Market Reports

Summary and Price Action Rundown

Global risk assets are mostly lower this morning as investors continue to ponder the outlook for economic reopening and the next round of policy support measures while awaiting US consumer data and monitoring the latest developments on the US-China front. S&P 500 futures point to a 0.4% lower open, which would deepen this week’s 2.6% loss for the index that has taken year-to-date downside to 11.7% and the decline from February’s record high to 15.8%. Equities in the EU are higher this morning while Asian stocks were mixed overnight. Longer-dated Treasury yields continue to fluctuate near recent lows amid the cautious tone in markets, with the 10-year yield at 0.60%. Meanwhile, the dollar is edging higher within its recent trading range. Crude oil is holding gains after registering a new high for the month.

White House Pivoting on Fiscal Relief Efforts?

Though House Democrats, Senate Republicans, and the White House appeared to be deadlocked over the size and composition of the next round of pandemic relief spending, a report yesterday indicated the Trump administration’s willingness to seek a deal. The Washington Post reported around midday yesterday that the White House was softening its opposition to state aid, which features prominently in the latest draft pandemic relief act drafted by House Democrats, in hopes of securing tax cuts and corporate liability limitations. This comes after President Trump called the $3 trillion HEROES Act crafted by House Democrats “dead on arrival” earlier this week and Treasury Secretary Mnuchin echoed this sentiment, indicating that the administration is intent on pausing for “the next 30 days and think carefully.” For context, the draft bill features $1 trillion in support for states and municipalities, money for Covid-19 testing, direct payments to households of up to $6000, and surpasses the size of its predecessor, the $2.2 trillion CARES Act, which was signed into law in March.

 

US Consumer in the Spotlight

US retail sales for April will provide a degree of insight on the efficacy of government support payments, while Chinese economic data overnight suggested a choppy recovery. Although most traditional economic datapoints over the last few months have been considered stale by investors who are increasingly focused on the prospects for recovery rather than the depths of the current economic trough, April’s US retail sales figures have a greater likelihood of moving markets given the primacy of the US consumer to any global rebound scenario. Headline expectations are for a 12.0% month-on-month (m/m) contraction, deepening from -8.4% in March. A reading of May consumer sentiment follows later this morning. Last month’s industrial production is also forecast at -12.0% m/m after a 5.4% retrenchment in March. This follows yesterday’s latest jobless figures, which showed that 2.981 million Americans filled for unemployment benefits over the week ending May 9^th, down from 3.176 million the prior week and the lowest level since the coronavirus crisis began. However, filings came in well above market expectations of 2.5 million and lifted the total reported to 36.5 million, equivalent to nearly a quarter of the working age population. Furthermore, continuing jobless claims hit a new record of 22.833 million in the week ending May 2^nd.

Additional Themes

Mixed Chinese Data as Tensions with the US Percolate – Overnight, Chinese economic figures for April suggested an uneven and tepid recovery. While industrial production topped estimates at 3.9% year-on-year (y/y), rising from 1.1% y/y in March, retail sales undershot expectations at -7.5% y/y, though this still represents an improvement from the prior month’s -15.8% y/y. Fixed asset investment growth, on a year-to-date basis, roughly matched estimates at -10.3% y/y. This comes amid a week of rising friction between the US and China. This morning, headlines indicate US moves to block Chinese IT giant Huawei from using US software. Yesterday in an interview, President Trump indicated that he is focused on Chinese companies that are listed on the NYSE and Nasdaq but have not been subjected to US-standard accounting rules. This comes after the US government retirement savings fund, the Thrift Savings Plan (TSP), suspended their upcoming move that would have allocated a portion of its holding to Chinese stocks in proportion to the weightings of the MSCI All Country World Index.

Germany Faces Deepening Recession – Germany’s first quarter (Q1) GDP contracted 2.2%, in line with expectations, which was the steepest decline since Q1 2009. Q2 is forecast to register -10%. This comes a day after the Finance Ministry reported that Germany’s overall tax income for 2020 is expected to be €98.6 billion ($106 billion) lower than an estimate six months ago, the first drop since the global financial crisis. The estimates assume a 6.3% GDP contraction this year, with the country facing its deepest recession since World War II. With investors braced for downbeat news, the euro is stable near three-year lows versus the dollar and German bund yields continue to languish in negative territory.

Summary and Price Action Rundown

Global risk assets are mostly lower this morning as investors continue to digest this week’s somber messaging from Fed Chair Powell and Dr. Fauci while monitoring the latest developments on the US-China front and incoming unemployment data. S&P 500 futures indicate a 0.3% lower open, which would deepen this week’s 3.8% loss for the index that has taken year-to-date downside at 12.7% and the decline from February’s record high to 16.7%. Equities in the EU are underperforming again this morning while Asian stocks also declined overnight. Longer-dated Treasury yields are heading back toward recent lows amid the cautious tone in markets, with the 10-year yield at 0.61%. Meanwhile, the dollar is moving higher within its recent trading range. Crude oil, however, is bouncing back near one-month highs.

