The Market Today

Market Rally Recharged by Proposal for EU Recovery Fund

by Craig Dismuke, Dudley Carter


Updated: Vining Sparks Covid-19 Chartbook (PDF) (Link)

Monitoring the Headlines on Re-opening: White House adviser Kudlow hopes to see states open “as soon as possible” to accelerate economic “green shoots”. Governor Cuomo, who rang the NYSE’s opening bell as floor trading resumed after a two-month break, confirmed the Mid-Hudson region had opened and said Long Island would open today. New Jersey said professional sports could resume some competition and schools could host graduations starting July 6. California said 47 of 58 counties met re-opening guidelines and that some opened salons on Tuesday. The state announced Monday guidelines for in-store retail and places of worship to open.

Monitoring the Headlines on Stimulus: Senate Majority Leader McConnell said state and local aid was possible in the next relief bill, although opinions remain divided. He admitted a state revenue shortfall was a concern but stressed that so too is the national debt. There appears to be a greater consensus on potential changes to the Paycheck Protection Program. House Majority Leader Hoyer said the parties were close to agreeing on changes to improve the program’s efficacy. Among those touted as under consideration: lengthening the period to incur expenses that could be forgiven from the original eight weeks; giving businesses more time to re-hire workers; extending loan maturities from two years; removing a requirement for forgiveness that limits non-payroll expenses to 25% of the loaned funds.


Home Purchase Apps Up Another 8.6%: Mortgage applications for the week ending May 22 rose 2.7% according to the MBA report. Even more encouraging, purchase applications rose 8.6%, the sixth consecutive weekly gain in applications for home purchases.  Purchase apps have rebounded 54% over the past six weeks and are now at a higher level than at any point in 2019.  This is clearly a positive sign for the housing sector.

Richmond Fed Index and Beige Book: At 9:00 a.m. CT, the Richmond Fed Manufacturing Activity Index is expected to be less negative than it was in its April reading.  At 1:00 p.m. CT, the Fed will release their Beige Book report on conditions around the U.S. in preparation for their June 10 FOMC meeting.


Unchanged Market Focus: Last week’s market drivers remained in focus Tuesday as simmering U.S.-China tensions loomed over nascent optimism stirred by economic re-opening, improvement in some May economic data, and hopes for a possible vaccine. U.S. markets opened strongly amid a global rally on additional re-opening in Japan, Germany, and Spain and a second U.S. manufacturer announcing the start of a human vaccine trial. Daily economic data confirmed a historic April contraction but offered some glimmers of hope for May (more below). Shortly after the open, President Trump extoled that stocks were “up BIG” and urged that “states should open up ASAP.”

China Tensions Overhang Optimism: However, tensions between the U.S. and China continued to simmer, driving two discernible downticks on the intraday equity chart. First, White House adviser Kudlow said the president was “so miffed with China on virus and other matters that the trade deal is not as important to him.” He also called China’s move on Hong Kong a “big mistake” and hinted that the administration may share some of the costs of companies moving supply chains back from China. The S&P 500 dipped but recovered. While still finishing up 1.2%, the index faded late after a second headline said the U.S. was pondering sanctions on China for its seeking stronger national security in Hong Kong. Treasury yields rose on the day but also finished off the highs. The 10-year yield settled 3.7 bps higher at 0.70%.


European Commission Proposes 750B Euro Recovery Plan: After Asian markets took a breather early in the overnight session with tensions high in Hong Kong, the rally in risk assets was recharged by the European Commission’s 750 billion euro proposal to aid economic recovery across the bloc. The Commission’s plan, dubbed Next Generation EU, would be funded by borrowing in the capital markets and would provide a mix of grants and loans to member countries. While reports varied across news outlets, Bloomberg reported 500 billion would be provided in the form of grants with the remaining 250 billion offered as loans. The loans would be repaid “not before 2028 and not after 2058,” according to the official statement. Leaders from the 27 EU countries are expected to discuss the plan in mid-June.

Risk Assets Extend Tuesday’s Rally: The headline lifted the Stoxx Europe 600 to a new intraday high and its strongest level since March 6. With Italy and Spain slated to receive a large share of the funds, roughly 40% combined according to the same Bloomberg report, peripheral yields fell across Europe. Italy’s 10-year yield was 6.3 bps lower while Germany’s rose 2.9 bps. After solid gains for the major indexes to start the four-day trading week, U.S. futures were again up more than 1% at 7:30 a.m. CT. Treasury yields were higher by around 2 bps across the curve.


New Home Sales Post Big Surprise: New home sales were surprisingly strong in April, recovering 0.6% last month to a 623k-unit annualized pace after tumbling 13.7% in March and 7.4% in February. Economists expected sales to nosedive more than 23% to a pace of 480k units. Activity in the West dropped 6.3% while sales in the South, which typically accounts for more than half of all transactions, rose 2.4%. The smaller Mid-West and Northeast regions gained 2.4% and 8.7%, respectively. Even with the small gain, sales were nearly 8% lower than a year ago, consistent with the 8.6% annual decline in the median price. Lower prices combined with record-low mortgage rates may help explain the resiliency of activity.

Consumer Confidence Creeps Back Up in May: Consumer confidence recovered slightly less than expected in May according to the Conference Board, but reflected the broader dynamics of hopes for a brighter tomorrow cushioning a concerning current assessment. Confidence rose 0.9 points to 86.6 but remained down 46 points from February’s 132.6. Consumers’ present assessment weakened 1.9 points and for a fourth month to a seven-year low, down nearly 60% since January. The future outlook, however, rose 2.6 points and has recovered around half of March’s drop. Consumers expect business conditions to improve and the labor market to stabilize.

Dallas Fed Manufacturing Recovers but Remains Low: The Dallas Fed’s Manufacturing Index recovered more than expected in May from April’s all-time low but remained significantly below pre-virus levels. The headline index rebounded 24.8 points to -49.2, still far from an average reading of around even at the start of the year. The key details on production, orders, and employment mimicked the headline movement with notable bounces and are consistent with an improvement in the ISM survey to a still-low level. Looking ahead, new orders and production shot back into positive territory while employment and cap-ex plans were less negative.

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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