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The string of unprecedentedly huge spikes in jobless claims continues. In the last week 2.44 million Americans filed for unemployment benefits for the first time (slightly worse than the 2.40 million expected).

Source: Bloomberg

The small difference WoW suggests a second wave of unemployment is hitting…

That brings the nine-week total to 38.64 million, which is massively worse than the prior worst nine-week period in the last 50-plus years.

And of course, last week’s “initial” claims and this week’s “continuing” claims… the highest level of continuing claims ever

Source: Bloomberg

After last week’s SNAFU with the Connecticut (overstating their jobless claims by 200k), this week saw Washington, California, and New York dominated the job losses…

And as we noted previously, what is most disturbing is that in the last nine weeks, far more Americans have filed for unemployment than jobs gained during the last decade since the end of the Great Recession… (22.13 million gained in a decade, 38.636 million lost in 9 weeks)

Worse still, the final numbers will likely be hurt even more due to the bailout itself: as a reminder, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, could contribute to new records being reached in coming weeks as it increases eligibility for jobless claims to self-employed and gig workers, extends the maximum number of weeks that one can receive benefits, and provides an additional $600 per week until July 31. A recent WSJ article noted that this has created incentives for some businesses to temporarily furlough their employees, knowing that they will be covered financially as the economy is shutdown. Meanwhile, those making below $50k will generally be made whole and possibly be better off on unemployment benefits.

As Mises’ Robert Aro noted earlier in the week, the stimulus packages being handed out across this world provide us with an opportunity to document the anticapitalist process as it unfolds in real time, keeping in mind that when these inflation schemes fail, it will likely be blamed on capitalism.

The combination of increasing the money supply in order to pay people not to produce goods or services has consequences that not a lot of people are talking about.

It flies in the face of the free market and is as nonsensical as a negative interest rate. A loan that is forgivable is unconventional to say the least, because a loan is normally defined as an amount borrowed that is expected to be paid back with interest. When a loan is given on a first-come-first-served basis for the purpose of paying people not to work and is forgivable because it’s guaranteed by the United States government, we shouldn’t call it a loan.

It may be called socialism, maybe interventionism, and some may still prefer the term statism; but one thing is certain when it comes to the Paycheck Protection Program: it’s not capitalism!

Welfare cliffs are of course not the only reason so many capable Americans languish in partial dependency on government assistance. Dreadful government schools in poor areas and systematic obstacles to getting a job, such as minimum wage laws and occupational licensing laws, are also to blame. But the perverse incentives of America’s welfare system really hurt, and the CARES Act may have been a serious tipping point.

But, hey, there’s good news… well optimistic headlines as Treasury Secretary Steven Mnuchin said he anticipates most of the economy will restart by the end of August.

Finally, it is notable, we have lost 413 jobs for every confirmed US death from COVID-19 (93.439).

Was it worth it? Well of course it was – US equity markets are roaring higher…as if it never happened!

Summary:

• African CDC says cases pass 95k
• Russian deaths top 3k
• NYPost pressures de Blasio to reopen NYC
• MSM already blaming Trump for failing to stop ‘second wave’ of virus
• Nigerian doctors in Lagos end day-long “Doctor’s strike” over police harassment
• UK launches study into effectiveness of hydroxychloroquine as a COVID prophylactic

* * *

The world reached a particularly powerful coronavirus milestone last night: The number of cases confirmed across the world topped the 5 million mark roughly 5 months after the first cases of the virus were confirmed in Wuhan back in December. 

We also noted that Brazil is on track to overtake Russia as the second-largest outbreak in the world (after the US, of course) as it continues to break records with its daily number of confirmed cases, as testing ramps up after months of minimal government intervention to stop the virus.

In a bold move that’s bound to elicit a flood of public anger from the ‘stay home, save lives’ crowd, the cover of Thursday’s NY Post pleads with Mayor de Blasio to reopen the city. At this point, the data around the country clearly suggests that deaths and the number of newly confirmed cases have continued to fall, even as the MSM continues to focus on a couple of examples of ‘misleading’ presentation of data during the earlier days of the reopening in Georgia and Florida.

The @nypost front page tomorrow calls for an end (now) to NYC’s lockdown pic.twitter.com/BPwOA9anSX

— Jesse Rodriguez (@JesseRodriguez) May 21, 2020

Amusingly, the MSM has already pivoted to criticizing the Trump Administration for things that haven’t even happened yet. To wit, the Guardian reports that 9 “Obama Administration scientists” have signed onto a warning that the Trump Administration has “just 3 months” to rebuild its stockpiles of PPE before the next wave of the outbreak, the Guardian reports. The outbreaks in Brazil and Russia – not to mention the ‘partial lockdown’ imposed on another 100+ million in northeastern China – aren’t exactly reassuring, but this phenomenon of “pre-blaming” Trump for failures that haven’t happened yet seems to be growing more common since the NYT slammed the White House over projections calling for 3k deaths a day by June 1.