Fed Chair Powell Conveys Caution but Downplays Negative Rates

Yesterday, Chair Powell echoed his colleagues’ skepticism on negative interest rate policy (NIRP) but provided scant insight into what further easing measures the Fed is likely to enact, while market participants focused on his emphasis of downside risks. Chair Powell spoke yesterday on the extended impact of the coronavirus on the US economy and Fed’s response. His tone was cautious, calling the pandemic the “biggest shock to the economy in modern times” and noting that “there is a lot of uncertainty ahead.” Powell opined that “over the course of the next month or so unemployment will peak” but noted that “there is a growing sense that the recovery may come more slowly than we would like” and could thereby “turn liquidity problems into solvency problems.” Regarding future policy actions, he reiterated that “the committee’s view on negative rates has not changed. [NIRP] is not something we’re considering.” Powell also sent a message to Capitol Hill, stating that “additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” saying it was ultimately up to Congress and the administration to consider this trade-off. For context, Fed policy actions have thus far eased stresses in dollar funding markets, credit channels, municipal bonds, and US Treasuries, thereby suppressing systemic risks and bolstering investor sentiment.

Fiscal Relief Efforts Stall Ahead of More Jobless Data

With House Democrats, Senate Republicans, and the White House at loggerheads over the size and composition of the next round of pandemic relief spending, today’s latest unemployment claims reading is expected to show a high level but declining trend of new filings. Yesterday, President Trump called the $3 trillion HEROES Act crafted by House Democrats “dead on arrival,” and Treasury Secretary Mnuchin echoed this sentiment, indicating that the administration is intent on pausing for “the next 30 days and think carefully.” For context, the draft bill features $1 trillion in support for states and municipalities, money for Covid-19 testing, direct payments to households of up to $6000, and surpasses the size of its predecessor, the $2.2 trillion CARES Act, which was signed into law in March. With investors pondering the uncertain prospects for an economic rebound, Secretary Mnuchin reiterated his upbeat outlook for the recovery in a TV interview last evening. Later this morning, initial jobless claims for the week ending May 9^th are due, with estimates for 2.5 million new filings. While this would still be an exceptionally grim tally, it would also represent a decline from the prior week’s 3.2 million, which lifted the total reported since the beginning of the coronavirus crisis to 33.5 million, equivalent to an unemployment rate of 22%. Analysts will also note tomorrow’s April readings of US retail sales and industrial production.

Additional Themes

US-China Tensions Remain in Focus – In an interview, President Trump stated that he is focused on Chinese companies that are listed on the NYSE and Nasdaq but have not been subjected to US-standard accounting rules. This comes after news that the US government retirement savings fund, the Thrift Savings Plan (TSP), is suspending their upcoming move that would have allocated a portion of its holding to Chinese stocks in proportion to the weightings of the MSCI All Country World Index. The White House had reportedly been mulling an executive order to compel the TSP to halt this reallocation. California Governor Newsom has also come under pressure to divest his state’s massive pension funds from Chinese stocks. For context, political pressure to limit US public pension exposure to Chinese equities has been percolating for months, well before the pandemic hit, and these current developments are not being explicitly cast as retaliation for China’s handing of the coronavirus outbreak.

Bank of England (BoE) Downplays NIRP – Mirroring Fed Chair Powell’s stance, BoE Governor Bailey stated today that negative interest rates are “not something we’re contemplating” but refused to categorically rule out such a move. Nevertheless, yields on 2-year UK sovereign bonds remain in slightly negative territory.

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors await remarks from Fed Chair Powell and monitor the prospects for additional US fiscal support amid heightened uncertainty over economic reopening efforts. S&P 500 futures point to a 0.5% higher open after yesterday’s 2.1% loss took year-to-date downside to 11.2% and the decline from February’s record high to 15.2%. Equities in the EU are underperforming this morning amid downbeat earnings while Asian stocks were mostly higher overnight. Longer-dated Treasury yields are hovering above recent lows ahead of Chair Powell’s speech, with the 10-year yield at 0.67%. The dollar remains in the middle of its recent trading range and crude oil is stable around one-month highs.

