Morning Markets Brief 8-5-2020

Summary and Price Action Rundown

Global risk assets moved higher overnight as brightening prospects for the US pandemic stimulus bill and solid economic data in China and the EU lifted spirits and depressed the dollar, while US-China tension continue to simmer in the background. S&P 500 futures point to a 0.6% higher open after the index gained 0.4% yesterday to extend its year-to-date upside to 2.3% and register a new high for the pandemic, while the Nasdaq tagged another all-time high. Equities in the EU and Asia were mostly higher overnight. The dollar is relapsing back toward two-year lows while longer-dated Treasury yields are edging above their lowest levels since early March, with the 10-year yield at 0.53%. Brent crude prices are jumping above $45 per barrel, buoyed by solid global growth figures and a weakening dollar.

Signs of Compromise Brighten US Fiscal Stimulus Prospects

After reports from Capitol Hill signaled further slippage in the timeline for an agreement, the Trump administration appears to be taking the initiative to push for an expedited compromise. As negotiations extend into their second week over the size and shape of the next stimulus package, mixed reports of progress towards a consensus continue. Yesterday evening, Treasury Secretary Mnuchin stated that while a deal was not imminent, there had been agreement with House Speaker Pelosi and Senate Minority Leader Schumer over the timeline to reach accord by the end of this week so that legislation can pass next week. He noted that the White House was offering a compromise on jobless benefits and an extension of an eviction moratorium to year-end. Speaker Pelosi emphasized the need for swift passage of this bill in a subsequent interview, and she and Senator Schumer both characterized last evening’s meeting as representing a step forward. This comes after some key Congressional leaders warned yesterday that talks may spill over into next week as progress remains elusive on the main sticking points, namely federal unemployment benefits and financial aid to state and local governments. The Trump administration has continued to float the idea of taking unilateral action should Congress fail to finalize a deal. Specifically, President Trump has mentioned issuing, through executive order, an eviction moratorium and perhaps more controversially the suspension of the Federal payroll tax, a proposal both parties curtly rejected in the early construction of their stimulus plans.

US-China Tensions Continue to Simmer

With the controversy over TikTok as the latest flashpoint in the fraught relations between Washington and Beijing, headlines yesterday indicated that the US would review the progress on the Phase One trade deal around mid-month. With US-China friction continuing over issues such as TikTok, Hong Kong, handling of the pandemic, and human rights in Western China, analysts noted reports that US Trade Representative Lighthizer would be meeting virtually with Chinese Vice Premier Liu He on August 15th to review the first six months of progress since inking the Phase One trade deal. China’s US Ambassador characterized the review as a routine exercise and expressed expectations of a “positive” atmosphere. However, Chinese buying of US agricultural goods is lagging the targets set forth in the deal for a year-one increase of $77 billion worth of purchases, while progress toward the $25.3 billion energy products purchase target is even further behind the curve. For context, in early May, President Trump had mused publicly that the Phase One trade deal might break down over China’s alleged mishandling of the Covid-19 outbreak. However, on May 8th, the Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call among US Trade Representative Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu as constructive. The USTR statement indicated “good progress” and noted that “both countries fully expect to meet their obligations… in a timely manner.”

Additional Themes

China PMIs Remain Firm – The Caixin China composite purchasing managers’ index (PMI) slipped to 54.5 in July from 55.7 a month earlier, with an easing pace of expansion in the service sector cooling the gauge, while the manufacturing sector expanded at the fastest pace in nearly a decade. China’s July services PMI eased to 54.1 from a decade high of 58.4 the prior month but that level remains consistent with solid growth. For context, PMI readings over 50 denote expansion of activity in the sector. The manufacturing PMI rose to 52.8 in from 51.2 in June, beating market consensus of 51.3. New orders kept increasing and the backlog of work also rose. Meantime, both overseas demand and employment continued to be troubled for both sectors. Both onshore and offshore renminbi hit five-month highs versus the dollar overnight.

Solid EU Data Lifts Euro – The euro is rising to its strongest level versus the dollar since spring of 2018 after the final reading of July service PMIs were slightly lower the initial estimates but remained in robustly expansionary territory, lifting the July composite reading slightly ahead of estimates to 54.9 from 48.5 in June. Meanwhile, EU retail sales for June also remained strong, rising 5.7% on the month to gain 1.3% on the year.