A few weeks ago we proposed that what "Phase 1 trade deal hopes" were for 2019, so "Economic Recovery hopes" would be for 2020, and the overnight session was just another indication of that, and after sliding back under 3,000 just before the Tuesday close on renewed concerns about a US escalation over Hong Kong, S&P futures and European stocks stormed higher because, as Reuters put it "investors focused on progress in reopening economies" while an avalanche of fiscal stimulus including 117 trillion yen out of Japan and €750 billion out of Europe, helped spark animal spirits. The Euro jumped above 1.10 for the first time since March, Treasuries slumped further while gold tumbled below 1700.
The pattern is so simple, even an economist can spot it, in this UBS' global wealth chief economist Paul Donovan:
Today is following the standard pattern—rhetoric between the US and China is ignored, and optimism over economic stimulus is the focus. US President Trump promised unspecified action against China by the end of the week—but markets cannot be expected to pay attention to every comment or Tweet on the Trump Twitter Feed. That would be exhausting.
Despite dismal economic data and corporate earnings, unprecedented monetary and fiscal stimulus, the easing of lockdowns and optimism about an eventual COVID-19 vaccine have powered a rally, helping the S&P 500 end at its highest level since early March on Tuesday. On Tuesday the benchmark index, however, closed just short of 3,000 points, a key psychological level, after President Donald Trump said the United States would announce before the end of the week its response to China’s planned national security legislation for Hong Kong. Those concerns were quickly extinguished overnight as a new wave of buying emerged in the overnight session.
At 8 am ET, S&P 500 e-minis EScv1 were up 1.16% at 3025, after the S&P500 closed up 1.23% at 2,991.77 on Tuesday. Travel-related stocks, which were among the worst hit in the sell-off earlier this year, continued to outperform. United Airlines Holdings, American Airlines Group rose more than 7% in premarket trade. Planemaker Boeing is expected to announce U.S. job cuts this week, people briefed on the plans and a union said. Its shares rose 3.1%. Walt Disney was set to announce its proposal for a phased reopening of its Orlando, Florida, theme parks to a local task force on Wednesday. Disney shares gained 1.9%.
As Bloomberg writes, "Investors have taken daily escalations in US-China friction in stride, including possible sanctions over Beijing’s crackdown in Hong Kong, as they drive global stocks to levels not seen since early March on hopes that economies are beginning to recuperate after a deep downturn."
In Europe, the Stoxx 600 Index was headed toward its third daily increase and Italy’s government bonds rose following news the European Commission’s package of grants and loans would total up to 750 billion euros, in an unprecedented push to overcome the region’s deepest recession in living memory.
Earlier in the session, Asian stocks closed mixed in the wake of the latest Sino-American flare-up, and China’s yuan slipped, nearing its weakest level on record against the dollar. India's S&P BSE Sensex Index and Japan's Topix Index rose, and Singapore's Straits Times Index and Hong Kong's Hang Seng Index fell. The Topix gained 1%, with Torex Semiconductor and J-Lease rising the most after Bloomberg reported that the Abe administration is compiling a new 117 trillion yen ($1.1 trillion) stimulus package. The Shanghai Composite Index retreated 0.3%, with Kingfa Sci & Tech and Zhejiang Jiuzhou posting the biggest slides.
The recent equity rally "is an indication that investors are getting optimistic about the reopening of the economy and the drug-treatment development,” Katerina Simonetti, senior portfolio manager at UBS Private Wealth, said on Bloomberg TV. “We hope that it will eventually lead to a normalization in the market, but we have to keep an eye on the re-emergence of virus cases.”
In rates, Treasuries gave back earlier gains after news that the European Commission aims to mobilize EU750b for European recovery, including EU500b in grants and EU250b in loans. Yields flipped back to cheaper on the day across a slightly flatter curve. Stocks remain elevated, also capping Treasuries, with as S&P 500 futures extend beyond 3000 mark during Asia session. U.S. auctions resume with 5-year note sale for a record size $45b ahead of a 7-year offering Thursday. Yields out to seven years are cheaper by ~1.6bp vs. Tuesday close, while long-end yields up slightly less, flattening 5s30s by 1bp; while 10-year yields hover around 0.71%.