Spotlight on Fed Policy Ahead of Chair Powell’s Remarks

With FOMC officials this week almost unanimously talking down the appropriateness of negative interest rate policies, analysts are expecting Chair Powell to follow suit but also provide more insight into what further easing measures the Fed is likely to enact. Yesterday, St. Louis Fed President Bullard and Dallas Fed President Kaplan both downplayed the potential for the FOMC to adopt a negative interest rate policy (NIRP), as did Minneapolis Fed President Kashkari, although he declined to rule out the policy entirely. This comes after Monday’s statements from Chicago Fed President Evans and Atlanta Fed President Bostic also expressed skepticism over the appropriateness of NIRP. Correspondingly, fed fund futures have shifted out of negative territory on the late 2020/early 2021 contracts. Analysts expect Fed Chair Powell to echo his colleagues’ skepticism on NIRP in his remarks on today but are also anticipating guidance on what additional easing measures are being considered. For context, in the press conference following the late April Fed meeting, Chair Powell expressed his opinion that the economy would require more monetary support from the Fed in the coming months but did not specify his preference for a particular policy tool. Meanwhile, the New York Fed announced Monday that it will begin to buy corporate credit, some of it below investment grade, though exchange-traded funds (ETFs). Reports suggest an initial amount of $250 billion among the Fed’s overall purchase programs will be allocated to corporate credit ETFs.

Uncertainty Over Economic Reopening While Congress Wrangles Over Further Relief

Yesterday’s virtual Senate testimony by White House coronavirus advisor Dr. Fauci highlighted the challenges of reopening the economy, while partisan divisions deepen over the next round of fiscal support for the ailing economy. Dr. Fauci sounded a cautious note in his testimony yesterday, warning that restarting economic activity before important containment benchmarks are achieved carries the “real risk” of widening outbreaks that reverse progress toward recovery. With investors refocusing on the potential for secondary infection spikes and re-imposed lockdowns, US equities retraced a portion of their recent rally yesterday but have stabilized overnight. Meanwhile, House Democrats released a draft version of the latest Covid-19 relief bill totaling $3 trillion, which is set to go to the House Rules committee on Thursday in preparation for a vote on Friday. For context, this bill, dubbed the HEROES Act, features $1 trillion in support for states and municipalities, money for Covid-19 testing, direct payments to households of up to $6000, and surpasses the size of its predecessor, the $2.2 trillion CARES Act, which was signed into law in March. Republicans in the House are set to oppose the relief bill while Senate Republicans are said to be split, with Majority Leader McConnell calling instead for “narrowly-targeted legislation.” The White House has sent mixed signals on this latest round, with President Trump today referencing the potential for a second round of stimulus payments to households.

Additional Themes

Oil Prices Stabilizing Above Lows – Oil prices are little changed this morning as traders await official US stockpile data later today, with estimates suggesting the first decline since February. For context, brimming US oil storage helped spur a flight from the expiring May WTI contract last month, with market participants shunning physical delivery, which sent that contract into negative territory. OPEC’s monthly report is also due today. After the swift two-day oil price rebound stalled last Wednesday, both international benchmark Brent crude and US benchmark WTI front month futures have spent the past week trading in a choppy sideways pattern.

UK GDP Contracts – First quarter (Q1) UK GDP printed -1.6% year-on-year, bettering estimates of -2.2%, though the economy shrank nearly 6% in March and estimates for Q2 reflect a much steeper retrenchment. The Bank of England has cut its policy rate to 0.10% and is engaging in asset purchases (quantitative easing), with accommodation expected to be augmented at next month’s meeting. Yields on 2-year UK sovereign bonds are -0.03% suggesting that NIRP is possible. The pound, however, is taking the data in stride, rising a moderate 0.3% versus the dollar this morning at 1.23 to hold well above the crisis lows of 1.15 in March.

Summary and Price Action Rundown

Global risk assets are moving higher this morning as investors remain focused on economic reopening and the prospects for additional fiscal and monetary support. S&P 500 futures indicate a 0.2% higher open after yesterday’s flat close left year-to-date downside at 9.3% and the decline from February’s record high at 13.5%. Equities in the EU and Asia were mixed and muted overnight. Longer-dated Treasury yields are hovering above recent lows as investors focus on Fed policy signals and impending debt auctions, with the 10-year yield at 0.71%. The dollar remains in the middle of its recent range as the renminbi holds up despite heighted US-China tensions. Crude oil is re-approaching one-month highs amid more Saudi supply cuts.

Markets Send Mixed Messages on Reopening as Congress Ponders Another Relief Bill

Financial markets continue to send mixed signals on the outlook for the recovery, as share price outperformance of sectoral “winners” from the pandemic like tech and healthcare becomes ever starker. Yesterday, in a familiar trend, the S&P 500 closed in positive territory as the health care and IT sectors, which gained 1.7% and 0.6%, respectively, again propped up the index while most other sectors posted losses on the day. Although the buoyancy of US equity indexes is consistent with a degree of investor optimism over the prospects for economic reopening, the growing disparity in performance among sectors that are less impacted by (or even benefit from) the pandemic and those that are adversely impacted suggests skepticism on a return to normalcy over the medium term. Treasury markets, meanwhile, remain consistent with a lengthy economic trough, though yields edged higher as Fed officials downplayed the odds of policy rates going negative (more below) and market participants prepare for upcoming Treasury auctions. As the feel-good factor of easing lockdowns is tempered by indications that reopening will be uneven and challenging, analysts are monitoring signals from Capitol Hill that the next round of fiscal relief may be back on track. Yesterday, New Jersey Senator Menendez indicated that a $500 billion support bill for states and municipalities was gaining traction, though White House officials have conveyed mixed messages on the administration’s stance.

