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Submitted by Christophe Barraud

According to the Bloomberg consensus, Existing Home Sales should decrease by 5.6% MoM to 4.09M, which would be the lowest level since November 2010.

→ EHS will surprise downward due to technical and fundamental factors:

• Buyers signed contracts in April for most May sales. As a result, lockdowns made it impossible for the rebound in closings to be finalized before June.
• Local and state reports confirm that many sellers waited before putting their homes on the market, restricting supply (and choices for buyers).

→ EHS will rebound sharply in June as suggested by first data related to pending home sales.

* * *

1. Data construction implies that May will reflect the worst of the crisis

Most of economists never looked at the construction of EHS data which explains a large part of miscalculation. According to the Census Bureau, “the majority of transactions are reported when the sales contract is closed. Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore, an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.” In other words, most buyers placed their offers in April (and to a lesser extent in March), during the height of stay-at-home orders. As a result, May existing home sales will reflect the worst of the crisis, with a print likely below 4.00M.

2. Local/state data showed that sales decline was broad-based across the country

Local/state figures and other proxies suggest that national existing home sales (non-seasonally adjusted: NSA) are likely to plunge by more than 30% YoY in May (which could be close to the largest decline ever). However, it’s worth noting that the crash was amplified by calendar effects, namely fewer business days in May 2020 (compared to May 2019).

These results look coherent with Redfin estimates which highlighted a 30.8% YoY drop after seasonal adjustment (the decline would have been larger on a NSA basis) in May. On the inventory front, Redfin also noted that new listings of homes for sale “are still about 20% below February’s level”, confirming that supply has been constrained over the past few months.

3. Local/state data suggest that pending home sales will rebound sharply in May amid normalization and lower mortgage rates.

On the positive side, local reports suggest that pending home sales (seasonally adjusted: SA), a leading indicator for existing home sales, rebounded on a MoM basis in May. As a matter of fact, Redfin lead economist Taylor Marr revealed that “Although the housing market was still mostly stalled in May, it’s worth noting that homes under contract to be sold jumped 33% between April and May after two consecutive months of decline.”

A sharp increase of EHS seems very likely in June a context where the situation started to normalize in several states (reopening), with purchases’ applications rising significantly. CNBC reported on June 17 that “Mortgage applications to purchase a home rose 4% last week from the previous week and were a remarkable 21% higher than one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. That was the ninth consecutive week of gains and the highest volume in more than 11 years.” The article also underlined that “Buyers were also fueled by a new record low mortgage rate. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 3.30% from 3.38%, with points decreasing to 0.29 from 0.30 (including the origination fee) for loans with a 20% down payment.”

With the longest day of the year now behind us, there is a bit of a summer lull ahead as those who can, go on vacation (that would be almost all of Europe), leading to a slowdown in newsflow.

As DB’s Jim Reid writes, the main highlight this week is likely to be the flash PMIs for June tomorrow, with manufacturing, services and composite PMIs coming out from around the world. Back in May, the PMIs rebounded from April’s rock-bottom prints. For example, the Euro Area composite PMI rose to 31.9 from 13.6, while in the US the composite PMI recovered to 37.0 from 27.0. For June the range of expectations across Europe/US are generally in the 40s with U.K. at the lower end and the US manufacturing possibly scraping to just over 50. Given these are diffusion indices and simply reflect whether conditions are getting better or worse then surely at some point soon these numbers are going to massively spike up regardless of the actual level of growth.

While a rising PMI headline number may give some cheer that confidence is returning the data in itself is forward looking which brings about two interesting points. It could be highly subject to change depending on the developments of a second wave virus (a la Apple on Friday). As analysts at ING note, looking at other data, including Google’s mobility index, the economy still appears to be operating well below its pre-virus level.

There are various other data releases but it’s not a big week for data. See the day by day calendar at the end for the full slate. Note that the IMF’s latest economic forecasts are released this Wednesday. In a website blogpost last week, their Chief Economist Gita Gopinath said that the update “is likely to show negative growth rates even worse than previously estimated.”

Below is a summary of key events by day, courtesy of Deutsche Bank.

Monday

• Data: UK June CBI industrial trends survey, US May Chicago Fed National Activity Index, existing home sales, Euro Area advance June consumer confidence
• Central Banks: Bank of Canada Governor Macklem speaks

Tuesday

• Data: Manufacturing, services and composite PMIs from Australia, Japan, France, Germany, Euro Area, UK and the US, Japan final May machine tool orders, US May new home sales, June Richmond Fed manufacturing index

Wednesday

• Data: Japan final April leading index, France June business confidence, Germany June Ifo business climate indicator, US weekly MBA mortgage applications, April FHFA house price index
• Central Banks: Reserve Bank of New Zealand monetary policy decision, Bank of Japan release Summary of Opinions from June meeting, Fed’s Evans and Bullard speak
• Politics: Parliamentary election in Mongolia
• Other: IMF release World Economic Outlook Update

Thursday

• Data: Japan April all industry activity index, Germany July GfK consumer confidence, UK June CBI distributive trades survey, US May advance goods trade balance, preliminary May wholesale inventories, durable goods orders, nondefence capital goods orders ex air, third reading of Q1 GDP, personal consumption, core PCE, weekly initial jobless claims, June Kansas City Fed manufacturing index
• Central Banks: Monetary policy decisions from central banks in Turkey and Mexico, Fed’s Bostic and BoE’s Haldane speak, ECB releases account of monetary policy meeting

Friday

• Data: France June consumer confidence, Euro Area May M3 money supply, Italy June consumer confidence index, economic sentiment, US May personal income, personal spending, final June University of Michigan sentiment

* * *

Focusing on the US, Goldman writes that the key economic data releases this week are the jobless claims and durable goods reports on Thursday and the core PCE report on Friday. There are several scheduled speaking engagements from Fed officials this week.

