Morning Markets Brief 9.28.2020

Summary and Price Action Rundown

Global risk assets are extending Friday’s rebound, led by high-flying tech stocks, as investors weigh the prospects of a Covid-19 resurgence and US fiscal stimulus. S&P 500 futures indicate a 1.4% higher open after the index jumped 1.6% on Friday, paring its loss on the week to 0.6% and upping its year-to-date gain to 2.1%, which is less than 8% below early September’s record high. Equities in the EU are outperforming despite accelerating regional coronavirus outbreaks, while Asian stocks were mostly higher overnight. A broad dollar index is retracing a portion of its recent rebound from 28-month lows amid support from safe haven demand, while longer-dated Treasury yields are edging higher, with the 10-year yield at 0.67%. Brent crude prices continue to hover around $42 per barrel.

Hopes Rise for US Fiscal Stimulus Deal

With consensus over the need for more pandemic support pushing both sides back to the table, House Speaker Pelosi made encouraging statements over the weekend. Optimism is rising amid renewed negotiations on the stalled pandemic relief package after Speaker Pelosi expressed “trust” in Treasury Secretary Mnuchin and stated her belief that “we come to an agreement” in remarks over the weekend. Speaker Pelosi’s office indicated that the two had spoken by phone on Friday. For context, House Democrats have slimmed their $3.4 trillion HEROES Act to a roughly $2.4 trillion package designed to restart negotiations with the White House. Last week, both Treasury Secretary Mnuchin and House Speaker Pelosi emphasized the importance of additional fiscal support for the economic recovery and expressed eagerness to continue negotiations. This comes after last week’s data showed further signs of backsliding. Initial jobless claims rose by 870K in the week ending September 19th, which is the fourth consecutive week in the 800K’s range, suggesting that the labor market recovery has stalled, while US durable goods orders for August also surprised on the downside. This week’s September nonfarm payroll number and ISM PMI reading, as well as August personal spending and income data, will be scrutinized for any signs of weakness. – MPP view: If the Pelosi/Mnuchin deal-making odd couple strike a bargain, we do not expect Senate Republicans to block it – not with the tight races some of their key members are in. We remain on the optimistic side of consensus that a deal can be done over the coming week.

Unwelcome Coronavirus Trends

The prospect of accelerating infection rates during a fall/winter second wave of Covid-19, which already appears to be occurring in the EU and UK, is spurring familiar pandemic-driven market dynamics. High-flying tech stocks are back in favor after a period of correction, with their rebound thus far coinciding with rising concerns over a resurgence of Covid-19. For context, IT and biotech sectors are among the equity market winners of the pandemic, generating outsized gains due to their relative advantage amid Covid-related economic impingements and social distancing. Although the number of daily cases and deaths have fallen slightly from their second peak this summer, the US is still averaging roughly 40,000 new infections and over 700 deaths each day, which was largely driven by surges in southern states along with a resurgence in California. Additionally, the past four weeks have seen all states in the country’s Midwest except Ohio report more cases compared with the previous four weeks, led by South Dakota and North Dakota. The number of tests conducted in the US has been dropping from a peak in late July amid shortages and delays, and that may affect the number of cases reported. Testing has surged in Europe, with France, for example, targeting 1 million tests a week, though the EU is experiencing a new spike in infections, linked to vacationers who caught the virus and brought it home, as well as young people socializing. German Chancellor Merkel warned today of a potential spike in cases by year-end.

Additional Themes

TikTok Ban Delayed by Court – A federal judge has granted an injunction against the ban sought by the White House on controversial social media app TikTok. The Trump administration had filed papers on Friday in response to an injunction request by TikTok’s Chinese owner ByteDance and the ruling was handed down yesterday after a hearing. The presiding federal judge had also offered the government the option of delaying the ban. This comes as lawyers for the administration attempt to overturn the judicial stay imposed on President’s intended ban on WeChat, another Chinese social media app targeted for national security concerns. Meanwhile, the Commerce Department announced restrictions on a key Chinese chipmaker over the weekend – MPP view: We continue to see low risk that the White House is gearing up for a high-profile “tough on China” October surprise and expect that the TikTok drama will remain the focal point, amid incremental policy action on other fronts like IT.

Oil Supply Dynamics in Focus – Oil prices remain stalled in a narrow range as analysts note surging supply from Libya after both sides in the ongoing civil conflict approved renewed crude output. Full supply capacity of the war-torn country is over 1 million barrels per day (bpd), and reports indicate that 250K bpd is already back on-line, with estimates suggesting that pace could double by the end of the year. This comes as Saudi and Russia struggle to maintain compliance with ongoing OPEC+ supply curbs and demand remains suppressed by the pandemic.