Fed Policy in Focus Over Negative Interest Rates and Credit ETF Purchases

Ahead of Fed Chair Powell’s remarks tomorrow, FOMC members yesterday talked down growing speculation over negative interest rate policy (NIRP) and the Fed will begin purchasing credit ETFs today. With an ex-Fed official and prominent Harvard economist both recently making the case for the Fed to follow the European Central Bank and Bank of Japan in imposing NIRP, and December 2020 and January 2021 fed fund futures both briefly reflecting negative interest rate expectations last week, FOMC members downplayed the likelihood of such a move. Chicago Fed President Evans indicated that he does not foresee the need for negative policy rates, though he expects them to remain at zero for “quite some time.” Meanwhile, Atlanta Fed President Bostic said he is “not a big fan” of NIRP, suggesting it is less effective than other policy tools. Correspondingly, fed fund futures have shifted out of negative territory on the late 2020/early 2021 contracts. Analysts expected Fed Chair Powell to echo his colleagues’ skepticism on NIRP in his remarks on Wednesday. Meanwhile, the New York Fed announced yesterday that it will begin to buy corporate credit, some of it below investment grade, though exchange-traded funds (ETFs). Reports suggest an initial amount of $250 billion among the Fed’s overall purchase programs will be allocated to corporate credit ETFs.

Additional Themes

Tensions with China Continue to Simmer – Despite last week’s improving atmospherics in the trade relationship, friction between China and the US, as well as some of its allies, continued overnight. In a move that had been floated by the White House previously and has some backing on Capitol Hill, President Trump is reportedly set to issue an executive order blocking the US government employee retirement savings plan from investing in Chinese equities. Still, the move is not being directly cast as retaliation for China’s handling of the Covid-19 outbreak nor is it as impactful as hiking tariffs, which President Trump had also threatened. Meanwhile, Australian stocks fell but the Aussie dollar recouped early losses after China suspended a significant portion of beef imports, a decision that may be tied to a spat over the pandemic.

Energy Earnings Slump – Last evening’s earnings reports highlighted the challenges to the energy sector. Sunoco and Energy Transfer both released downbeat reports missing earrings and revenue projections for the quarter, with their shares already -19.4% and -40.1% year-to-date, respectively. Meanwhile, Saudi oil giant Aramco also released dismal profit figures for last quarter but retained its dividend. Energy is the worst performing major US equity sector so far this year, though the week-long bounce in oil prices, which is continuing this morning, has provided some support. Oil prices have been fluctuating around one-month highs since Sunday after Saudi announced an additional unilateral output cut of 1 million barrels per day.

 

Summary and Price Action Rundown

Global risk assets are pausing last week’s rally this morning as investors monitor news and data for indications of progress on economic reopening. S&P 500 futures point to a 0.7% lower open, which would pare last week’s 3.5% rally that put year-to-date downside at 9.3% and the decline from February’s record high at 13.5%. Equities in the EU and Asia were mixed overnight. Longer-dated Treasury yields are hovering above recent lows despite troubling jobless data and cautious Fed communications, with the 10-year yield at 0.69%. Meanwhile, the dollar is rebounding this morning but remains near the middle of its recent trading range. After rebounding sharply last week, crude oil is backsliding but remains near one-month highs.

Investors Ponder Reopening Efforts Amid Depressed Economic Data

With financial markets conveying mixed signals on the outlook for the recovery, market participants will be more reactive to contemporaneous indicators than traditional economic data, which is considered backward-looking. On Friday, the nonfarm payroll report indicated that the US economy lost 20.5 million jobs in April, below consensus estimates of 22 million, and following 870K losses in March. This was the largest drop ever, and job losses were widespread, with 7.7 million lay-offs in leisure and hospitality and 5.5 million in food services and drinking places. The unemployment rate jumped to 14.7%, the highest in the history of the series and compared to market expectations of 16.0%. The number of unemployed persons rose by 15.9 million to 23.1 million. However, the real rate is another 5% higher, as the official figures does not include people who are not looking for a job as unemployed. 18.1 million of the newly unemployed characterized themselves as only temporarily laid off and expect to return to work once restrictions are loosened. Despite these deeply depressed figures, US equities closed the week on a high note, with the S&P 500 rising 1.7% for a 3.5% weekly gain to cut year-to-date losses under 10%. Treasury markets, on the other hand, remained consistent with a lengthy economic trough. Notably, fed fund futures for December 2020 and January 2021 for the first time last week moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. With traditional economic data viewed as stale, investors will be highly attuned to signs of progress or slippage on economic reopening. News over the weekend covered Shanghai Disneyland reopening but also Seoul closing bars and nightclubs after a secondary outbreak, lockdown of another Chinese city, and infections among White House staff, suggesting that economic reopening is likely to be uneven and challenging.