In a handful of countries including India, doctors have reported experience surprising levels of harassment from fellow citizens and police as some blame them for failing to save relatives who have succumbed to the virus. As unbelievable as this might sound to Westerners, Al Jazeera reports that Nigeria’s largest medical union has ordered its members in Lagos to resume work, ending a strike inspired by allegations of police harassment. The Nigerian Medical Association (NMA) doctors’ union, which ordered Lagos members to stop work indefinitely from Wednesday evening, said it had received assurances that doctors would be exempt from a nationwide overnight curfew and would therefore be allowed to move freely.

Despite official figures showing fewer than 500 deaths, scientists in South Africa are projecting up to 50,000 coronavirus deaths and as many as three million infections by the end of the year as the southern hemisphere braces for a rising infection rate as winter begins. SA already has the highest number of infections and deaths on the continent, with more than 18,000 identified cases and 339 deaths, but a national lockdown entering its sixth week had slowed infections.

Across Africa, the number of cases is creeping closer to 100k, after passing the 90k mark on Thursday. The number of the infected has reached 95,201, per the Africa Centers for Disease Control and Prevention. According to the latest data, the death toll on the continent was 2,997, while 38,075 people have recovered.

For the second day in a row, Indonesia has set a new record for new cases, bringing the total to 20,162 in the world’s fourth most populous country. Indonesia confirmed 973 new infections and 36 new deaths, taking the total number of fatalities to 1,278, according to health ministry official Achmad Yurianto.

After lifting his state of emergency order in the prefectures of Osaka, Kyoto and Hyogo on Thursday, Japanese PM Abe said he could lift the emergency status in Tokyo as soon as next week.

“The state of emergency will continue in Tokyo, Hokkaido and other regions. We will meet with experts (on Monday) to update the situation on infections,” Abe told reporters after ending the state of emergency in Osaka, Kyoto and Hyogo prefectures. “If the current situation continues, it is possible that the state of emergency could be lifted in those areas.”

As the US press slams President Trump for taking HQX for prophylactic purposes, UK healthcare workers will take part in a University of Oxford-led international trial of two anti-malarial drugs to see if they can indeed prevent COVID-19.

The ‘COPCOV’ study will involve more than 40,000 frontline healthcare workers from Europe, Africa, Asia and South America to determine if chloroquine and hydroxychloroquine truly are effective.

Finally, in Russia, officials said Thursday that the death toll topped 3,000 after another 127 deaths were reported, bringing the Russia-wide total to 3,099. Additionally, authorities reported 8,849 new cases of the virus, which brought Russia’s outbreak – the second-largest in the world behind the US – to 317,554.

Michelle Caruso Cabrera, former CNBC anchor, has been trying to engage with her political opponent, Alexandria Ocasio-Cortez, for months now. MCC has continually prodded AOC to debate her on a public stage, with little to no response from the reining Democratic socialist representative.

That was, of course, until this week’s BronxTalk virutal debate. The two political opponents finally got into a bit of a kerfuffle via social media after MCC accused AOC of staying in her “luxury” apartment in DC (“with a Whole Foods in the lobby”) while her constituents in the Bronx-Queens district are left to deal with the coronavirus pandemic on their own. 

AOC responded by saying that MCC once lived in a Trump-owned building in NYC and that her family still has roots in her district, according to the NY Post. “This is where my uncle is. There is where my brother is. This is where my family is,” AOC said. 

MCC responded: “AOC says her family lives here. Her mother moved to Florida because the taxes are too high.”

AOC thought the fact about her mom was a low-blow. “You can come after me all you want. Leave my mom out of it. My mom is a widow,” she barked back to MCC on a video posted online. “My mother is a school secretary who makes an hourly wage that’s laid off. You don’t know her. You don’t know what she’s been through. Leave my mom out of it. It’s really wrong.”

MCC then took on AOC driving Amazon out of New York: “We have to have an attitudinal shift toward jobs. We can’t tell job creators, ‘Go away, we don’t want your 25,000 jobs [referring to the aborted Amazon project].’ I’m never going to do that,” Caruso-Cabrera said.

She also noted that AOC voted against the Covid relief legislation last moth. “It’s what you always do. You’re always working on your celebrity status. No bill is ever perfect. But we have to start somewhere and we had to work quickly,” NCC said.

Responding later to MCC, Ocasio-Cortez says “This woman probably couldn’t find Sunnyside [Queens] on a map…”

“Who are you? Where is your family from?” an exasperated and triggered AOC finally yells at MCC later in the debate. “No one has seen you in this community before!”

“Greetings from Sunnyside Queens,” MCC then calmly responds. “My opponent is the one no one ever sees in the district. Let me tell you, the second this crisis started, I started delivering food and delivering masks. I have delivered nearly 3,000 masks and food and hand sanitizer to Jacobi hospital – which I’m not sure you could find on a map, AOC.”

“When I go out in the community, people say AOC is MIA,” Caruso-Cabrera concludes.  

You can watch the full Democratic primary debate for Congressional District 14 here. The fun starts about 47 minutes in:

The US can’t kick out Chinese companies from US stock exchanges if said Chinese companies delist first.

That is probably what went through the head of Chinese search giant Baidu – metaphorically speaking – one day after the Senate passed a bill on Wednesday that could stop some Chinese companies listing on U.S. exchanges unless they follow standards for U.S. audits and regulations in an escalation of a long-running dispute between Washington and Beijing about giving U.S. regulators access to Chinese audits.