Monday, June 22

• 10:00 AM Existing home sales, May (GS -10.0%, consensus -5.6%, last -17.8%): After falling by 17.8% in April, we estimate that existing home sales fell another 10.0% in May. Existing home sales are an input into the brokers’ commissions component of residential investment in the GDP report.
• Tuesday, June 23
• 09:45 AM Markit Flash US manufacturing PMI, June preliminary (consensus 50.8, last 39.8): Markit Flash US services PMI, June preliminary (consensus 48.0, last 37.5)
• 10:00 AM New home sales, May (GS +2.5%, consensus +1.9%, last +0.6%): We estimate that new home sales increased by 2.5% in May, reflecting higher new mortgage loan applications.
• 10:00 AM Richmond Fed manufacturing index, June (consensus -11, last -27)
• 01:00 PM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President James Bullard will discuss the US economy and monetary policy in a webinar hosted by the Milken Institute. Audience Q&A is expected.

Wednesday, June 24

• 09:00 AM FHFA house price index, April (consensus +0.3%, last +0.1%)
• 12:30 PM Chicago Fed President Charles Evans (FOMC non-voter) speaks: Chicago Fed President Charles Evans will participate in an online discussion about the economy and monetary policy hosted by the Corridor Business Journal. Prepared text and audience Q&A are expected.
• 03:00 PM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President James Bullard will take part in an online discussion hosted by Louisville’s Metro Chamber of Commerce. Audience Q&A is expected.

Thursday, June 25

• 08:30 AM Advance goods trade balance, May (GS -$66.0bn, consensus -$68.0bn, last -$69.7bn): We estimate that the goods trade deficit decreased slightly to $66.0bn in May on a coronacrisis-driven decline in imports but some stabilization in exports following sharp declines in the spring.
• 08:30 AM Durable goods orders, May preliminary (GS +10.0%, consensus +10.9%, last -17.7%): Durable goods orders ex-transportation, May preliminary (GS -1.5%, consensus +2.3%, last -7.7%): Core capital goods orders, May preliminary (GS -2.5%, consensus +1.5%, last -6.1%); Core capital goods shipments, May preliminary (GS -2.5%, consensus -0.5%, last -5.7%): We expect durable goods orders to increase 10.0% in the preliminary May report, reflecting stabilization in aircraft orders. We expect a 2.5% decline in core capital goods orders, given weak industrial production and export levels.
• 08:30 AM Wholesale inventories, May preliminary (consensus +0.4%, last +0.3%): Retail inventories, May (last -3.6%)
• 08:30 AM GDP (third), Q1 (GS -5.0%, consensus -5.0%, last -5.0%); Personal consumption, Q1 (GS -6.8%, consensus -6.8%, last -6.8%): We expect no revision on net in the third vintage of the Q1 GDP report (previously reported at -5.0% qoq saar), reflecting upward revisions in the May retail sales report and modest downward revisions in the quarterly services survey.
• 08:30 AM Initial jobless claims, week ended June 20 (GS 1,450k, consensus 1,350k, last 1,508k); Continuing jobless claims, week ended June 13 (last 20,544k): We estimate initial jobless claims declined but remain elevated at 1,450k in the week ended June 20.
• 09:30 AM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will take part in a video conference hosted by the Bretton Woods Committee on transformation of the world economy. Audience Q&A is expected.
• 11:00 AM Atlanta Fed President Bostic (FOMC non-voter) speaks: Atlanta Fed President Raphael Bostic will take part in a video conversation hosted by the Florida Chamber of Commerce on the state’s economy. Audience Q&A is expected.
• 11:00 AM Kansas City Fed manufacturing index, June (consensus -10, last -19)

Friday, June 26

• 08:30 AM Personal income, May (GS -6.8%, consensus -6.0%, last 10.5%); Personal spending, May (GS +10.0% consensus +8.8%, last -13.6%); PCE price index, May (GS -0.04%, consensus flat, -0.47%); Core PCE price index, May (GS +0.10%, consensus flat, last -0.39%); PCE price index (yoy), May (GS +0.39%, consensus +0.5%, last +0.54%); Core PCE price index (yoy), May (GS +1.03%, consensus +0.9%, last +1.04%): Based on details in the PPI, CPI, and import price reports, we forecast that the core PCE price index rose by 0.10% month-over-month in May, corresponding to a 1.03% increase from a year earlier. Additionally, we expect that the headline PCE price index decreased by 0.04% in May, corresponding to a 0.39% increase from a year earlier. We expect a 6.8% decline in personal income in May and a 10.0% increase in personal spending.
• 10:00 AM University of Michigan consumer sentiment, June final (GS 79.2, consensus 79.0, last 78.9): We expect the University of Michigan consumer sentiment index to edge up by 0.3pt to 79.2 in the final estimate for June, reflecting further reopening and a rebound in our Twitter Economic Sentiment Index.