Earnings Season Wraps Up as Optimism is Tempered by Uncertainty

With the bulk of first quarter (Q1) earnings reports in the books, equity investors took a “glass half full” approach to uneven results and widely withdrawn guidance. With just around 86% of the S&P 500 companies having reported their Q1 earnings, the results so far have marked one of the most challenged earnings seasons in the past decade, and the signs are pointing to an even more difficult Q2. Nevertheless, equity markets continued their ongoing uptrend amid some upbeat management commentary and hopes of a summer rebound. As of Friday, 66% of reporting companies have beaten earnings estimates, led by consumer staples and materials while 58% have topped revenue estimates, led by the health care and information technology sectors, which are the lowest ratios since the 2008 financial crisis. The blended earnings growth for the S&P 500, the mix between the earnings that have released and the projections for those that have not, is at -13.6% year-over-year, which represents the largest quarterly year-over-year earnings loss since Q3 2009. The blended revenue growth of 0.6% would be the lowest since Q2 2016. Headline results for the current quarter are expected to be considerably worse, as lockdowns became more widespread in April and carried into May, but investors will be expecting evidence of a recovery to feature prominently in Q2 results.

Additional Themes

China in Focus – Despite threats of retaliation against China from the White House for alleged malfeasance over the Covid-19 outbreak, the atmospherics of the US-China trade relationship improved last week after the Office of the US Trade Representative (USTR) and the Chinese Ministry of Commerce both characterized a conference call early Friday as positive. President Trump has indicated that more details of Beijing’s trade deal compliance will be released perhaps as early as this week. Meanwhile, China published April aggregate financing figures, which showed credit extension and broad money supply outpacing estimates. Later this week, retail sales, industrial production, and fixed asset investment data for last month are due.

Fed Policy Uncertainty – After fed fund futures briefly reflected NIRP by year-end, the announcement of a speech this Wednesday by Fed Chair Powell had traders guessing that he would use the opportunity to tamp down any such expectations. Still, fed officials have been unanimous in emphasizing downside economic risks and the need for more monetary easing.

 

Summary and Price Action Rundown

Global risk assets are continuing this week’s upbeat trend ahead of what is expected to be a historically dire US jobs report for April, as the focus remains firmly on recovery prospects, with positive earnings and better US-China atmospherics also boosting the market mood. S&P 500 futures indicate a 1.0% higher open, which would extend yesterday’s 1.2% gain that put year-to-date downside at 10.8% and the decline from February’s record high at 14.9%. Equities in the EU and Asia were higher overnight as well. Treasury yields are sinking back toward recent lows amid more troubling jobless data and cautious Fed communications, with the 10-year yield at 0.62% and longer-dated Fed fund futures projecting negative interest rates for the first time (more below). This has dented the dollar, which is falling back to the middle of its recent trading range. After rebounding sharply earlier this week, crude oil is fluctuating around three-week highs as traders weigh an improving demand outlook against the ongoing supply glut.

US Labor Market Pain Continues as Markets Reflect Negative Interest Rates

In contrast to increasingly exuberant US equity markets, real economic data remains dismal, Fed speakers are conveying deep concerns, and Treasury markets remain consistent with persistent economic doldrums. This morning, the April nonfarm payroll report is expected to reflect a historic level of job losses, with a consensus forecast of 22 million jobs lost and an understated 16.0% unemployment rate. This follows yesterday’s latest jobless claims figures which showed that 3.2 million Americans filled for initial unemployment benefits last week, compared to 3.8 million in the prior week and above market expectations of 3.0 million. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 million, equivalent to a 22% unemployment rate. For context, the nonfarm payroll report lags the weekly unemployment claims data. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.6 million. Amid these deeply depressed figures, Fed speakers yesterday continued to highlight concerns over the outlook for the economy, Treasuries staged a robust rally, and fed fund futures for December 2020 and January 2021 for the first time moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. This price action in Treasury and fed fund futures markets is consistent with a lengthy economic trough.

Earnings Season Generally Better Than Feared but the Outlook Remains Uncertain 

With the bulk of first quarter (Q1) earnings reports in the books, a preponderance of upside surprises has bolstered investor optimism in the face of low visibility into the coming quarters. Being one of the final household names left to report, Uber released its quarterly figures after yesterday’s market close, missing earnings estimates but beating revenue projections. Uber’s business has been impacted by the pandemic, to which the company attributed a $19 million revenue loss in the Rides segment. As the shelter-in-place policies were instituted, Uber’s demand for rides fell 3%. Conversely, demand for food delivery through Eats increased 54%. During the Q1 earnings call, Uber management stated that rides have experienced week-over-week growth for the past three weeks. Notably, last week alone saw a 12% increase. Uber shares soared 11% yesterday to put year-to-date upside at 4.0% and are extending gains by 7.9% in pre-market trading. With 426 of the S&P 500 companies having reported, 60% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.7% above estimates thus far, while earnings growth is -7.1% y/y. This week marks the end of peak Q1 earnings reporting season.

