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  • Weekly market focus
  • Treasury market sees heavy auction supply plus reduced Fed buying
  • U.S. on Saturday blacklists more Chinese companies and protests break out in Hong Kong
  • Busy economic calendar today


Weekly market focus
 — The U.S. markets this week will focus on (1) high US/China tensions, (2) whether the pandemic continues to ease, allowing more areas to reopen, (3) this week’s very heavy supply of Treasury securities, (4) the tail end of Q1 earnings season with 14 of the S&P 500 companies reporting, (5) another busy week for Fedspeak, and (6) this week’s busy U.S. economic calendar.

In Europe, the focus is on the EU bailout package.  The EU’s executive arm this week will offer its own proposal as EU negotiations formally begin.  Germany and France last week broke a logjam by offering a 500 billion euro bailout fund launched under the EU budget framework with debt issued by the European Commission.

The Asian markets will continue to focus on Hong Kong tensions and accelerating US/China tensions after the U.S. on Saturday blacklisted more Chinese companies.

Treasury market sees heavy auction supply plus reduced Fed buying — The Fed trimmed its daily Treasury purchases for this week to $5 billion from last week’s $6 billion.  The Treasury last Friday said it will buy $4.5 billion per day of MBS securities this week, unchanged from last week’s level.

The Fed’s balance sheet in the week ended last Wednesday rose by +$103 billion from the previous week.  That was less than half of the $213 billion of purchases in the previous week, but was mildly higher than the levels of $83 billion and $65 billion in the two weeks before that.

Boston Fed President Rosengren on Sunday’s “Face the Nation” program said that the Fed expects to have its Main Street lending program operational within two weeks.  He said the Fed expects to have the loan documents available this week and banks then need to register with the Fed.  The markets are hoping that the Fed’s Main Street lending program will be able to help keep afloat a large number of medium-sized American companies that have seen their revenue plunge due to the pandemic shutdowns.

Mr. Rosengren, like other Fed officials, was downbeat on the economic outlook, predicting double-digit unemployment rates through the end of the year.  He said, “Getting back to the low level of unemployment we saw at the end of February probably takes either a vaccine or other innovations that make it much less risky to go out.”  Like other Fed officials, he called for more fiscal support for the economy.

The Treasury this week will sell a huge amount of securities.  The Treasury will sell its usual deluge of T-bills and will also sell a massive $147 billion of T-notes, starting with today’s sale of $44 billion of 2-year T-notes.  Today’s 2-year T-note issue was trading at 0.17% in when-issued trading late last Friday afternoon.

U.S. on Saturday blacklists more Chinese companies and protests break out in Hong Kong — The Hong Kong situation remains very tense after the Chinese government’s announcement last Friday that it will force through a Hong Kong national security law.  The Chinese legislature this week is expected to push that measure ahead.  There were protests in Hong Kong over the weekend with tear gas, water cannons, and arrests.

The Hang Seng index last Friday plunged by -5.56% on the news of the Hong Kong national security law, although the index on Monday was able to stabilize and closed the day slightly higher by +0.10%.

US/China tensions took another turn for the worse over the weekend after the Trump administration on Saturday blacklisted more Chinese companies by putting 33 more companies on the Treasury’s Entity List, thus barring U.S. companies from dealing with those companies.  That followed the Trump administration’s move on May 15 to impose more restrictions on global chip companies for selling chips to Huawei.

Adding to that, the Senate last Wednesday approved a bill that would allow Chinese stocks to eventually be delisted from American exchanges.  Also, the Senate may soon consider legislation to authorize sanctions against Chinese officials and entities that implement and enforce China’s proposed revision of Hong Kong’s security laws.

China has yet to announce any retaliation for the latest U.S. move against Huawei or the weekend list of new blacklisted companies.  China has been threatening to name U.S. companies to its “unreliable entities” list such as Apple and Qualcomm, which could mean Chinese investigations and restrictions on those companies for their sales in China.

The US/Chinese tensions have yet to sink the phase-one trade deal.  In positive news, Chinese Premier Li Keqiang told the annual gathering of parliament last Friday that, “We will work with the United States to implement the phase one China-U.S. economic and trade agreement.”  Meanwhile, White House economic spokesman Kudlow last Thursday said that the US/China trade deal is “intact” and that USTR Lighthizer and Chinese Vice Premier Liu spoke recently.  He said that China’s commodity buying has lagged a bit due to the pandemic but that China has every intention of implementing the phase-one deal.

Busy economic calendar today — Today’s March U.S. home price indexes are expected to show strength since the tight availability of supply supported home prices in March even as demand plunged.  Today’s May Conference Board U.S. consumer confidence index is expected to stabilize with a small +0.1 point increase to 87.0 after April’s -31.9 point plunge to 86.9.  Today’s April new home sales report is expected to plunge by -23.4% to 480,000, adding to March’s -15.4% decline to 627,000.

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