Source: Deutsche, Goldman, BofA

 

Submitted by Michael Every of Rabobank

US President Trump held a rally in a half-empty stadium over the weekend in which, as expected, he pledged to be the face of Law & Order. He’d already tweeted “LAW & ORDER!” previously – to which someone replied “MORK & MINDY!”…which sums everything up. Indeed, the half-empty stadium might reflect flagging Trump voters and an imminent defeat of America First US economic populism. Or, as Democrat AOC tweeted, it might have been teenagers ordering hundreds of tickets each in order to leave seats empty – and by using Chinese-owned apps like Tiktok and Zoom, the latter of which was recently in the headlines for literally shutting down discussion *in the US* that China does not approve of.

Once again what used to be a key signalling device to markets –that said, only after they didn’t listen to it in 2016– is perhaps distorted by some form of suppression. How to work out if the US will swing one way or the other in November and take economic policy with it? Might we see US-China détente under Biden, or a broader anti-China coalition? Would be see even more generous fiscal policy, or an attempt to try to reduce the deficit? The fact that his campaign is holding no kind of campaign at all, it seems, leaves us all wondering. But if markets are starting to wonder which way to go, think of the poor politicians outside the US.

For now, the US-China Cold War is dangerously real and getting worse: but should one act now to take sides not knowing if Washington will change direction by year end? The Wall Street Journal alleges Russia is getting cold feet siding with a China that seems to want conflict with the West. India’s policy of appeasement of China is over following the opposition calling the Prime Minister not Narendra but Surrender Modi: he has just permitted Indian troops on the Chinese border to use live fire for the first time in decades. Russia says it supports India. New Delhi is also realising it will need to look westwards.

Meanwhile, Europe can’t seem to make up its mind. As protests backing statues coming down take place in Europe too, Germany is putting a new statue of Lenin *up*. At least Europe appears clear on one thing: the ‘frugal friends’ appear to have watered down the Rubicon-crossing fiscal stimulus package, which now holds only token grants. With Germany’s virus ‘R’ number back up to nearly 3 (meaning lockdown should loom?) a warning for a Europe desperately trying to show a normal summer holiday season is possible, and even Stuttgart just seeing a small riot, if the EU keeps austerity up it may see lots more Lenin statues going up too.

Key economic decisions are being made as all this unfolds. The Indian public and some states are boycotting Chinese goods and firms – a huge future market China cannot afford to lose. The EU today holds a virtual summit with China, and the press are already reporting the bloc will “seek to cool tensions” despite Hong Kong, India, Australia’s recent claim that it just suffered a major cyber-attack by a certain state actor, and the EU’s own decision to start the process of closing off parts of its internal market to a certain state. Notably, Europe will miss out if the US-China trade deal continues, as both signatories are currently pretending is the case. Yet the passage of a draconian Hong Kong national security law, perhaps even by month-end, means the risk of US sanctions looms larger – and so do risks of a pre-November US-China decoupling. There are also whispers the US could turn its trade sights on Germany by year-end too. More so if Trump rallies remain empty? “Did we mention our new Lenin statue, Mr Chairman? It’s really very nice.”

With Eurasia, Eastasia, and Oceania strategic shifts in play, and for lots of other reasons, Orwell should be on our minds at present. So should Huxley, who gets a new TV version of Brave New World later this year. Twenty years ago I liked to mutter “Orwell worried about us being watched by Big Brother; he should have worried about us *watching* Big Brother”, which was the first smash-hit UK reality TV show to dominate our attention as the economic seeds we are reaping today were being so generously watered. As ever, someone else had the same thought and better: as Neil Postman writes in ‘Amusing Ourselves to Death:

”What Orwell feared were those who would ban books. What Huxley feared was that there would be no reason to ban a book, for there would be no one who wanted to read one. Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egoism. Orwell feared that the truth would be concealed from us. Huxley feared the truth would be drowned in a sea of irrelevance. Orwell feared we would become a captive culture. Huxley feared we would become a trivial culture, preoccupied with some equivalent of the feelies, the orgy porgy, and the centrifugal bumble-puppy.“

Orwell might have feared a Soviet Union where there were no markets. We have a world where we can all watch Barstool Dave Portnoy pick US stocks randomly using Scrabble letters live online – and then watch him outperform hedge funds. “Trivial is essential”. And the essential is now trivial. Bloomberg, which combines Orwell with Huxley and Douglas Adams, sums it up thus: “A ‘Buy Everything’ Rally Beckons in World of Yield Curve Control” That as the Fed’s number two, Clarida, recently stated there are no signs of asset bubbles forming due to Fed policy! The RBA’s Lowe is also open to re-assessing the bank’s property inflation targeting framework in a few years…when interest rates eventually rise again: in the meantime, “Borrow now!” is the message. The PBOC left its supposed new base 1-year loan prime rate on hold at 3.85% just days after promising USD4.2 trillion new broad credit growth this year, which is just as inconsistent in its own way.