Additional Themes

Positive Signals on US-China Trade – The Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call overnight 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.” This comes after President Trump has referenced the potential breakdown of the Phase One US-China trade deal in recent days, indicating that more details of Beijing’s compliance will be released over the next few weeks. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are reportedly mulling retaliatory options.

Looking Ahead – With Q1 earnings reporting season past its peak, the focus will shift back toward economic data, which features US retail sales and industrial production for April. Both are naturally expected to reflect significant downside, but market participants have been taking historically impaired economic data in stride over the past month. Consumer sentiment for May will provide a more contemporaneous datapoint as analysts ponder prospects for recovery. Key Chinese economic data for April is also due and is forecast to show a moderate rebound.

Summary and Price Action Rundown

Global risk assets are rebounding from yesterday’s slide this morning as rising oil prices again provide support for sentiment ahead of more dismal US unemployment data. S&P 500 futures point to a 1.4% higher open, which would erase yesterday’s 0.7% loss that put year-to-date downside at 11.8% and the decline from February’s record high at 15.9%. Asian stocks were mixed overnight but EU stocks are rallying. This week’s crude oil rebound, which stalled yesterday and capped the broader rally in risk assets, is resuming this morning on Saudi pricing news (more below). After climbing moderately earlier this week, longer duration Treasury yields are stable this morning, with the 10-year yield at 0.70%, while a broad dollar index is consolidating its recent gains as the renminbi steadies and oil-dependent currencies gain.

Oil Price Bounce Supports Growth Optimism Ahead of Dire US Labor Figures

Crude prices remain in focus this week as investors grope for forward-looking indicators of the anticipated global economic recovery while monitoring labor market data for any hints of improvement. In keeping with the pattern from the first three days of this week, crude oil prices have helped set the tone for broader risk assets overnight. Both international benchmark Brent crude and US benchmark WTI are soaring this morning amid reports that Aramco, the Saudi oil giant, is slashing discounts for its customers in Asia and Europe. Analysts indicate that this move signals an intent by Saudi officials to support prices but is also indicative of improving demand in Asian and EU markets. For context, crude oil prices staged a sharp rebound from multi-decade lows on Monday and Tuesday as traders focused on the prospects for rising demand due to economic reopening, but relapsed to the downside yesterday amid more dispiriting stockpile data showed a brimming US surplus. With oil prices suggesting a brighter economic outlook, investors are poised to take another week of dismal US initial jobless claims numbers in stride this morning, as has been the trend in recent weeks. New unemployment filings for the week ending May 2 are forecast to ebb to 3 million, down from 3.8 million the prior week. This comes after yesterday’s ADP private payrolls figures registered 20.2 million layoffs in April, after shedding an upwardly revised 149k in March, which was in-line with a forecast of 20 million. This was the largest single-month decline ever in employment. Friday’s nonfarm payrolls are expected to show similar job losses, with consensus of 21.3 million.

Peak Earnings Reporting is Winding Down on a Generally Optimistic Note

With first quarter (Q1) earnings season entering its later stages, yesterday evening’s releases fit the broader pattern of unevenness and uncertainty, but with a cautiously optimistic outlook. PayPal released its earnings report last evening after the market closed, with the downside surprises in earnings and revenue overbalanced by encouraging signs of a rebound. Specifically, PayPal noted a 17% revenue increase in April and 135% increase of new users during the month. Shares are up 9.0% in the pre-market. Like many other companies, PayPal also withdrew its full-year guidance. Ahead of earnings, PayPal stock was down 18.6% year-to-date (ytd). T-Mobile, Hyatt Hotels, and Lyft also released their earnings reports last evening. Although T-Mobile missed on revenue and Hyatt missed on earnings, the three otherwise beat consensus estimates. Though T-Mobile shares are lower in early trading, Hyatt is flat and Lyft is up 14.1%, though both Hyatt and Lyft remain in deeply negative territory at -44.0% and -39.3% ytd, respectively. Hyatt’s revenue fell 20% year-over-year (y/y), and as of April 30 roughly 35% of the company’s hotels were closed. Hyatt has raised capital through a bond sale, cut costs by closing hotels, and began furloughing its employees. Lyft followed suit, reducing its more than 5,000-person workforce by 17% and furloughed nearly another 300. The company stated it expected to “cut its annualized fixed costs by $300 million by the end of the year.” The outlook for both Hyatt and Lyft hinges upon the lifting of shelter-in-place orders and peoples’ comfort in returning to using their services. With 388 of the S&P 500 companies having reported, 61% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.3% above estimates thus far, while earnings growth is -8.2% y/y.