In response, Reuters reports that Chinese search engine giant Baidu is considering delisting from the Nasdaq and moving to an exchange closer to home “to boost its valuation”  amid rising tension between the United States and China over investments, three sources said. It wasn’t clear how moving away from the biggest pool of megatech bubbles in the world, the Nasdaq, to some other exchange would “boost its valuation” but whatever: clearly the political feud between Trump and Xi is now translating into soft capital controls, and explains why Baidu stock tumbled on the news, sliding briefly below $100 after dropping first yesterday on news of the Senate bill.

The news also dragged lower other Chinese megatechs such as Alibaba and the broader China internet sector.

As Reuters further reports Baidu – one of China’s first US listings – is reaching out to “trusted advisers” to see how it could best be done if it were to proceed, including looking at issues around funding and any regulatory reaction although the discussions are at an early stage and are subject to change, said the sources, who spoke on condition of anonymity because the matter is not public.

The company pointed to comments by co-founder and CEO Robin Li who told the state-controlled China Daily on Thursday that Baidu was paying close attention to the tighter U.S. scrutiny of Chinese companies listed in the country.

“For a good company, there are many choices of destinations for listing, not limited to the U.S.,” he told the newspaper.

The sources also said that Baidu believed it was undervalued on the Nasdaq exchange in New York; which probably answers our question from above, if not actually “how” it is undervalued. In other words, Baidu wants to be closer to the chronically insane momentum-chasing gamblers that make up the Chinese investing class. 

Baidu’s shares have fallen more than 60% since their peak in May 2018 while the Nasdaq Golden Dragon China Index, which tracks Chinese firms listed on the U.S. exchange, has lost less than 10% over the same period. Baidu’s market cap just below $30 billion is only 5% of the market value of Alibaba, which has shares listed in Hong Kong and American Depository Shares listed in New York.

In January, Reuters reported that Baidu, Ctrip and NetEase have all held preliminary talks with Hong Kong Exchanges and Clearing about a possible secondary listing to follow Alibaba in establishing an investor base closer to China.

S&P futures drifted lower alongside European and Asian stocks on Thursday as Trump ramped up his criticsm of China and Xi Jinping, amid rapidly deteriorating Sino-US relations, souring the mood on the the recent rally in risk assets. Safe havens such as Treasuries edged up with the dollar. As reported here last night, in a rare outburst that went so far as to accuse the “very top” of China’s government of a “massive disinformation campaign”, Trump slammed China again just days before the biggest Chinese political gathering of the year, with traders betting that it was now just a matter of time before China retaliated in deed instead of just in word.

….It all comes from the top. They could have easily stopped the plague, but they didn’t!

— Donald J. Trump (@realDonaldTrump) May 21, 2020

As a result, contracts on the three main equity index futures dropped after the S&P closed at the highest level in two months, a day after the Senate overwhelmingly passed a bill that could bar some Chinese companies from listing on U.S. exchanges, with the Emini flirting on either side of the critical 2,950 level.

“Markets may be pricing in far too much complacency as the U.S.-China ‘phase one’ trade deal could be at risk,” said market strategist Stephen Innes. “The pandemic and resulting acute economic downturn have made China’s trade commitment to the U.S. much more challenging to fulfill.”

Europe’s Stoxx 600 Index fell, with nearly all 19 sector groups in the red. Deutsche Lufthansa AG shares bucked the trend after the carrier said it was close to a multibillion-euro bailout deal from the German government. There was some good news out of Europe, where May flash PMIs (even though there is still ten days in the month) rebounded solidly from April’s lows. As Goldman notes, after reaching a historical low in April at the height of the coronacrisis, the Euro area flash composite PMI rebounded by 16.9pt in May (to 30.5), and above consensus. The increase was broad-based across sectors—with manufacturing output rising by slightly more than services activity—consistent with the gradual lifting of containment measures from early May.

Yet there was some continued weakness with German manufacturing PMI printing at 36.8, below the 39.2 expected.

Earlier in the session, Asian stocks also fell, led by utilities and communications, after rising in the last session. Markets in the region were mixed, with Shanghai Composite and Hong Kong’s Hang Seng Index falling, and India’s S&P BSE Sensex Index and Taiwan’s Taiex Index rising. The Topix declined 0.2%, with Funai Soken and Marudai Food falling the most. The Shanghai Composite Index retreated 0.5%, with Xinjiang Korla Pear and Nanjing Chervon Auto Precision posting the biggest slides.

Concerns over the growing stress between the US and China and global coronavirus cases reaching 5 million are vying for investor attention with optimism over reopening economies and progress on thwarting the pandemic. AstraZeneca received more than $1 billion in American funding to develop a Covid-19 vaccine. Meanwhile, the U.S. legislation could lead to Chinese mega-companies such as Alibaba Group Holding and Baidu being barred from exchanges. Both slipped in early trading, with Baidu going so far as declaring it may delist first before it is kicked out:

• EXCLUSIVE-CHINA’S BAIDU CONSIDERS DELISTING FROM NASDAQ TO BOOST VALUATION – RTRS

Investors are also awaiting the latest weekly jobless claims data, which is due at 8:30 a.m. ET and is expected to show millions more Americans filing for unemployment benefits due to layoffs and mass furloughs as a result of the lockdown. Still, claims have gradually declined since hitting a record 6.867 million in the week ended March 28 and Thursday’s report could offer early clues on how quickly businesses re-hire as they reopen.

