It is going to be another rollercoaster of a week with public companies reporting Q2 earnings. Following last Friday’s optimism that an effective treatment for the virus might be closer, S&P 500 Futures are currently 0.70% higher to 3,200.25 and 10-year U.S. Treasury yields are 0.011% higher to 0.647%. 1-month LIBOR set at 0.17475% today.
Kicking off the major U.S. earnings season will be JPMorgan Chase, Citigroup, and Wells Fargo on Tuesday. During the last earnings season, understandably, over 80% of companies failed to provide forward guidance due to the novel coronavirus. No news was good news as valuations for many companies rebounded from the March lows, with the Fed promising to provide unlimited support and retail investors pushing their weight around thanks in part to low or no fee trade execution costs. This time around, investors will be less forgiving and expect more guidance surrounding financials and corporate plans to profitably co-exist with the virus.
Crude Oil
OPEC+ has successfully doubled Brent crude prices to $43 a barrel, as of this writing, from a decade low of $16 a barrel back in April through unprecedented output cuts. The group is now considering opening up its oil taps as the global lockdown eases. This may be a risky move as the U.S. is experiencing an acceleration of new COVID-19 cases in the sunbelt region, not to mention the re-emergence of the virus in Asia, which may prompt another lockdown. With a glut of supply in the U.S. and China, markets are pricing futures higher than spot futures (known as contango), indicating that the market has not yet recovered. Be on the lookout for a potential drop in pricing, should OPEC+ release an overwhelmingly large supply of crude. Hedging the downside risk may be prudent here.
Yield Curve Control Update
While European Central Bank (ECB) Chief Economist, Philip Lane, said “we are not, absolutely not, into yield-targeting or yield curve control” a fortnight ago, the ECB will meet later this week to discuss its monetary policy tools to combat a slow economic growth environment. As the Euro region struggles to recover, economists and investors ponder whether or not the ECB will eventually utilize yield curve targets to provide low-cost loans to companies impacted by the virus. Central banks from other nations including the Bank of Japan (BOJ) implemented a cap on its 10-year JGB close to 0% nearly four years ago and the Reserve Bank of Australia is targeting a 0.25% yield on its three-year government debt. The Federal Reserve’s John Williams said the FOMC is “thinking very hard” about such control (should that occur, we believe the target would be up to the three-year tenor in Treasuries).
Up ahead this week:
- JPMorgan, Bank of America, Wells Fargo, Goldman Sachs, BNY Mellon, and Citigroup start the U.S. earnings season.
- On Wednesday, we have the Bank of Japan’s monetary policy decision followed by Governor Haruhiko Kuroda’s briefing.
- The EIA crude oil inventory report is due Wednesday.
- China releases Q2 GDP on Thursday as well as key economic indicators for June.
- The European Central Bank (ECB) meets to set monetary policy on Thursday, with President Christine Lagarde holding a virtual press conference afterward.