Additional Themes

US-China Trade Deal in Focus – Yesterday, President Trump again referenced the potential breakdown of the Phase One US-China trade deal, indicating that more details of Beijing’s compliance will be released over the next few weeks. Reports indicate that US Trade Representative Lighthizer and Chinese Vice Premier Liu will participate in a call next week. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are mulling retaliatory options.

Commerce Set to Soften Huawei Stance – There are reports that the Department of Commerce is close to signing off on a new rule that will allow US companies to work with China’s Huawei Technologies on setting standards for next generation 5G networks.

Summary and Price Action Rundown

Global risk assets are extending this week’s rally this morning despite mixed earnings as efforts around the world to restart economic and social activities, alongside rising oil prices, undergird recovery optimism. S&P 500 futures indicate a 0.7% higher open, which would extend the index’s two-day gain of 1.3% that put year-to-date downside at 11.2% and the decline from February’s record high at 15.3%. EU and Asian stocks were mixed. The oil price rebound has taken center stage this week, with its conspicuous surge from recent multi-decade lows lifting energy sector stocks, nudging longer duration Treasury yields higher, with the 10-year yield at 0.68%, and spilling over into broader risk sentiment. The dollar is extending gains.

Investors Focus on Recovery Amid Grim Economic Signals

Despite the ongoing drumbeat of dismal growth figures, loosening social distancing guidelines in the US and around the globe have supported risk sentiment this week, with rising oil prices playing a key role in stoking optimism. Vice President Pence confirmed that the White House was discussing the dissolution of the coronavirus task force, though Dr. Fauci, the leading White House advisor on the pandemic, disputed this claim. Nevertheless, the task force is clearly directing its attention toward the process of loosening restrictions and California will begin its reopening process on Friday. Contemporaneous economic figures remain dire, with today’s reading of ADP private US payrolls for April expected to show the US economy shedding 21 million jobs and Friday’s nonfarm payrolls expected to show similar losses. EU data overnight was deeply depressed with the regional service sector purchasing managers’ index at 12.0 for April, rendering a composite reading of 13.6 when combined with the manufacturing PMI. March readings of German factory orders and EU retail sales sank 16.0% and 9.2% year-on-year (y/y), respectively. The European Commission downgraded their economic outlook for the year, slashing the EU’s 2020 GDP projection to -7.7%, with Italy, Spain, and Greece suffering contractions of over 9%, and warned of risks to the stability of the bloc. Nevertheless, with investors firmly focused on the prospects for recovery and groping for clues on its trajectory, the sharp rise in oil prices this week has been a frequently-cited factor in kindling hope for a decent rebound (more below).

Equities Remain Buoyant Amid Mixed Earnings

As first quarter (Q1) earnings season entering its later stages, the S&P 500 has remained supported despite decidedly uneven results, a number of high-profile misses, and low visibility into the coming quarters. Last evening, Disney released its Q1 figures, which missed consensus earnings but handily outpaced revenue projections. The pandemic hit many of Disney’s key business branches quite hard, including theme parks, cruises, and movie studios, with management estimating $1.4 billion in lost revenue, though the sharp rise in Disney+ subscriber growth provided some offset. Shares are 2.1% lower in pre-market trading, which would deepen year-to-date (ytd) losses of 30.1%. Allstate issued spotty results as well, topping earnings forecasts but missing on revenue. Earlier this quarter Allstate announced that it would issue a payback program sending money back to auto insurance payers of over $600 million and has paid $210 million. Shares are 1.8% higher in early trading, set to pare ytd downside of 9.2%. Meanwhile, the energy sector has been among the top performing segments of the S&P 500, though that has more to do with the sharp rebound in oil prices than stellar earnings from industry leaders. Still, Occidental Petroleum topped estimates for both earnings and revenue in Q1, sending its stock 6.0% higher in pre-market trading after falling 62.8% ytd. With 347 of the S&P 500 companies having reported, 61% have surprised to the upside on sales and 67% have topped earnings expectations. Aggregate earnings have come in 0.3% below estimates thus far, while earnings growth is -8.5% y/y. Today, GM, PayPal, and Lyft report.

Additional Themes

Oil Prices Extend Rally – After plumbing two-decade lows over the past month, crude oil prices have staged a sharp rebound this week as traders focus on the prospects for rising demand due to economic reopening alongside contracting supply, with falling output figures for key producers. For context, crude prices had struggled to find a floor despite the cessation of the price war between Saudi and Russia and deepening output curb commitments by OPEC and its allies, with traders focused on depressed demand and dwindling storage for the growing glut.