In rates, Treasuries were flat into early U.S. trading after paring Asia-session gains that were paced by demand for longer-dated tenors after Wednesday’s well-received 20-year auction, the first in decades. Yields remain lower by about 1bp across the curve, 10-year around 0.67%, with 5s30s, 2s10s flatter by around 0.5bp each. Gilts outperformed, richer by 2bp vs. Treasuries; BOE conducted buybacks via three operations Thursday, totaling GBP4.5b. Treasuries also drew support during Asia session from rising U.S.-China tensions. The new 20-year, priced at 1.22% Wednesday, improved to about 1.16%.

 

Market Snapshot

• S&P 500 futures down 0.8% to 2,945.50
• STOXX Europe 600 down 0.9% to 339.81
• MXAP down 0.3% to 148.47
• MXAPJ down 0.2% to 479.40
• Nikkei down 0.2% to 20,552.31
• Topix down 0.2% to 1,491.21
• Hang Seng Index down 0.5% to 24,280.03
• Shanghai Composite down 0.6% to 2,867.92
• Sensex up 0.8% to 31,058.54
• Australia S&P/ASX 200 down 0.4% to 5,550.43
• Kospi up 0.4% to 1,998.31
• German 10Y yield fell 1.1 bps to -0.479%
• Euro down 0.1% to $1.0967
• Italian 10Y yield fell 0.2 bps to 1.46%
• Spanish 10Y yield rose 2.2 bps to 0.662%
• Brent futures up 2% to $36.47/bbl
• Gold spot down 0.8% to $1,734.25
• U.S. Dollar Index up 0.2% to 99.31

Top Overnight News

• U.S. and European futures retreated and the dollar advanced with Treasuries as deteriorating Sino-American ties cast a cloud over the recent rally in risk assets
• The euro-area economy started to claw its way out of its deepest downturn ever as the relaxing of coronavirus lockdowns allows thousands of businesses to reopen. Markit’s headline gauge of private-sector activity rose in May, though it continued to signal contraction in both manufacturing and services
• The U.K.’s economic slump eased this month as some companies resumed trading amid a lockdown that has brought most activity to a halt. IHS Markit’s Purchasing Managers Index for the whole economy rose to 28.9 from 13.8 in April in a preliminary estimate
• The U.S. threw its weight behind one of the fastest-moving experimental solutions to the coronavirus pandemic, pledging as much as $1.2 billion to AstraZeneca Plc to help make the University of Oxford’s Covid vaccine
• British banks are confronting the European import of sub-zero interest rates that could damage profits already weakened by the coronavirus pandemic, and the Brexit divorce rumbling towards its rocky end

Asian equity markets struggled to sustain the impetus from the rebound on Wall St where stocks were underpinned by hopes of a pick-up in economic activity after all US states were said to have at least partially reopened and as the continued recovery in oil prices also supported the risk tone, with sentiment in Asia eventually clouded by ongoing US-China tensions. ASX 200 (-0.4%) was initially led higher by strength in energy names although the index later reversed the moves after its top weighted financials sector dipped into the red and amid the souring ties with China. Nikkei 225 (-0.2%) also failed to hold on to opening gains despite reports Japan is set to lift the emergency declarations in Osaka, Kyoto and Hyogo, but with Tokyo not included in the status lifting, while participants digested mixed trade data that showed Exports at a narrower than expected contraction, which was still the worst decline since 2009. Hang Seng (-0.5%) and Shanghai Comp. (-0.5%) were subdued as the war of words between US and China persisted with US President Trump alleging the incompetence of China was behind the mass worldwide killing and that China’s disinformation and propaganda attack on the US and Europe is a disgrace. Furthermore, the White House released a report blasting China for its actions ranging from predatory economic policies to human rights abuses, and the US Senate recently passed the bill aimed at increasing oversight of Chinese companies that could see them delisted from US exchanges. Finally, 10yr JGBs were higher as they tracked the upside seen in T-notes following the hostile US-China rhetoric and decent results at the new US 20-year auction which disproved the naysayers that had anticipated a lacklustre auction, while the BoJ presence in the market and mild deterioration in risk tone also added to the upside for JGBs.

