Morning Markets Brief 8-4-2020

Summary and Price Action Rundown

Global risk assets were mixed overnight as investors monitor central bank policymaking, await additional corporate earnings, and ponder prospects for the US pandemic stimulus bill. S&P 500 futures indicate a 0.2% lower open after the index rose 0.7% yesterday to register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mixed overnight. The dollar is steady near two-year lows and longer-dated Treasury yields are turning back toward their lowest levels since early March, with the 10-year yield at 0.54%. Brent crude prices continued to hover in a narrow range around $43 per barrel.

Central Bank Policy in the Spotlight

The Reserve Bank of Australia (RBA) held its monetary settings steady overnight as the Federal Reserve sets the groundwork for a potential policy pivot in September. As widely expected, the RBA kept its policy rate unchanged at a record low of 0.25%, a level it first set in late March. The central bank said that a recovery from the Covid-19 crisis is now underway in most of Australia, despite Victoria’s government imposition of stage 4 restrictions across Melbourne over the weekend to contain a second-wave outbreak. Their baseline economic scenario has output falling 6% this year and then growing 5% next year with the unemployment rate increasing to around 10% by the end of the year. The RBA board reiterated that it will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be within the 2-3% target. Governor Lowe emphasized that fiscal and monetary stimulus will be required “for some time” and indicated that the RBA would start a fresh round of bond buying tomorrow to maintain its yield curve control policy (YCC), because the yield on 3-year Australian Government Securities had recently started rising above its target interest rate of 25 basis points. The RBA did not focus on the level of the Australian dollar, which is continuing its appreciation trend this morning, rising 0.2% versus its US counterpart to re-approach its strongest level since early 2019. This comes ahead of the Bank of England (BoE) meeting this Thursday, at which policy is expected to be held similarly steady, though some analysts expect an increase in asset purchase levels. Also, market participants will focus on any additional insight from the BoE regarding the prospect for negative interest rate policy (NIRP) over the coming months if the economy needs additional monetary easing. Meanwhile, Fed officials have expressed broad skepticism of NIRP and recent communications suggest little appetite for RBA-like YCC. Instead, the FOMC appears poised to enact a more subtle shift at the September meeting by adopting a form of enhanced forward guidance on interest rates, explicitly tied to their already-existing inflation and employment mandates.

Talks Grind Ahead on US Fiscal Stimulus Deal

Commentary from Capitol Hill suggested incremental progress toward agreement on this next phase of pandemic relief. Yesterday, House Speaker Pelosi characterized the day’s negotiations with Treasury Secretary Mnuchin and White House Chief of Staff Meadows as “productive” but despite “moving closer together,” she indicated that “there are a lot of issues that are still outstanding.” The main point of contention and the most urgent matter is the $600 per week unemployment benefit augmentation from the CARES Act, which expired last Friday. Meanwhile, President Trump has floated the idea of taking executive action to alleviate the economic burden caused by the coronavirus, particularly on evictions, but details are scant.

Additional Themes

US-China Frictions Over TikTok – Chinese state media likened the Trump administration’s actions regarding the controversial social media platform TikTok to thievery, though acknowledging that the sale of US operations to Microsoft or another buyer might be appealing to owner ByteDance on a business level. For context, President Trump has ordered TikTok to exit its US operations by September 15th to allow time for a potential sale to be finalized, and further stated that the US government should collect a substantial fee for arranging the deal. Chinese state media referred to impending retaliation, though Beijing has limited options for a directly proportionate response given that it already bans Facebook, Twitter, and Google.

Earnings Season Features Final Key Reports – The busiest and most consequential period of second quarter (Q2) earnings season has concluded but this week still features some meaningful reports, including companies that have faced notable impacts from the pandemic. Insurers Allstate and Prudential along with Walt Disney and Wynn Resorts, report after today’s closing bell. Through the remainder of the week, CVS, MetLife, Etsy, Royal Caribbean, Eastman Kodak,AMC Entertainment, and Norwegian Cruise Lines are among the headliners. With 338 of S&P 500 companies having reported, 84.5% of results have featured a positive earnings-per-share (EPS) surprise and 65.6% have topped revenue estimates. However, growth of sales and earnings are down 12.1% and 10.6%, respectively, thus far year-on-year.