Partisan Divisions Deepen Ahead of CARES 2.0 – Yesterday, Senate Leader McConnell reiterated his advocacy of a “pause” in fiscal support efforts while President Trump is pushing for a payroll tax cut, and reports indicate that capital gains tax cuts as well as corporate liability limitations for operations during the pandemic are also on the White House wish-list. Meanwhile, Speaker Pelosi is working to finalize the House Democrats blueprint for the CARES Act 2.0 in an effort to focus this next round of stimulus on aid for states and localities.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning despite mixed earnings as investors focus on efforts to restart economic and social activities in various locations globally. S&P 500 futures point to a 1.1% higher open, which would extend yesterday’s 0.4% gain that put year-to-date downside at 12.0% and the decline from February’s record high at 16.1%. US equities shook off early losses yesterday as rising oil prices and rallying tech stocks led to the upside. Some overseas equity markets remain closed for holidays but EU and Asian stocks were mostly higher overnight. Longer duration Treasury yields have edged above their recent lows, with the 10-year yield at 0.65%, while a broad dollar index is stable despite euro underperformance (more below). Crude oil prices are rising more steeply from 20-year lows.

Investors Focus on Easing Restrictions in Some Locations

Analysts are pointing to the loosening of social distancing guidelines in Hong Kong and encouraging signals from Dr. Fauci in the US as helping lift risk sentiment over the past day. Hong Kong’s local benchmark Hang Seng stock index rallied 1.1%, though it remains 15.3% lower on the year, after Chief Executive Lam announced earlier today that social distancing measures are being loosened in the territory. With a dwindling infection rate and the general lockdown expiring on Thursday, Hong Kong is preparing to reopen a broad array of businesses, including restaurants and gyms, but with continuing restrictions on proximity of patrons and mandated use of masks. Schools are set to reopen in phases beginning later this month. Regional examples suggest little clarity on the outcome, as South Korea has continued to keep the virus contained during its gradual reopening process, while Singapore was forced back into lockdown after a secondary spike in cases. Meanwhile, Dr. Fauci, the leading White House advisor on the pandemic, stated in an interview that certain regions and counties in the US should be able to “pull back” some of the restrictions meant to limit the spread. California will begin its reopening process on Friday.

Earnings Continue to Emphasize Stark Disparity of the Virus Impact

First quarter (Q1) earnings remain uneven, as investors ponder the ability of companies to adapt ongoing Covid-19 risks. After garnering some negative press last month by taking and then returning Payroll Protection Program money, Shake Shack released mixed Q1 results after yesterday’s market close, beating on earnings but missing on revenue. Still, its shares are trading higher as management guidance focused on reopening plans and emphasizing drive-thru options. The company reported a 12.8% drop in same-shack sales, attributable to a steep decline in dine-in areas due to the pandemic restrictions. CEO Randy Garutti stressed the company remains flexible and has started the rehiring process, but withdrew full-year guidance due to uncertainty around the pandemic. Shares are up 3.5% in pre-market trading, which would pare the year-to-date (ytd) decline of 11.4%. Meanwhile, Diamondback Energy also topped earnings estimates but undershot revenue projections in its report last evening. As a response to the oil price volatility and general uncertainty in the markets, Diamondback plans to “voluntarily curtail 10-15% of expected May 2020 oil production” where it deems efficient to do so, “reduced full year 2020 capital budget by over 40%”, and will reduce drilling rigs by half by Q4. Pre-market gains of 5.5% represent only a modest retracement of Diamondback shares’ -54.2% ytd performance. Lastly, AIG missed analysts’ projections for earnings and revenues and detailed significant investment losses, leaving its stock price unchanged in early trading against a ytd loss of -53.1%. With 299 of the S&P 500 companies having reported, 62% have surprised to the upside on sales and 67% have topped earnings expectations. Aggregate earnings have come in 0.3% below estimates thus far, while earnings growth is -8.9% y/y. This week features Disney and DuPont today, with Hilton, Prudential, CVS, GM, Uber, and PayPal later this week.

Additional Themes

German Legal Challenge to ECB Program – One of the primary monetary support measures enacted by the European Central Bank (ECB) to counteract the impact from Covid-19 is under scrutiny by Germany’s Constitutional Court. The court’s ruling held that the ECB must provide justification of its regional sovereign bond purchases under the €750 billion Pandemic Emergency Purchase Program (PEPP). Although analysts are skeptical that this ruling will have any concrete impact on the program, the uncertainty is denting the euro, pushing it 0.6% lower versus the dollar this morning toward the lower end of its recent trading range, while peripheral EU bonds are selling off moderately, with Italy a notable underperformer.

Hardening US / China Rhetoric – Chinese official media outlets pushed back on US officials’ accusations that the Covid-19 virus emanated from a lab in Wuhan. But analysts note that singling out Secretary of State Pompeo rather than President Trump suggests restraint on the part of Beijing despite an intensifying war of words.