Top Asian News

• China Simplifies Iron Ore Import Rules Amid Australia Spat
• Chinese Port Operator Xinghua’s Owner Said to Explore Sale
• Fiscal Nightmare Ties Up Kuwait’s Stimulus With 40% Deficit
• Airlines Caught Off Guard as India Suddenly Allows Flights

European stocks see losses across most major bourses [Euro Stoxx 50 -1.4%], as the negative APAC sentiment reverberated into the region. Bourses see broad-based losses amid the escalating rhetoric between US and China as sentiment between the nations hit a low – with Spain faring slightly better after earlier underperformance on account of its extended State of Emergency, while Switzerland and Scandi markets are closed amid holidays. Broader sectors are all in the red with defensives faring better than cyclicals – suggesting risk aversion across the market, whilst the breakdown pains a similar picture with banks and Travel & Leisure among the laggards. In terms of individual movers, easyJet (+6.3%) holds onto gains after announcing the resumption of flights from 15th June. Co. believes there is sufficient customer demand to support profitable flying. Initial schedule will comprise mainly of domestic flights in UK and France, Further routes will be announced in the coming weeks as customer demand increases. Sticking with the airline sector, Lufthansa (+4.8%)  confirmed it is in advanced talks with the German Govt’s Economic Stabilisation Fund (WSF) on a stabilisation package comprising of measures amounting up to EUR 9bln, with the package subject to approval by the European Commission. On the flip side, Altice (-12%) shares tumble post earnings.

Top European News

• EasyJet Among First Carriers in Europe to Plan Restart
• Swissport Seeks Support to Raise up to $417 Million of Loans
• British Lenders Brace for Sub-Zero Rates Floated by Central Bank
• U.K. Grid Struggles as Renewables Overtake Fossil Fuels

In FX, mixed to weaker than forecast French and German PMIs were rather misleading, as the preliminary survey for the bloc as a whole beat on all counts to keep the Euro elevated and more resistant than other majors against a broad Dollar revival. Indeed, Eur/Usd remains underpinned above 1.0950 even though the DXY has pared some losses from Wednesday’s 99.001 low to sit a bit more comfortably within a 99.183-434 range ahead of US PMIs and the latest weekly jobless claims data. Similarly, albeit to a lesser extent, the Pound has regained composure in wake of UK services, manufacturing and composite readings all surpassing consensus, with Cable back above the 1.2200 handle and Eur/Gbp just holding below 0.9000. However, the former still looks bearish from a technical standpoint after breaching one side of an inverse head and shoulders chart formation at 1.2225, while a softer than forecast CBI trends metric did little to spur any action.

• AUD/NZD – Renewed risk aversion and further assurances from RBA Governor Lowe about turning up the QE dial again if needed have prompted a pull-back in the Aussie and Kiwi from midweek peaks vs their US counterpart, as Aud/Usd reverses from 0.6600+ and Nzd/Usd is back under 0.6150. Note much in the way of additional impetus gleaned from CBA PMIs overnight, but NZ retail sales could be more pivotal later.
• CAD/CHF/JPY – Firm crude prices continue to cushion the Loonie from downturns in broader risk sentiment, but Usd/Cad has further from sub-1.3900 lows into a band up to 1.3946, while the Franc is pivoting 0.9650 and Yen is consolidating between 107.49-84 parameters following a much wider than expected Japanese trade deficit due to exports plunging around 3 times more than imports.
• SCANDI/EM – The Scandi Crowns have both lost momentum amidst the aforementioned risk-off mood, with Eur/Sek and Eur/Nok rebounding after forays to fresh multi-month lows towards 10.5000 and 10.8500 respectively, but the overall trend remains bearish in cross terms. Meanwhile, EMs have also handed back some of their recent gains as the clock ticks down to CBRT and SARB rate verdicts that are predicted to reveal matching 50 bp benchmark reductions, but could conceivably culminate in more aggressive easing moves. Usd/Try is straddling 6.7900 at present and Usd/Zar has reversed through 18.0000 after crossing the psychological mark on Wednesday.
• RBA Governor Lowe said the future remains unusually uncertain in which one uncertainty is the pace of which restrictions are eased and another source is the level of confidence people have about their future, while he added the RBA remain prepared to scale up bond purchases again if necessary but noted there is a limit to what can be achieved with monetary policy. Furthermore, RBA Governor Lowe added there is no change to thinking on negative rates which are still extraordinarily unlikely and that the costs of negative rates exceed the benefits. (Newswires)

In commodities, WTI and Brent front month futures eke mild gains in what is another new-flow light European session. Rising US-Sino frictions weigh on the stock markets but caps gains in the energy market, as the complex still prices in demand from reopening economy alongside lower supply from producers. Regarding OPEC, Russian oil and condensate between May 1-19 was reported to have averaged 9.42mln BPD – although condensate is not part of the OPEC+ deal – its output was reportedly between 700-800mln BPD, meaning Russian oil output was modestly above the agreed cap of 8.5mln BPD, according to ING. WTI July resides just south of USD 34/bbl whilst its Brent counterpart trades on either side of USD 36/bbl – with both benchmarks within a USD 1/bbl or so intraday band. In terms of bank commentary, Citi sees Brent prices averaging USD 39/bbl in Q2 and USD 48/bbl in Q4, expects oil market to move into a deficit from June through Q3 2020 onward. Meanwhile, spot gold remains weighed on by a firmer USD as President Trump ramped up rhetoric against China – with the yellow metal around USD 1735/oz having printed a high of USD 1749.50 thus far. Copper prices have receded in tandem with stocks and the overall protectionism-hit sentiment, but downside action remains limited as the demand prospect from opening economies underpin demand for the red metal.

US Event Calendar

• 8:30am: Philadelphia Fed Business Outlook, est. -40, prior -56.6
• 8:30am: Continuing Claims, est. 24.3m, prior 22.8m; Initial Jobless Claims, est. 2.4m, prior 2.98m
• 9:45am: Bloomberg Economic Expectations, prior 29; Bloomberg Consumer Comfort, prior 35.8
• 9:45am: Markit US Manufacturing PMI, est. 39.5, prior 36.1
• 9:45am: Markit US Services PMI, est. 32.3, prior 26.7
• 9:45am: Markit US Composite PMI, prior 27
• 10am: Existing Home Sales, est. 4.22m, prior 5.27m; Existing Home Sales MoM, est. -19.92%, prior -8.5%

DB’s Jim Reid concludes the overnight wrap

One interesting stat that we’ve included in our penultimate CCD today is that in the US state of Pennsylvania (12.8m pop.) more people have died of covid-19 aged over 100 years old than below the age of 45. In total it is 41 deaths under the age of 45 vs. 72 over the age of 100. In fact more people have died in the 105-109 year old age bucket (six people) than in any 5 year buckets up to the age of 30. Eight people under 30 have died in total in the state out of 4493. We show the graph in the CCD today. It is perhaps the most granular age data we’ve seen so far and goes up to those 110 years old.

Onto markets now and it was yet another strong day for risk assets yesterday, with the S&P 500 climbing a further +1.67% to reach its highest closing level since the crisis was in full-swing. Indeed, the index now stands at an astonishing +32.82% higher since its closing low less than 2 months ago, as abundant liquidity, the continually slowing rates of infection and possible signs of hope on a vaccine have seen equities make one of their fastest moves upwards in many years. The question is whether this can sustain itself given that the very live risk of a second wave remains, as well as the fact that a vaccine is far from certain.

In terms of the details, 23 of 24 industry groups in the S&P moved higher, with energy leading the way on the back of higher oil prices. Europe also made gains as the STOXX 600 rose +0.98%, led partially by oil and gas stocks. The DAX was also up +1.34% and at a 2-month high. As mentioned, oil’s rally helped the covid laggards lead the day’s rally with both WTI (+3.05%) and Brent crude (+3.71%) making significant advances as both reached their own 2-month highs. It was not all positive for the commodity as data out of the US showed that there was an increase in gasoline storage thus showing the ongoing demand weakness. Markets continue to look beyond this at the moment with hopes that reopening of large parts of the US will see demand return.

The positive moves yesterday actually came in spite of a further escalation in rhetoric between the US and China. Secretary of State Pompeo said that China was ruled by a brutal, authoritarian regime, and that Beijing was hostile to free nations, which follows warnings from China after Pompeo congratulated the new Taiwanese President on her inauguration, since China claims Taiwan as part of its “one China” principle. Lastly, the US Senate passed by unanimous consent, legislation yesterday which require companies certify that they are not under the control of a foreign government for them to be listed on US exchanges. This was pointed at China with the Senator introducing the bill, John Kennedy (Republican from Louisiana), saying that “I do not want to get into a new Cold War,” but he wants “China to play by the rules.”

In terms of markets this morning, momentum has faded somewhat as that trade rhetoric weighs on sentiment. The Nikkei (-0.16%) is down, Hang Seng and Shanghai Comp both flat and Kospi (+0.33%) has posted a modest gain. Futures on the S&P 500 are also down -0.62%. Elsewhere, the US dollar index is trading up +0.24% while yields on 10y USTs are down -2.1bps.

We’ve also had the preliminary May PMIs for Japan and Australia overnight. Japan’s manufacturing PMI printed at 38.4 (vs. 41.9 last month), the lowest reading since March 2009 while the services print came in at 25.3 (vs. 21.5 last month) thereby putting the composite at 27.4 (vs. 25.8 last month). For Australia, the manufacturing PMI came in at 42.8 (vs. 44.1 last month) and services reading improved to 25.5 (vs. 19.5 last month) which put the composite at 26.4 (vs. 21.7 last month). In addition to that, Japan’s April trade data revealed that exports fell by -21.9% yoy (vs. -22.2% yoy expected), the largest decline since 2009 while the decline in imports was -7.2% yoy (vs. -13.2% yoy expected). In other overnight news, President Trump said that he may hold the June G-7 meeting at Maryland’s Camp David after previously planning a video conference.

Here in the UK, Bloomberg reported overnight that the government is considering an option of asking businesses to take over paying national insurance and employer pension contributions for furloughed staff as it weighs up winding down its spending on the program. Separately, the Financial Times has reported that Chancellor Sunak is drawing up plans to extend the holiday on mortgage payments that banks have to give 1.7 million homeowners suffering financial stress due to the virus. The holiday is currently set to finish at the end of June.

