Today’s podcast

https://soundcloud.com/user-291029717/shares-rise-on-vaccine-hopes-then-fall-on-china-tensions?in=user-291029717/sets/the-morning-call

Overview: Can’t stand losing you

• S&P 500 makes a COVID-19 high, but then ends the day in the red. NASDAQ hits another record high, but then also ends in the red
• Mixed US virus news. California announces new restrictions
• US takes a harder line on China’s  claims to the South China Sea
• AUD and NZD still facing strong resistance at 70c and 66c respectively
• NAB Survey and AU payrolls today followed by China trade data, ZEW and NFIB surveys

• • JPMorgan, Citigroup and Wells Fargo are the US earnings reporting highlights

US equities started the new week on a positive note with the S&P 500 trading to a new a COVID-19 high early in the session. But mixed US  virus news and renewed heightening US-China tensions soured the mood in the US afternoon with both the S&P 500 and NASDAQ ending the day in the red. AUD and NZD continue to find resistance at 70c and 66c respectively and end the day a tad softer.

It was all looking so good at the start of the US session

European equities had embraced the positive lead from Asia and both the S&P 500 and NASDAQ were enjoying a good start to the new week, up close to 1.5%. This meant that the S&P briefly traded to a new COVID-19  high of 3235 and the NASDAQ was also printing a new record high. Tesla, the new darling in the US equity, was also on a tear, up 16% , after gaining 11% on Friday.

Earnings season kicked off overnight

With PepsiCo reporting better-than-expected earnings and revenue for Q2.  Earnings for the S&P 500 are expected to fall 44.6% in Q2 from a year ago (-55% for the Eurostoxx), although analysts have been revising their expectations higher over recent weeks.  With investors already well-conditioned for a big fall in earnings in Q2, a lot of the focus is expected to be on the earnings outlook and guidance from company executives as the global economy reopens.  JP Morgan, Citi and Wells Fargo report tomorrow

It is hard to attribute a specific trigger for the turn in sentiment that followed in the US afternoon trading session, but it seems that California virus news and US China tensions were the main culprits.

We had good news on the COVID-19 vaccine front

With Pfizer and BioNTech’s experimental vaccines granted fast track designation by the US regulator and phase three trials are now expected to commence later this month. Florida reported over 12,000 new cases on Monday, but the proportion of people testing positive with the virus continued to drift lower (to 11.5%, a two-week low).  The spread of COVID-19 also looks to have peaked in another of the US hotspots, Arizona, which reported its lowest level of new cases in a fortnight (1,357).  In New York City there were no COVID-19-related deaths reported on Saturday, the first time for months.

Against this backdrop of positive news

Virus statistics in California were disappointing. After reporting record daily levels of infection on Saturday, California Gov. Gavin Newsom ordered the entire state to close indoor activities in restaurants, bars, museums, zoos and movie theatres. He enacted further restrictions on activities in counties that are on the state’s monitoring list, which has grown to include 80% of the state’s population. California accounts for about 15% of the US economy, so the introduction of containment measures is likely to have a hindering effect on the recent improvement in US economic activity readings.

Meanwhile US-China tensions continue to go from bad to worst

Yesterday China announced sanctions on several US officials, including senators Rubio and Cruz, following the US imposed sanctions on Chinese officials last week.  Also in a significant change of position, late in the US session, US Secretary of State Michael Pompeo released a statement rejecting China’s expansive claims in the South China Sea. Pompeo’s statement noted that “We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them,”. In the past the US has called  for protecting “freedom of navigation” in the South China Sea, the overnight statement is now taking a position against China on the territorial disputes in the region.

The rates market continues to show very little reaction to the swings in equity sentiment

Which saw the VIX index jump from 27.39 to 32.19 in the overnight session. The US 10-year Treasury yield closed the sessions at 0.6184%, about 2.5bps lower relative to Friday’s closing levels and remains firmly contained within its 0.55% – 0.75% trading range.

Early in the session when risk sentiment was riding high

The USD index (BBDXY) reached a one-month low, but a reversal in the equity market triggered  a safe haven bid helping the greenback recover almost across the board. The Euro and Danish Krone, were the exception up 0.39 and 0.43% respectively. Gains in the euro have come ahead of the EU leaders’ summit at the end of the week, where countries will try to find agreement over the proposed EU recovery fund.  The proposal is for the bulk of the €750b fund to be distributed as grants, rather than loans, to the worst-affected (and already debt-saddled) countries in the region, like Italy, although there is reportedly opposition from several Northern European countries.  The JPY and GBP are both lower on the day ( -0.41% and -0.55% respectively), with the latter possibly affected by market concern over the lack of progress in Brexit negotiations.

AUD and NZD continue to find solid resistance around the 70c and 66c mark

Overnight both pairs came close to trading above their respective big figures, but true to form the negative turn in equity sentiment weighed on both antipodean currencies. AUD now trades at 0.6940, down -0.14% over the past 24 hours and NZD trades at 0.6545, down 0.53%.

Coming up

• This morning Australia gets its weekly consumer sentiment reading (9:30 AEDST) followed by the NAB Business Survey and Weekly Payroll Jobs and Wages data for June 27, both out at 11:30 AEDST.
• Yesterday the ABS’ latest COVID-19 household survey for 24-29 June revealed employment gains likely slowed even before the Melbourne lockdown. The survey results also imply hours worked stayed steady or even rose as the share of people working paid hours increased. This survey, however, has large margins of error so today’s payrolls data should shed further light onto whether employment gains did indeed slow late in June.
• Sometime today we should also get China’s June trade data for June (Trade Bal. exp at $59.6bn vs $62.9bn prev.). Japan final May industrial production numbers are out this afternoon followed by UK May GDP data (16:00 AEDST, 5%mom exp. Vs -20% prev.) and Germany’s July ZEW survey (19:00 AEDST). Germany also gets its final June CPI print and the Eurozone releases May industrial production numbers.
• Tonight, the June NFIB small business optimism survey is out in the US (20:00 AEDST 98 exp. vs 94.4 prev.) followed by CPI numbers for June (22:30 AEDST, Core 0.1% vs -0.1% prev.). Fed Bullard is on speaking duties while JPMorgan, Citigroup and Wells Fargo are the US earnings reporting highlights.

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets