The Market Today
Small Business Confidence Beats Expectations; Brexit Negotiations Resume with a Thud
by Craig Dismuke, Dudley Carter
Small Business Confidence Beats Expectations, Positive Indicator for Trump Re-Election: Small business sentiment improved more than expected in August, up from 98.8 to 100.2. The most positive aspect was another improvement in the index tracking plans to increase employment (+3 points). Also better was the earnings outlook, up 7 points but remaining negative at -25. The most concerning underlying metric, those expecting higher real sales fell 2 points and remains tenuous at +3. Despite the recent pandemic-induced collapse, business confidence is now up 5.3 points since President Trump’s election. Dating back to 1980, Presidents Trump and Obama oversaw the largest improvements in small business confidence, 5.3-point increases from pre-election levels, at this point in their tenures (see Chart of the Day).
Global Markets Retreat after Upbeat Start in Asia: While Asian equity markets closed with solid gains, other risk assets have extended last week’s retreat as Europe grapples with its new virus wave and U.S. tech shares continue to unwind their astronomical post-pandemic gains. The MSCI Asia Pacific index rose 0.4% but the Stoxx Europe 600 was 1.4% weaker and near its lows of the day around 7 a.m. CT and U.S. futures were markedly lower. The rate of virus spread in Europe remained a concern as France, Germany, and the U.K. reported concerning daily case increases. The U.K. FTSE 100, however, was outperforming with a smaller loss as a slumping pound helped stabilize the export-focused index. The British currency fell sharply after a report indicated PM Johnson was considering altering the Brexit withdrawal agreement and willing to walk away from negotiations altogether, risking an end to the transition period without a trade agreement in place.
Treasury Yields Fall and Flatten Amid Continued Risk-Off Bid: While the risk-off tone had weighed broadly on sovereign yields, the latest concerns around Brexit pushed U.K. yields down the most in Europe. The 10-year gilt yield was down 5.6 bps while Germany’s 10-year yield had dropped 3.7 bps. The oil market was in focus as the sell-off in equities also led to a nearly 6% decline in U.S. WTI and a 4% drop for Brent crude. The better-than-expected small business confidence reading did little to cheer up U.S. assets, with futures on the Nasdaq tumbling more than 3.2% at 7:30 a.m. CT and S&P 500 contracts down more than 1.3%. The Dow, shielded more from tech after Apple’s stock split, was 0.6% lower. Treasury yields were down notably and the curve was flattening. The 2-year yield inched 0.6 bps lower to 0.14% while the 10-year yield slid 4.3 bps to 0.68%.
ICYMI – September 4, 2020 Weekly Market Recap: Last week’s market story was a tale of two halves as yields reversed higher Friday following a sharp fall in unemployment while equities ended lower after correcting sharply Thursday from a record level. Longer Treasury yields drifted lower for the first four days of the week even as the S&P 500 set records on Tuesday and Wednesday. The persistent drop in yields unwound the prior week’s rise following the Fed’s shift to a policy approach that targets inflation that averages 2% over time. Vice Chair Clarida clarified on Monday that the framework change meant that “low unemployment…by itself” would no longer “be a sufficient trigger for policy action.” In that regard, longer Treasury yields were jolted higher Friday after unemployment fell from 10.2% to 8.4%, well below the 9.8% expected. With the Fed committed to keep rates low until sustained inflation pressures appear, the curve steepened the most in a single day since June 4. Friday’s fierce rise in yields was even more glaring given that it occurred amid a correction in the stock market. After rising uninterruptedly for weeks and setting a new record on Wednesday, tech led U.S. equities in the worst sell-off since early June on Thursday as momentum reversed. Broadly speaking, last week’s economic data signaled the economic recovery has continued but appears to have leveled off. Click here to view the full recap.