There were two noteworthy items out of central banks yesterday. Later in the day the Fed’s minutes from the 28-29 April meeting were released. The highlight was the level of concern the committee felt the virus posed to the US economy and the need to stem the fallout. “Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time.” There was ample discussion into how forward guidance should be determined in the upcoming months, two suggestions were an outcome-based approach specifying macroeconomic indicators that needed to be reached or a date-based approach with the target range for the benchmark rate only rising after a specific amount of time had passed. The topic of negative rates were only brought up once, as “respondents to Desk surveys attached almost no probability to the FOMC implementing negative policy rates.” One of the issues with determining the best approach to forward guidance is the uncertainty around the path of the virus itself. Many Fed officials judged that there was a “substantial likelihood of additional waves of outbreak in the near or medium term. In such scenarios, it was believed likely that there would be further economic disruptions.” See our US economists recap for further details. Link here.

The cautionary tone of the FOMC minutes did not help the dollar as it fell against other major currencies on the day. The Bloomberg dollar index was down -0.25% to levels last seen on 1 May. The Euro rose 0.52%, trading higher for the fourth straight day, the longest such streak since the last week of March.

Back here in the UK, we got a few headlines from the Bank of England, as Governor Bailey said that “we’re keeping the tools under active review in the current situation”. He continued to not rule out negative rates, in line with the recent rhetoric we’ve been hearing, but he also acknowledged that there’ve been pretty mixed reviews on their use elsewhere, so it doesn’t obviously look as though these are going to be on the table anytime soon. The comments came as the UK’s debt management office actually sold bonds at a negative yield for the first time yesterday, raising £3.75bn at a yield of -0.003%. Our economists’ view is that the next policy move will be £125bn of extra QE next month, rather than negative rates.

Meanwhile, we got reports from MNI that the ECB would soon announce details on the reinvestment of principal payments on the bonds it’s bought under their Pandemic Emergency Purchase Programme launched in March. It was also said to be likely to add junk debt to its purchases. Credit had a good day yesterday with IG cash spreads 5bps tighter in USD and 3bps tighter in EUR, and HY cash spreads 19bps tighter in USD and 11bps tighter in EUR.

Looking at sovereign bonds yesterday, they were mostly treading water on both sides of the Atlantic, with no big moves in either direction. This was even as the US government sold 20-year bonds for the first time since 1986, and at a yield (1.220%) only marginally above the pre-auction levels. 10yr US Treasury yields ended the session mostly unchanged, down -0.8bps at 0.68%, while those on bunds fell by -0.4bps. One of the bigger moves was seen in Greece, where the country’s spread over 10yr bunds came down by -4.7bps to their lowest level in over a month.

There wasn’t a lot of data to mention, though we did get a number of CPI inflation prints. In the UK, CPI fell to +0.8% in April and the final Euro Area CPI reading was revised down a tenth from the flash to +0.3%, which in both cases is the lowest inflation has been since August 2016. In Canada, we actually saw deflation, as CPI was at -0.2% in April, moving into negative territory for the first time since September 2009.

Attention today will be back on the data once again, with the both the flash PMIs for May as well as the weekly initial jobless claims from the US offering markets the latest clues on how economies are faring as they ease off their most stringent lockdown measures. Starting with the PMIs, last month we saw the composite PMIs fall to record lows on both sides of the Atlantic as the surveys fully encompassed the lockdowns. There will likely be a decent bounce but bear in mind that PMIs are diffusion indices, where respondents simply say whether things are better or worse than last month, meaning that in extreme events such as these they don’t necessarily give the best picture on the scale of the declines or rebounds when they happen.

On those weekly jobless claims, our US economists are forecasting a 2.5m reading for the week through May 16. We’re also likely to see downward revisions to the previous week since we’ve been informed that last week’s number for Connecticut was around 10 times what it should have been. A 2.5m reading would be the 7th consecutive decline since the peak back in late March, but given that such a number would still be at least triple the previous record before the coronavirus took hold, the big question is how long it’ll take before we start to see more “normal” numbers again.

To the day ahead now, where the data highlights are likely to be the aforementioned flash PMI readings from around the world and the weekly initial jobless claims from the US. Other than that, there’ll also be the CBI’s industrial trends survey for May in the UK, while from the US we’ll get the Philadelphia Fed’s business outlook for May, as well as the leading index and existing home sales for April. From central banks, there are monetary policy decisions from Turkey and South Africa today, in addition to remarks from the Fed’s Powell, Clarida and Williams, along with the ECB’s Panetta. Finally, earnings releases include Nvidia, Medtronic, Intuit, TJX and Hewlett Packard Enterprise.

A few days ago, Hayman Capital Management founder Kyle Bass published an editorial warning about Beijing’s renewed focus on stamping out dissent in Hong Kong now that protesters are beginning to re-emerge as the number of new cases of COVID-19 declines to zero. Specifically, he warned of the possibility that President Xi would adopt new “laws” granting Beijing broad latitude to interfere in Hong Kong’s affairs, in explicit violation of the 1984 treaty between the UK and Hong Kong that set the Special Administrative Region on the path back to reunification.

Hong Kong’s liberal values have always been at odds with Beijing’s demands for unwavering obedience. One PLA officer – clearly an old-line Communist – once told the SCMP that Hong Kong had the worst “social values” of anywhere in China. And while that may be, technically, Hong Kong has another ~27 years to enjoy these freedoms before: According to the “one country, two systems” agreement struck with Britain, China doesn’t gain full custody of the de facto independent city state until July 1, 2047, the date marking 50 years since Britain officially handed Hong Kong back to China.