And in the ‘real world’ two-metre rules are one-metre rules – because that works better for pubs. “Air bridges” will soon appear despite reports the virus is mutating such that antibodies for one strain are no use for resisting another. Four-day weeks might be the new five-day weeks in the UK and New Zealand. Indeed, a UK cut in VAT is what is required as government debt to GDP exceeds 100% for the first time since the 1960s….and yet MMT is still not a thing anywhere officially. Naturally, Eurasia has always been at (trade) war with Eastasia.

Enjoy the central-bank bumble-puppy. And nanoo-nanoo.

Following its biggest collapse on record (by a long, long way), the National Activity Index (produced by the Chicago Fed – CFNAI) was expected to rebound in May but remain deeply underwater.

The headline index rose to +2.61 (from a revised lower -17.89 in April), smashing the expectation of -10.00. +2.61 is a record the index going back to 1970…

Source: Bloomberg

This was led by improvements in production and employment-related indicators (57 of the 85 monthly individual indicators made positive contributions, while 28 indicators affected the index negatively).

The more-watched three-month average (because it smooths out fluctuations) is still negative (-6.65) indicating growth is dramatically below trend.

However, the diffusion index remains disappointing, signaling overall momentum remains negative on a longer-term basis…

Source: Bloomberg

(As CFNAI notes, a diffusion index of this type is one way in which to capture the “momentum” behind recent changes in the index, given that changes in the index driven by a large percentage of indicators pushing in the same direction tend to be more persistent than those driven by a small number of indicators.)

We suspect optimism for the “V-shaped” rebound is overdone.

For the seventh time this month, Chinese warplanes approached Taiwan’s air defense identification zone (ADIZ) on Monday in what could be a deepening phase of geopolitical turmoil between Beijing and Taipei, reported Reuters. 

The People’s Liberation Army Air Force (PLAAF) flew at least one H-6 bomber and J-10 fighter jet into the ADIZ at the island’s southwest territory. 

Taiwan’s air force responded by issuing verbal warnings to the PLAAF aircraft and dispatched aerial reconnaissance and fighter jets to intercept the Chinese jets. 

Taiwan’s Ministry of National Defense (MND) said Taiwanese fighters “proactively drove off” the PLAAF aircraft. The incident marks the seventh time, last seen on June 9, 12, 16, 17, 18, and 19, that Chinese military aircraft have violated the country’s ADIZ.

The H-6 is a nuclear-capable bomber, used by China in “island encirclement” war exercises around the Chinese claimed-island. 

Beijing insists Taiwan is part of China, and the war drills around the island, if that is in the air or by sea, act as a routine reminder that China has plans for unification. 

The sudden spike in Chinese warplane sightings comes weeks after Taiwan’s President Tsai Ing-wen was sworn in for a second presidential term in late May. 

US Secretary of State Michael Pompeo congratulated Tsai and said Taiwan is a “force for good in the world and a reliable partner.”

Usually, the US has refrained from recognizing Taipei’s government in the past. This certainly angered China – and probably why PLAAF aircraft have been flying around the island. 

With cross-strait and Sino-US diplomatic relations quickly deteriorating – Beijing will likely continue its aggressive stance in the region. 

Via The Epoch Times,

One person was wounded in what was the second shooting in Seattle’s protest zone in less than 48 hours, police said.

The shooting happened late Sunday night in the area near Seattle’s downtown that is known as CHOP, for “Capitol Hill Occupied Protest,” police tweeted, adding that one person was at a hospital with a gunshot wound.

The person arrived in a private vehicle and was in serious condition, Harborview Medical Center spokesperson Susan Gregg said in a statement.

The zone evolved after weeks of protests in the city over police brutality and racism, sparked by the police killing of George Floyd, a black man, in Minneapolis.

The Sunday shooting followed a pre-dawn shooting on Saturday in a park within the zone that left a 19-year-old man dead and a 33-year-old man critically injured. The suspect or suspects in that first shooting fled the scene, and no arrests had been made as of Sunday, Detective Mark Jamieson had said.

A sign welcomes visitors on East Pine Street during ongoing Black Lives Matter events at the so-called “Capitol Hill Organized Protest” in Seattle, Wash., on June 14, 2020. (David Ryder/Getty Images)

It wasn’t immediately clear where within the zone Sunday night’s shooting took place. The Seattle Fire Department arrived at the scene at 10:46 p.m. and went to a staging area near the zone’s perimeter, fire department spokesperson David Cuerpo told The Seattle Times.

The fire department was soon notified that the injured person has already been taken away. Both victims in Saturday’s shooting—whose identities hadn’t yet been released—were also transported to the same hospital via private car.

Seattle police tweeted that they had heard of a second shooting that they were unable to verify, given “conflicting reports.”

Further details about what transpired Sunday night weren’t immediately available. It wasn’t clear whether anyone was in custody.

The CHOP zone is a several-block area cordoned off by protesters near a police station in the city’s Capitol Hill neighborhood. President Donald Trump, a Republican, has criticized Seattle Mayor Jenny Durkan and Gov. Jay Inslee, both Democrats, for allowing the zone.

Response to Deadly ‘CHOP’ Shooting

Seattle police released the body camera footage of officers responding to the fatal shooting in the CHOP zone over the weekend.

