beijing has limited options for a directly proportionate response given that it already bans Facebook, Twitter, and Google. Over the weekend, Secretary of State Pompeo indicated that other Chinese-owned software platforms would also be facing restrictions.

Additional Themes

Earnings Season Rolls On – The busiest and most consequential period of second quarter (Q2) earnings season has concluded, featuring dramatic outperformance by US tech giants Apple, Amazon, and Facebook last week. However, this week still features some meaningful reports, including companies that have faced notable impacts from the pandemic. Tyson Foods, Clorox, Allstate, Prudential, Walt Disney, Wynn Resorts, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak, AMC Entertainment, and Norwegian Cruise Lines are among the headliners this week. With 313 of S&P 500 companies having reported, 85.0% of results have featured a positive earnings-per-share (EPS) surprise and 66.4% have topped revenue estimates. However, growth of sales and earnings are down 11.8% and 10.4%, respectively, thus far year-on-year.

July PMIs Reflect Recovery – China’s privately-compiled manufacturing purchasing managers’ index (PMI) for July registered 52.8 versus a forecast of 51.1 and the prior month’s 51.2 reading. Meanwhile, the final readings of EU and Japanese manufacturing PMIs were revised higher from their preliminary estimates released last month, though the latter remained in contractionary territory. For context, PMI readings above 50 denote expansion of the sector. US PMIs for July are due later this morning.