Now, a disturbing story first published by a Hong Kong gossip site has apparently been confirmed by HK’s paper of record, the English-language South China Morning Post: During this year’s annual Party Congress, Xi and the Standing Committee are expected to draft a resolution calling for a new “national security” law aimed at stamping out all “secessionist” and “subversive” acts, as well as “terrorism” and “foreign influence”. Remember, Chinese media regularly referred to the pro-Democracy protesters as terrorists.

Beijing will introduce a draft resolution to allow the National People’s Congress to chart legislation for a new national security law tailor-made for Hong Kong that will proscribe secessionist and subversive activity, foreign interference and terrorism in the city, sources have told the Post.

A Beijing source said the new law would ban all seditious activities aimed at toppling the central government and external interference in Hong Kong’s affairs. It would also target terrorist acts in Hong Kong.

A mainland source familiar with Hong Kong affairs said Beijing had concluded that it was impossible for the city’s Legislative Council to pass a national security law to enact Article 23 given the city’s political climate and hence was turning to the National People’s Congress, the country’s legislature, to take on the responsibility.

SCMP’s sources confirmed what many Hong Kong observers likely suspected: Beijing is using its decision to back away from the controversial extradition bill that sparked last year’s wave of protests to justify passing its own national security law to effectively criminalize dissent in Hong Kong, in defiance of an international agreement with the UK.

“Some opposition politicians have shut the window for Hong Kong to enact its own national security law,” the source said, referring to the confrontational approach they had adopted towards Beijing.

“If the national security legislation is not done during the annual session of the National People’s Congress or shortly afterwards, is there any guarantee that it can be passed by the Legco in the next two years?” the source said.

“We can no longer allow acts like desecrating national flags or defacing of national emblem in Hong Kong.”

Bass warned of exactly this in a Newsweek editorial from earlier this week.

China’s biggest political meetings of the year kicked off in Beijing on Thursday, marking a key milestone in President Xi Jinping’s battle against the global coronavirus pandemic. The Chinese People’s Political Consultative Congress, an advisory body with no legal powers, held its official session with Mr Xi and the rest of the Chinese Communist party’s top leadership in attendance. On Friday morning Premier Li Keqiang will address the annual session of China’s rubber-stamp parliament, the National People’s Congress, with a closely watched work report that will give details about the government’s plans to revive the world’s second-largest economy.

The “two sessions,” normally held in March but delayed by almost three months this year because of the coronavirus, are being held against a backdrop of rapidly deteriorating relations between China and the US.

The Party Congress kicked off on Thursday, but a vote on the resolution – which would authorize the Standing Committee to draft the law – is expected to be held on May 28 (Wednesday).

Notably, the law will likely be in effect before elections in the fall for Hong Kong’s legislative council – or “Legco” – a vote that pro-democracy lawmakers have been hyping up as a gesture against the increasingly authoritarian tendencies exhibited by Beijing.

Legco is headed for elections in September that opposition parties have vowed as a make-or-break opportunity to get a majority to block all bills put forward by the government, buoyed by their success at last November’s district council elections.

The move to introduce the draft resolution comes as the city’s delegates to the nation’s parliamentary sessions are preparing to meet Xia Baolong, director of the State Council’s Hong Kong and Macau Office (HKMAO) on Thursday evening.

Sources have told the Post that a draft of the resolution will be shared with delegates on Thursday night and presented as a motion to the NPC, on Friday afternoon.

The NPC is then expected to vote on the resolution at the end of the annual session, likely to be on May 28. The resolution will then be forwarded to the Standing Committee of the NPC to chart out the actual details of the legislation.

The Standing Committee is expected to meet again next month, and the law could be drafted and included in Annex 3 of Hong Kong’s “Basic Law”, which is based on British legal principles.

The Standing Committee, which last met on April 26 to 29, meets every two months and is expected to hold its next meeting as early as June and this could be the earliest date at which the legislation could be approved.

“The NPC decision will delegate the NPC Standing Committee to draft the new legislation for Hong Kong, which would be included in Annex 3 of Hong Kong’s Basic Law,” the source said.

“The new law will be introduced in Hong Kong through promulgation, without the need for local legislation.”

If the process as outlined by sources is confirmed, Hong Kong will finally have national security laws, 23 years after the handover of the city from British to Chinese rule.

Why is Beijing so eager to make these changes? Because since the British left, Hong Kongers have repeatedly rebuffed efforts by Beijing to crack down on dissent by opposing national security bills, even though the “Basic Law” requires the city-state to adopt one. Now, Beijing has apparently found a work-around to simply impose these restrictions on Hong Kongers.

One thing seems likely: Like Bass, we suspect this doesn’t bode well for Hong Kong’s reeling economy. Because, as Bass once explained, the reason Hong Kong has functioned as a gateway to China for the west is due to a ‘special status’ granted to HK by the US government. That status is contingent on Beijing effectively keeping its hands off Hong Kong. Once this ‘national security’ law has passed, the US will have no choice but to revoke certain special privileges it has accorded Hong Kong.