“This is inside the area referred to as the Capitol Hill Organized Protest (CHOP),” the department wrote in a statement. “Officers attempted to locate a shooting victim but were met by a violent crowd that prevented officers’ safe access to the victims.”

The body camera footage showed officers arriving before heading through the zone with guns drawn as angry occupiers yelled profanities and approached the officers.

An officer in the video can be heard yelling: “Please move out of the way so we can get to the victim! All we want to do is get to the victim and provide them aid!”

Protesters are then heard telling the police to “put your guns down.”

“Homicide detectives responded and are conducting a thorough investigation, despite the challenges presented by the circumstances,” the department said.

The president of the union representing a Seattle police union told Fox News that “violence has now besieged the area known as CHOP, and it is no longer the summer of love, it’s the summer of chaos.” He was referring to the flowery “summer of love” comment made by Seattle Mayor Jenny Durkan earlier this month when she described the autonomous zone.

A 1970s-era poster of activist Angela Davis hangs at a boarded up and closed Seattle police precinct on June 21, 2020. (Elaine Thompson/AP Photo)

Washington state Gov. Jay Inslee told reporters in response to the shooting:

“I certainly believe we have to find a way to simultaneously have the community a chance to speak and for police services and importantly fire services to people to be able to be provided. Clearly we need to have a way to provide adequate police and fire protection everywhere in the state of WA including in that area.”

Over the weekend, the New York Post published a written, first-hand account from journalist Andy Ngo, who has long documented the far-left militant group Antifa throughout the Pacific Northwest, about CHOP. Because of a lack of “agreed-upon leadership,” he wrote, “those who have naturally risen to the top have done so with force or intimidation.”

“Though CHAZ claims to have no rules, it quickly developed a complex code of conduct that varied from zone to zone and even the time of the day. For example, those in the garden area, who are mostly white, need to make sure they do not ‘recolonize’ the space,” Ngo wrote, as he detailed random acts of violence in the zone.

Welcome to a new week, and a new rollercoaster in illiquid overnight futures trading, which saw spoos start off sharply lower on fresh coronavirus concerns after new cases in California rose by a record (4,515) and Florida infections up 3.7% from a day earlier, compared with an average increase of 3.5% in the previous seven days, while the German R-naught surged almost 3x to 2.88 in three days. As a reminder, on Friday stocks slumped late in the day after Apple said that it will again close almost a dozen stores in the US because of a recent rise in coronavirus infections in the South and West, denting the optimism that the US recovery is in full swing.

However, sentiment reversed sharply around 9pm ET when China reported that Beijing saw only 9 new cases suggesting that the latest breakout in the capital had been contained while South Korea saw the smallest daily increase in about a month, prompting renewed optimism that everything is once again under control. Futures then continued their ascent into the early European open, when Eminis rose as high as 3,097 before once again hitting the brakes and reversing modestly lower. Despite the rise in virus cases in Germany and the U.S. states of Florida, California and Texas.

Sentiment was also lifted by the same old news, that there’s growing speculation that politicians will be unwilling to put cities back on lockdown because of the economic toll. Historical stimulus programs by the major central banks are also supporting the sentiment.

European shares also opened lower as much as 1.1% but then quickly staged a sharp rally and nudged into positive territory as a jump in Germany’s coronavirus reproduction rate over the weekend was seen as unlikely to trigger a massive second wave or new lockdowns. Germany’s coronavirus reproduction rate jumped to 2.88 on Sunday from 1.06 on Friday, health authorities said. The spike in infections was mainly related to local outbreaks including in North Rhine-Westphalia.

“I regard the German R statistic as a bit of a red herring or more of a statistical quirk,” said Chris Bailey, Raymond James European strategist. “Coronavirus at-the-margin remains an overhang but the opening up of Europe still looks on much more solid foundations than the US/Americas.”

Meanwhile Germany’s mega-fraud WireCard shed another 50% of its market cap after the company admitted $2.1 billion in cash will never be found. The plunge assured that CEO Braun is facing financial ruins as he no longer has enough shares to cover his €150MM margin loan.

Asian stocks were little changed, with communications rising and industrials falling, after rising in the last session. Markets in the region were mixed, with Thailand’s SET and South Korea’s Kospi Index falling, and India’s S&P BSE Sensex Index and Singapore’s Straits Times Index rising. The Topix declined 0.2%, with Olympic and Land Co falling the most. The Shanghai Composite Index was little changed, with Ningxia Xinri Hengli Steel Wire advancing and Guangdong Songyang declining the most.

Investors are also wary of developments in Hong Kong after details of a new security law for the territory showed Beijing will  have overarching powers on its enforcement. China’s top legislative body, the National People’s Congress Standing Committee, will meet on June 28, and the Global Times reported it was likely to enact the Hong Kong security law by July 1.

Hong Kong’s Hang Seng .HSI fell 0.5%, underperforming regional markets.

Torn between record stimulus and growing fears of a second wave of infections, global stocks have been moving sideways in recent weeks after rising more than 40% from March lows on hopes the worst of the pandemic was over.

“Markets have climbed back … with stocks proving the doubter wrong yet again as a world of stimulus trumps the reality of economic and health struggles,” said Joshua Mahony, senior market analyst at IG.

