- Weekly global market focus
- U.S. pandemic steadily worsens
- Washington reaches crunch time on new pandemic rescue bill
- EU leaders struggle on negotiations over 750 billion euro Recovery Fund
- Q2 earnings season kicks into gear with expectations for -43% y/y plunge
Weekly global market focus — The U.S. markets this week will focus on (1) the alarming U.S. pandemic statistics and the impact on the economic recovery, (2) the first big week for Q2 earnings with 88 of the S&P companies reporting, (3) anticipation of next week’s FOMC meeting where the Fed is expected to leave its main policy variables unchanged but could turn more cautious on its economic outlook, (4) oil prices after OPEC last week approved the tapering of its production cut to 7.7 million bpd in August from 9.6 million bpd in July, and (5) the Treasury’s sale of 20-year T-bonds on Wednesday and 10-year TIPS on Thursday.
In Europe, the focus is on whether EU leaders will be able to agree on the 750 billion EU Recovery Fund. The European markets are also focused on the ongoing Brexit talks, which are scheduled to last until the end of July. Friday’s July Markit Eurozone manufacturing PMI is expected to show a +2.5 point rise to 50.0, adding to June’s sharp +8.0 point rise to 47.4.
The Asian markets this week will focus on (1) any fresh U.S./Chinese tensions over tech companies, Hong Kong, or the pandemic, and (2) the extreme volatility in the Chinese stock market. The Shanghai Composite index in the first half of July surged by +16% to a 1-1/2 year high on July 13, but has since plunged by an overall -8% to a 2-week low after Chinese authorities put a damper on the rally by cracking down on stock margin buying and by encouraging state-connected funds to engage in some selling.
U.S. pandemic steadily worsens — Some hard-hit states such as Florida, Texas, and California are under pressure to take more stringent measures to slow the rising pandemic infection rates in their states. Other states last week adopted orders requiring masks. State officials are trying to keep as many businesses open as possible, but there may be little choice but to return to stay-at-home orders in some areas if the infection rates don’t slow down soon and if hospitals become overwhelmed.
Covid infection rates in the U.S. have risen sharply in the past five weeks to a record high. The 5-day average for new daily Covid cases reached a record of 70,837 cases over the weekend, which is more than double the previous peak seen in April of about 32,000 cases that sparked the initial lockdowns, according to Johns Hopkins. India’s pandemic rates are also steadily rising, while Brazil’s pandemic rate has leveled off.
Washington reaches crunch time on new pandemic rescue bill — Talks on a new rescue bill are scheduled for today at the White House with attendees including Senate Majority Leader McConnell and Treasury Secretary Mnuchin, according to White House chief of staff Meadows. Time is running out for a deal since the unemployment bonus ends this coming weekend and since the Senate will adjourn on August 10 for its summer recess.
Mr. McConnell this week is expected to release the Senate’s version of a rescue bill, which is expected to be around $1 trillion. The House already passed a $3.5 trillion rescue bill that is waiting for a response from the Senate and the White House.
Republicans and Democrats are far apart on a deal. One of the main areas of contention is the $600 per week unemployment bonus, which expires this coming weekend (July 25-26). Democrats want to extend the bonus until the end of 2020, while Republicans want to reduce or eliminate the bonus. Another area of contention is President Trump’s demand for a payroll tax holiday. Democrats oppose a payroll tax holiday, which they view at too broad, and many Congressional Republicans are cool to the idea as well.
EU leaders struggle on negotiations over 750 billion euro Recovery Fund — EU leaders over the weekend struggled in their negotiations over the 750 billion euro EU Recovery Fund. Negotiations spilled over into Sunday night with the so-called Frugal Four holding out to reduce the size of grants being given to troubled countries.
The peripheral Eurozone bond markets last week were relatively relaxed and confident that rescue funds will be coming through. The spread of the Italian 10-year government bond yield over bunds last Friday fell to a 4-month low of 162 bp.
Q2 earnings season kicks into gear with expectations for -43% y/y plunge — Q2 earnings season kicks into gear this week with 88 of the S&P 500 companies scheduled to report. Notable reports include Halliburton and IBM on Monday; Capital One and United Airlines on Tuesday; Microsoft on Wednesday; Intel, Twitter, Pultegroup, Royal Caribbean Cruises, and AT&T on Thursday; and Verizon and Amex on Friday.
The consensus is for a plunge of -43.2% y/y in S&P 500 Q2 earnings (according to Refinitiv) due to the widespread economic shutdowns seen across the United States and the world. Looking ahead, the consensus is for earnings to fall by -24.1% y/y in Q3 and -12.9% in Q4, then recovering sharply in early 2021. On a calendar year basis, the consensus is for SPX earnings to fall -23.4% in 2020 and then recover by +31.1% in 2021.
Earnings results in Q2 will be highly variable depending on how hard a particular sector was hit by the pandemic. The earnings consensus by sector, according to Refinitive, is as follows in ranked order: Energy -159.0%, Consumer Discretionary -116.6%, Industrials -89.3%, Financials -51.7%, Materials -38.5%, Communication Services -29.8%, Consumer Staples -16.5%, Real Estate -15.8%, Health Care -8.8%, Info Technology -7.8%, and Utilities -4.5%.