In FX, the dollar gave up earlier gains and many risk-sensitive G-10 currencies swung from declines to advances gains against the greenback as risk appetite picked up in the European session; the Swiss franc was the worst performer as it sold off amid a squeeze versus the euro. The euro rebounded from an early drop, rising a second day; Spanish, Portuguese long-end debt outperformed euro-area peers amid a bid for duration and after Spain didn’t mandate a bond syndication this week. The pound erased most losses, after earlier falling against the dollar as domestic political pressure on Prime Minister Boris Johnson intensified, with the government moving nearer the next round of Brexit talks with the European Union. The Chinese yuan dropped as the Trump administration weighed a range of sanctions against China and protests returned to the streets of Hong Kong.
In commodities, WTI crude oil was steady at about $34 a barrel in New York after declining modestly from the highest settlement in 11 weeks on signs Russia was planning to start easing supply cuts from July, while tensions between the U.S. and China escalated amid the specter of sanctions. Gold briefly dropped below $1,700 before recovering some losses.
U.S. economic data calendar includes May Richmond Fed manufacturing index at 10am ET; GDP, durable goods orders, personal income/spending, PCE deflator, MNI Chicago PMI and University of Michigan sentiment also this week
- S&P 500 futures up 0.8% to 3,017.25
- STOXX Europe 600 up 0.5% to 350.63
- MXAP up 0.4% to 149.86
- MXAPJ down 0.08% to 475.04
- Nikkei up 0.7% to 21,419.23
- Topix up 1% to 1,549.47
- Hang Seng Index down 0.4% to 23,301.36
- Shanghai Composite down 0.3% to 2,836.80
- Sensex up 2.9% to 31,496.11
- Australia S&P/ASX 200 down 0.09% to 5,775.01
- Kospi up 0.07% to 2,031.20
- German 10Y yield fell 2.1 bps to -0.45%
- Euro down 0.1% to $1.0967
- Italian 10Y yield fell 2.4 bps to 1.379%
- Spanish 10Y yield rose 3.8 bps to 0.664%
- Brent futures down 1.5% to $35.62/bbl
- Gold spot down 0.1% to $1,708.34
- U.S. Dollar Index up 0.2% to 99.12
Top Overnight News
- The European Union’s executive arm will propose a fiscal stimulus package of 750 billion euros ($823 billion), of which 500 billion euros will be distributed in the form of grants to member states, and 250 billion euros in loans, a person familiar with the matter says, declining to be named, in line with policy. The package will be partly funded via joint debt issuance
- The euro-area economy is faring worse than hoped, facing a recession as bad as the European Central Bank’s more pessimistic forecasts, according to President Christine Lagarde. Output is set to shrink between 8% and 12%, she said, with estimates for a milder slump now “out of date.”
- The House of Representatives is poised to give final passage Wednesday to legislation that would sanction Chinese officials for human rights abuses against Muslim minorities, the latest in a series of moves by Congress and the White House to put pressure on the Beijing government
- The U.S. Treasury Department could impose controls on transactions and freeze assets of Chinese officials and businesses as China pushes a security law for Hong Kong, according to people with knowledge of the matter
- Europe’s push to revive battered economies looks to be on track, as coronavirus infections show no sign of a resurgence during the winding down of restrictions on daily life
- China’s efforts to tighten its grip on Hong Kong pose a threat to the rules-based international order, EU foreign policy chief Josep Borrell said in a letter to the bloc’s 27 foreign ministers, calling on member states to respond with a “robust” message
Asian equity markets traded indecisively for most of the session as the broad global rally stalled following the handover from Wall St, where all major indices finished positive although staggered heading into the close after reports the US is considering sanctions on Chinese officials and firms over Hong Kong, while President Trump later noted we will hear about US actions on China by the end of the week. ASX 200 (U/C) declined heavily at the open with the index pressured by weakness in the metals complex and underperformance in gold miners, although strength in energy and financials provided a cushion to help the index retrace the initial losses. Nikkei 225 (+0.7%) was temperamental with an improvement in the risk appetite seen after initial details of the 2nd extra budget were announced which is valued at JPY 117.1tln and will include direct spending of JPY 72.7tln, while PM Abe suggested they will provide JPY 140tln in financial support to companies. Hang Seng (-0.3%) and Shanghai Comp. (-0.3%) were cautious amid the heightened US-China tensions but with downside stemmed after a firm liquidity injection by the PBoC and as participants digested the latest Chinese Industrial Profits data for April which showed a decline of just 4.3% compared to the 34.9% slump in the prior month. Finally, 10yr JGBs were lower despite the tentativeness in the region with prices subdued amid the lack of BoJ presence in the markets and anticipation of increased supply with Japan’s 2nd extra budget to involve an additional JPY 31.9tln of JGB issuances to push the total issuances for the current fiscal year to JPY 210tln.