In rates, the 10Y TSY yield dropped to 0.685%, trading around its 50DMA, and back in sideways trading range after false breakout beginning of June. The yield on Germany’s 30-year government debt fell below zero for the first time since May. Crude oil hovered below $40 a barrel in New York. Bunds bull flattened, breaching Friday’s highs and outperforming Treasuries by ~1bp. Gilts bull steepen slightly in a subdued reaction to comments from BOE’s Bailey.

In FX, the U.S. dollar meanwhile slipped from two-and-a-half-week highs as risk appetite remained alive in a world awash with cheap money after credit rating agency Moody’s warned that the stimulus measures will leave advanced economies with much higher debt than they accumulated during the last financial crisis. “Government debt/GDP ratios will rise by around 19 percentage points, nearly twice as much as in 2009 during the GFC … the rise in debt burdens will be more immediate and pervasive, reflecting the acuteness and breadth of the shock posed by the coronavirus.” Moody’s said.

The pound rose for the first time in five days against the dollar after Governor Andrew Bailey indicated that the Bank of England would reduce the size of its balance sheet before considering interest-rate increases. The euro also headed for the first gain since June 15. New Zealand’s dollar and the Swedish krona led G-10 currency gains. U.S. stock futures dictated the market’s mood after a record increase in California’s new virus cases was followed by news that China was containing a resurgence of infections, prompting a rally.

As central banks continued their unprecedented liquidity firehose, gold finally appeared reach to breach $1,750, nearing a seven-year high.

Elsewhere in commodities, oil prices steadied on tighter supplies from major producers, but concerns that the rising coronavirus cases could curb demand checked gains. Brent rose 0.2% to $42.25 a barrel, while WTI fell slightly to $39.65 a barrel.

Market Snapshot

• S&P 500 futures up 0.7% to 3,082.25
• STOXX Europe 600 down 0.2% to 364.83
• MXAP down 0.09% to 159.14
• MXAPJ down 0.06% to 513.47
• Nikkei down 0.2% to 22,437.27
• Topix down 0.2% to 1,579.09
• Hang Seng Index down 0.5% to 24,511.34
• Shanghai Composite down 0.08% to 2,965.27
• Sensex up 1.2% to 35,159.56
• Australia S&P/ASX 200 up 0.03% to 5,944.54
• Kospi down 0.7% to 2,126.73
• German 10Y yield fell 1.7 bps to -0.432%
• Euro up 0.3% to $1.1209
• Brent Futures up 0.02% to $42.20/bbl
• Italian 10Y yield fell 2.2 bps to 1.229%
• Spanish 10Y yield fell 1.9 bps to 0.474%
• Brent Futures up 0.02% to $42.20/bbl
• Gold spot up 0.2% to $1,747.44
• U.S. Dollar Index down 0.2% to 97.41

Top Overnight News from Bloomberg

• Germany’s coronavirus infection rate rose for a third day, lifted by local outbreaks including in the region of North Rhine-Westphalia, where more than 1,300 people working at a slaughterhouse tested positive.
• Beijing reported only nine new infections, a sign that a recent outbreak is under control. China blocked poultry from a Tyson Foods plant where many workers tested positive
• The European Central Bank’s most determined attempt yet to confront the German legal headache bedeviling its quantitative easing policy may emerge as soon as this week.
• Bank of England Governor Andrew Bailey signaled a major shift in the central bank’s strategy for removing emergency stimulus, stressing the need to reduce the institution’s balance sheet before hiking interest rates.

Asian equity markets began the week cautiously as sentiment was clouded by reports of increasing COVID-19 infections rates globally in which the World Health Organization reported a record daily increase of 183k cases, while new cases in the US topped the 7-day average and Germany’s reproduction rate surged to 2.88 from 1.79. This initially pressured US equity futures at the open and also weighed on ASX 200 (U/C) and Nikkei 225 (-0.2%), although US index futures have since fully recovered and Asia-Pac bourses also retraced their early declines with outperformance seen in commodity-related sectors, in particular Australia’s gold miners after the precious metal resumed its rally and broke above the USD 1750/oz level. Hang Seng (-0.5%) and Shanghai Comp. (-0.1%) were mixed with price action rangebound after the PBoC maintained its 1-year and 5-year Loan Prime Rates at 3.85% and 4.65% respectively as expected, while it also conducted a CNY 120bln net liquidity injection which was welcomed by mainland bourses. Furthermore, there were reports that China is planning to step up purchases of US farm goods following recent discussions and that President Trump deferred sanctions on Chinese officials related to Uighur minorities as it may impact the US-China trade deal, although Hong Kong lagged after the release of the draft Hong Kong National Security Law which the Standing Committee of the NPC is speculated to enact when it meets on June 28th-30th. Finally, 10yr JGB traded subdued as the intraday recovery in Japanese stocks weighed on bond prices but with downside also cushioned by the BoJ’s presence in the market for over JPY 1tln of JGBs with 1yr-10yr maturities and with the Japan Securities Dealers Association noting regional banks bought a record amount of ultra-long JGBs last month.