Top Asian News
- Hong Kong Police Arrest More Than 240 in Wednesday Protests
European equities have kicked the session off on the front-foot once again (Eurostoxx 50 +1.9%) in a continuation of recent gains with mounting US-China tensions unable to curtail momentum; and further support arising most recently from reports around the EU recovery fund proposal – to be formally unveiled later today. Instead, the composition of today’s movers and shakers across the continents takes a similar form to those yesterday with travel & leisure names continuing to benefit from ongoing reopening optimism with recent easing of lockdown measures not currently triggering any material pick-up in COVID-19 cases/deaths in the region. As such, Tui AG (+20.4%) sit at the top of the leaderboard once again with IAG (+4.2%) shares also extending on yesterday’s gains and the troubled cruise-line sector seeing some reprieve with Carnival shares up over 8%. Elsewhere, banking names are firmer this morning, in-fitting with price action in their transatlantic counterparts yesterday on Wall St. with upside seen for the likes of RBS (+8.6%), BNP Paribas (+8.4%), SocGen (+9.4%), Barclays (+7.8%), Commerzbank (+7.7%), BBVA (+4.6%). Renault (+15.2%) and Peugeot (+8.2%) are benefiting from yesterday’s announcement of a EUR 8bln support package from the French government with the former also reportedly mulling potential cost savings of EUR 2bln by 2024. To the downside, underperformance can be seen in defensive names with health care the laggard in Europe, whilst IT names are also seen lower with Infineon (-2.0%) shares hampered by the Co.’s decision to raise capital.
Top European News
- Virgin Atlantic Suitors Narrow With Clock Ticking on Rescue
- PharmaSGP to Sell Stock in Frankfurt IPO as Markets Heat Up
- New CEO of Norway’s $1 Trillion Fund in Make-Or-Break Moment
- Denmark Told It Can Start Winding Down Coronavirus Aid in July
In FX, consolidation saw the DXY back with a 99.000 handle in APAC trade following yesterday’s heavy selling. The index remains choppy throughout the session as it hit a high of 99.350 before declining on initial details of European Recovery Fund, with losses prompting the DXY to relinquish the round figure to a low of 98.710. Meanwhile, the Yuan continued to decline through late APAC hours after US President Trump said US actions regarding China will be unveiled by the end of the week, whilst sources noted US is mulling sanctions on Chinese officials and firms over Hong Kong. USD/CNY rise to a whisker from 7.1600 (vs. low 7.1350) with the PBOC issued a firmer fix after the dollar decline. USD/CNY sees its 2019 peak at 7.1844 whilst its offshore counterpart resides north of 7.1700 (vs. low 7.1430) ahead of its record high at 7.1965. Focus today will remain on US-Sino developments alongside the unveiling of the EC Recovery Fund proposal.
- EUR, GBP - The Single Currency fought back against the Dollar after reports emerged the European Commission is to propose EUR 750bln for the European Recovery Fund, comprising of EUR 500bln in grants and EUR 250bln in loans. ECB President Lagarde did little to dent the EUR but posited that the ECB’s mild GDP scenario of -5% is outdated – with the metric likely in the range of the medium (-8%) to severe (-12%) scenarios. ECB aside, eyes are on the unveiling of the European Recovery Fund later in the day, with focus on sentiment across EU members, namely the North and South, as the Commission’s proposal is unveiled. EUR/USD took out the 1.1000 handle alongside its 200 DMA (1.1011) having topped its 100 DMA (1.0957) and with EUR 1bln option expiries scattered between 1.0950-60, with a further EUR 1.8bln around 1.0990-1.1000. Meanwhile, Sterling remains lethargic around 1.2300 vs. the USD as overnight weakness emanated from reports UK Chancellor Sunak is set to announce this week that the government will soon stop allowing companies from placing employees on the furlough scheme. Cable trades in the middle of a 1.2290-1.2350 parameter ahead of a potential barrier at 1.2360 (50% Fib from 30 Apr-18 May move).
- AUD, NZD, CAD - High-beta FX largely mirrors USD action, but the Kiwi outperforms as the AUD/NZD cross homes in on the 1.0700 mark to the downside. Meanwhile the Loonie and Aussie initially eke mild gains before the Dollar saw broad losses. NZD/USD reclaimed 0.6200 and topped its 100 DMA around 0.6203 (vs low 0.6175). The Aussie hoverd on either side of 0.6650 before taking out its 200 DMA (0.6658) to the upside and matching yesterday’s high prints at 0.6675. USD/CAD holds onto a bulk of yesterday’s losses and remains sub-1.3800, with the next support point seen at the psychological 1.3750 ahead of 1.3700 mark which coincides with the pair’s 100DMA.
- JPY, CHF - Mixed trade for the traditional safe-haven FX with considerable weakness seen in the Franc relative to the peers amid potential SNB presence. EUR/CHF eyes 1.0650 to the upside whilst USD/CHF trades north of 0.9700 vs. lows of 1.0587 and 0.9650 respectively. The JPY meanwhile remains flat on either side of 107.50 and within a tight 25-pip or so range awaiting fresh fundamental developments and a clear risk tone.
In commodities, WTI and Brent front month futures see a session of modest losses thus far as the July contracts hover around USD 34/bbl and USD 35.75/bbl respectively – both within tight ranges of less that USD 1/bbl, and seemingly deriving support from general sentiment. Eyes now turn to the upcoming OPEC meeting starting June 9th, a day after the proposed JMMC meeting – with focus on the producer’s assessment of the oil market and effectiveness of the current output pact. Participant will also be on the lookout for countries that voice for an extension of current curtailments. Aside from that, US-China developments remain in focus whist the EC Recovery Fund proposal could prove a sentiment risk for complex, whilst the weekly Private Inventory figures will be released later today on account of Monday’s Memorial Day Holiday. Spot gold prices mirrors USD action and threatens a test of USD 1700/oz to the downside (vs high USD 1715/oz). Copper prices tracked Chinese stocks and the yuan as US-China tensions continue to mount.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -2.6%
- 10am: Richmond Fed Manufact. Index, est. -40, prior -53
- 12:30pm: Fed’s Bullard Discusses Economy During the Pandemic
- 2pm: U.S. Federal Reserve Releases Beige Book
- 2pm: U.S. Federal Reserve Releases Beige Book
- 3pm: Fed’s Bostic to Take Part in Virtual Discussion on Economy
DB's Jim Reid concludes the overnight wrap
While we have stopped the Corona Crisis Daily, we have updated our tables from it and have published them in the pdf of this report today. We may do it every day (or every few days) depending on the demand. Let us know. The latest highlights are that Brazil is now the second most infected country in the world in terms of overall recorded cases with nearly 391k. Until Brazil’s total infections passed New York this past Sunday, the US state has had more total cases than any country in the world since passing Italy in early April. Recently however, case growth and new fatalities in New York State look more akin to Germany and Southern Europe and are now in the 0.1-0.5% range. See the full tables in the pdf for this and more.
Global equities rose yesterday as risk assets surged following the holiday weekend in the UK and US. The positive sentiment was driven by a mix of economic data turning better, more and more economies reopening, the possibility for additional stimulus on both sides of the Atlantic, and hopes over another potential vaccine and treatment from reports out of Merck. Though rising US/China tensions in the last couple of hours of trading took a little shine off the session.
The S&P 500 had rallied roughly +1.8% until the last hour of the day, trading through the 3000 level we first hit in July 2019 but last saw on 5th March, 4 days before Italy locked down on the 9th. The S&P closed at +1.23% and back below 3000 though as headlines materialised suggesting that the Trump administration were considering sanctions over the recent Chinese actions surrounding Hong Kong. Later on Bloomberg reported that amongst the measures the US is considering one is that the Treasury Department could impose controls on transactions and freeze assets of Chinese officials and businesses and added that other measures under consideration include visa restrictions for Chinese Communist Party officials.
Notwithstanding the late dip, the rally saw the virus laggards take the reins, as Banks (+7.86%) and Autos (+4.70%) were the leading industry groups in the US, with Technology and Healthcare the worst performers. Highlighting the lag in healthcare stocks, Merck was only up +1.17% on the news of the antiviral treatment and potential vaccine. J.P. Morgan Chase CEO Jamie Dimon made the headlines at our Deutsche Bank Global Financial Services Conference. He said that “The Fed took out the whole military and applied it. Just announcing these programs reduced spreads in the market. It’s going to save a lot of small businesses” and it’s “helping people avoid stress.” Mr. Dimon also highlighted consumer banking data that he said showed “a healthier consumer. You see that in underlying delinquencies. It’s completely different from a consumer standpoint” than what was seen during 2008. Elsewhere, the Fed’s Bullard said in an interview that although the jobless rate was 14.7% last month, “I think we will be under double digits by the end of the year.”