Top Asian News

• Hong Kong Central Office Vacancies Reach 12-Year High: JLL
• Japan Industry Group May Penalize Banks Breaking Debt Sale Rules
• Virus- Drug Nod Spurs Record Rally in India’s Glenmark Pharma
• The Most Popular U.S. Bond Market Trade Has Now Gone Global

Europe kicked the week off on the back-foot but have since nursed a bulk of its losses [Euro Stoxx 50 -0.4%] as initial downside stemmed from second wave woes amid record daily increases recorded by the WHO, Germany’s R-number jumping amid cluster outbreaks and with the US cases rising above its key 7-day level. Nonetheless, stock markets continued on its upwards trajectory since the cash open despite light fundamental news-flow. Note, the EU-China summit is underway but with expectations low. Sources noted there will be no joint communique between the sides this year – but, the meeting with Germany could prove to be interesting as the country will be taking the baton of rotating EU presidency in H2 2020; note, Germany has previously signalled a tougher EU line towards China. Nonetheless, bourses regain earlier lost ground alongside sectors – now mixed following an all-negative open – but still fail to indicate a clear risk tone. The sectorial breakdown also provides little clarity on this front as Oil & Gas, Travel & Leisure and telecoms remain the laggards. In terms of individual movers, Wirecard (-36%) shares continue to suffer after the group announced the missing EUR 1.9bln likely never existed, whilst it withdrew its prelim FY19 and Q1-2020 results. Separately, former CEO Braun – who was the largest individual shareholder – is reportedly unloading a large amount of his 7% stake in the Co. Elsewhere, Lufthansa (-6%) shares are weighed on after its CEO stated that the EUR 9bln state-backed aid is at risk of not passing the upcoming shareholder vote as only around 40% of shareholders have registered to vote at the EGM thus far vs. required 2/3 majority for it to pass. On the flip side, BT (+1.9%) remains supported by reports that the Saudi Public Investment Fund is said to have been acquiring a stake in the Co. through open-market purchases over the last few weeks, according to sources.

Top European News

• Lufthansa Braces for Portentous Week With Future on the Line
• Turkish Stocks Erase 2020 Losses After Wave of Local Buying
• Halkbank, Involved in U.S. Case, Jumps After Berman Resigns

In FX, the Greenback is weaker across the G10 board with only the Yen underperforming, and then only marginally vs the scale of recovery gains forged by other majors. Further increases in coronavirus infections and fatalities appear to be weighing on the Buck even though the US is far from alone in terms of suffering fresh outbreaks. Indeed, the KCDC is reportedly classifying the situation in South Korea as a 2nd wave as the global tally hit the highest level so far for a single day, according to the WHO and Germany’s R value rebounds to 2.88. However, the DXY has slipped back below 97.500 to a 97.287 low from last Friday’s 97.727 high ahead of May’s national activity index, existing home sales and a late speech from Fed’s Kashkari.

• AUD/NZD/GBP/SEK/EUR – The Aussie is back within striking distance of 0.6900 vs its US counterpart and not too unsettled by comments from RBA Governor Lowe overnight reiterating that rates are likely to remain at current levels for years, as he also seemed unfazed by the Aud’s present valuation. Meanwhile, the Kiwi has reclaimed 0.6400+ status ahead of the RBNZ policy meeting with markets all but ruling out any chance of a change in rates, but Sterling’s comeback from the low 1.2300 area towards 1.2435 is somewhat less easy to reconcile and may have more to do with Eur/Gbp flows/direction as the cross pulls back from 0.9065 to test bids said to be sitting at 0.9025. Note also, 1.85 bn option expiries at 0.9060 may be capping the cross ahead of the NY cut after Sterling shrugged off an improvement in CBI trends. Elsewhere, the Swedish Crown is also perky against the single currency and perhaps drawing some traction from the latest Riksbank business survey revealing stabilisation in May and June, though the Euro has clawed back gains vs the Dollar from circa 1.1168 to hover between decent expiry interest at 1.1200-05 (1.9 bn) and 1.1245-50 (1.24 bn) ahead of flash Eurozone consumer confidence and ECB speeches via de Guindos and Lane.
• CAD/CHF/NOK – Also on a firmer footing to at least start the new week, with the Loonie nearer the top of a 1.3560-1.3630 range vs its US peer awaiting comments from BoC Governor Macklem, the Franc back above 0.9500 in wake of latest weekly Swiss bank sight deposits showing a dip in both domestic and total balances and the Norwegian Krona consolidating post-Norges Bank advances either side of 10.8000 against the Euro.
• JPY/XAU – As noted above, the Yen is bucking the broad trend, but still keeping its head over 107.00 and Gold has lost some steam after surging above Usd 1750/oz and stalling ahead of the next major bullish technical target around Usd 1765 from May 18.