In Europe, the STOXX 600 was up +1.08% with 17 of 19 sectors higher on the day. Travel and Leisure was the best performing sector, up +6.94%, as news came through that the German government is planning to lift a travel warning on its citizens to 31 European countries on June 15. Chancellor Merkel’s cabinet could approve it later today.
Staying with Europe, spreads of 10yr Italian (-9.0bps), Spanish (-5.1bps), Greek (-7.7ps) and Portuguese (-8.5bps) debt to bunds had all narrowed as 10yr Bund yields rose 6.5bps to -0.429% and US 10yr Treasury yields were up +3.7bps to 0.697%.
This comes ahead of the expectation that today will see the release of proposals from the European Commission over the European recovery fund. Can they release credible proposals given the large void between the Merkel/Macron (MM) proposals and the Frugal Four (FF) counter plan? The recent tightening suggests that the MM proposal was a turning point whatever the bumps are along the way. DB’s Mark Wall suggested in his weekend blog (link here) about the FF counter proposal that the risks of delays to the fund have risen but ultimately he expects agreement on its inception. European Commission President von der Leyen speaks before the European Parliament (EP) later so it’s likely it will coincide with that. From looking at the draft agenda from the EP it looks like the action will be at around 13:30-15:00 CET.
Keeping with the stimulus theme, US Senate Leader Mitch McConnell has been one of the most reticent on the prospect of further stimulus in the US. Though in a public appearance in his home state of Kentucky, where he is up for re-election this autumn, he said, “a lot of Americans have lost their jobs, so we need to make sure we have unemployment insurance properly funded for as long as we need and that could well lead to yet another bill." Though he continues to believe that it needs to be more targeted than $3 trillion bill that the House passed 2 weeks back.
Stimulus talk is the main theme overnight too with news that the Japanese government looks set to unveil another $1.1tn package helping the Nikkei to gain +0.74%. However it’s more mixed elsewhere with the Kospi and ASX up (+0.13%) and (+0.46%) respectively, while the Hang Seng (-0.39%) and Shanghai Comp (-0.05%) are lagging as renewed protests by pro-democracy groups in Hong Kong and the sanction reports for China weigh on those markets. In FX, the onshore Chinese yuan is down -0.33% to 7.1583, the lowest in 8 months while all G-10 currencies are also trading weak against the greenback. Elsewhere, futures on the S&P 500 are up +0.63% and WTI oil prices are down -0.35% to $34.25.
In other overnight news, ECB Executive Board member Isabel Schnabel said in an interview with the FT that “If we judge that further stimulus is needed, the ECB will be ready to expand any of its tools in order to achieve its price stability objective”. Schnabel also said that “with respect to the Pandemic Emergency Purchase Programme, this concerns the size but also the composition and the duration of the program. We are ready to react to new data coming in.” The euro is trading down -0.20% as we go to print.
Economic data continued to improve from the April and March’s lows yesterday, while still showing the toll the coronavirus has caused across the global economy. The majority of data came from the US yesterday. The Chicago Fed’s National Activity Index fell to -16.74, far exceeding the -3.50 expectations and down from last month’s -4.97 reading. Only 6 of the 85 monthly indicators made a positive contribution to the diffusion index, while all 79 others were negative. Last month was already a record low for the index, but the current reading is over four times worse than the lowest past reading. On the other hand, US consumer confidence, as measured by the Conference Board’s index, rose by 0.9 points to 86.6 (87.0 expected) from last month’s revised 85.7. Interestingly, the present situation component fell further to 71.1 from 73, but was offset by a rise in expectations (96.9 from 94.3). In other somewhat good news, new home sales rose to 623k from 619k in April far exceeding the 480k expectations, though it should be noted that overall sales are down -6.2% y/y. Lastly, Germany’s June GfK consumer confidence survey rose to -18.9 (vs. 18.0 expected) up from -23.1 in May, meanwhile the business expectations improved to -10.4 in May compared to -21.4 in April.
To the day ahead now, and it is a fairly light macroeconomic data day. Though one highlight may be the Fed releasing its Beige Book, which highlights anecdotal information on the current economic conditions and can give insight into the effects of the shutdowns and what to expect as the reopening progress in the US. We will see China’s industrial profits for April and France’s May consumer confidence reading. There is a pair of data readings out of the US, the weekly MBA mortgage applications and the May Richmond Fed manufacturing index. In terms of central bank speakers, the ECB’s President Lagarde and the Fed’s Bullard will both give remarks. While the majority of earnings are behind us, we still have some major names reporting this week – today sees Autodesk and Royal Bank of Canada. Lastly, European Commission President von der Leyen speaks before the European Parliament as discussed above.