In commodities, WTI and Brent August contracts remain choppy and reside within a tight range, albeit the benchmarkes have nursed opening losses of around 1%, which originally emanated from COVID-19 second wave woes as the WHO reported a record daily increase of 183k cases, while new cases in the US topped the 7-day average and Germany’s R-rate spiked to 2.88 from 1.79. Meanwhile, Nigeria and Angola will be presenting their respective over-compliance plans today after failing to do so last week – with a presser expected following a review of the strategy – albeit, this has not been confirmed. Meanwhile, a new study shows that US shale companies could be forced into writing down at least USD 300bln of assets in Q2 as producers account for the oil price collapse earlier this year on balance sheets, which will be based on an oil price around USD 35/bbl according to the FT. WTI August fluctuates on either side of USD 40/bbl (vs. 39/bbl low) whilst its Brent counterpart tested resistance at USD 42.50 (vs. 41.58/bbl low) earlier in the session. Elsewhere, spot gold has given up some recent gains amid the recovery in stocks, but nonetheless currently remains underpinned by a weaker USD – with the yellow metal trading on either side of USD 1750/oz early-doors before printing a marginal new session low at USD 1741.90/oz. Copper prices are supported by the softer Buck and continues to trend higher amid support from draws in LME and China inventories. In terms of bank commentary, Citi sees gold prices at an average of USD 1702/oz this year and USD 1761/oz next year, whilst the bank forecasts copper at USD 5654/t in 2020 and 5850/t in 2021.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, prior -16.7
• 10am: Existing Home Sales, est. 4.09m, prior 4.33m; Existing Home Sales MoM, est. -5.59%, prior -17.8%

DB’s Jim Reid concludes the overnight wrap

Hard to believe we’re now going to have to deal with the nights slowly getting darker again here in the northern hemisphere. We spent the longest day yesterday at the beach and I think we’ll be discovering sand in various places across the house, car and bodies for the next week. It’s a horrendously messy thing to do, especially when the showers were closed for social distancing reasons. It is amazing what the bracing sea air does though as bed time went without incident last night, which is a rarity. They were all shattered.

It was amazing how busy the beach was but people generally practiced social distancing unless they were just deliberately keeping out the way of my horrors. It’s a strange period where life is getting slowly back to some kind of normality, but with major constraints and with everyone waiting to see what happens next. Indeed the virus spread continues to create a lot of uncertainty in markets. For example, does it matter that the troublesome US states are continuing to see case numbers increase or does it provide some good news that economies can stay open as cases rumble on? It’s possible that with more knowledge on the virus, the vulnerable are now being better protected which will dramatically reduce the fatalities if successful.

Even in countries that are perceived to have had a good response to the crisis are having issues. Last week we highlighted the reports out of Germany of a meat factory closing due to a rash of infections. Over the weekend, the Robert Koch Institute estimated that the effective reproduction factor of the virus was now 1.79 in the country after being 1.06 on Friday, and below 1.0 earlier in June. Yesterday there were over 600 new cases in the country, with the 7 day average of new cases over 500 for the first time in 5 weeks. It will be interesting to see how they deal with this small uptick that has shades of a second wave. China is also seeing a mini second wave with the country now having averaged around 40 new cases per day for the last week, after seeing low single-digit new cases per day all through May and early June. Beijing has closed schools and asked those who can to work from home when possible. In a positive sign, Beijing reported only 9 new cases overnight.

Elsewhere Brazil is still engulfed in their first wave passing 1 million total cases over the weekend, and registering 54,711 new cases on Friday, the most new cases in one day for any country in the world. They did have a small reporting backlog though. Nevertheless cases have risen by 3.3% per day over the last 7 days, in line with the 7 day period prior at 3.4%. The other virus hotspot is the US. After registering multiple days with daily case growth under 1.0% in the early part of June, cases have been rising at 1.5% per day on average over the last week, higher than the 1.2% average for the period previous. The majority of these cases are in large Southern states like Texas, Florida, and Arizona, but California continues to have similar problems. All four states currently have a 7-day average of new cases higher than the period prior, implying that the virus spread is accelerating and no longer even flat.

Using rtlive’s estimates, whose underlying methodology was updated over the weekend, 24 of the 50 US states now have effective transmission rates over 1.0. Of the main focus states, California has been trending higher for the last month and after falling back below 1.0, it is now at 1.05. Florida is at 1.39 and Texas at 1.16.

So plenty of worrying news on the virus at a global level but there are still signs that technicals in the market look supportive. Doing my weekend reading of DB research it was interesting to read our equity strategist Binky Chadha’s latest view where he suggested positioning in US equities has dipped again to the 5th percentile. He suggested that such low positioning is historically associated with strong performance of the market 1 week and 1 month forward. See here for more. A reminder that when Binky discussed the low positioning a few weeks ago one of the main justifications for that during a big rally was the emergence of new retail investors into the market with institutional investors remaining relatively on the sidelines.

A quick check on markets this morning now where broadly speaking most Asian bourses have pared a weak open. The Nikkei (+0.31%), Shanghai Comp (+0.28%) and ASX (+0.47%) are now showing modest gains while the Kospi is flat and the Hang Seng down -0.32%, likely not helped by news over the weekend that China has proposed a national security law that would allow the Beijing to override Hong Kong’s independent legal system. Elsewhere, futures on the S&P 500 are trading up +0.65% after erasing losses at the open of c. -1%.

In other weekend news, a Bloomberg story has argued that a change in the composition of Germany’s Constitutional Court has the potential to be less confrontational towards the ECB. Astrid Wallrabenstein, seen as more EU friendly, will replace Andreas Vosskuhle, president of the court whose term has expired and made the May 5 ruling on the ECB bond purchases while, Stephan Harbarth, a conservative lawmaker from 2009-2018, will become the new president. German daily Frankfurter Allgemeine Sonntagszeitung has already reported Wallrabenstein saying that it could be in the interest of the court to take an easier stand if the “demands are being taken seriously” and the actions taken by politicians, the German central bank and ECB “go into the right direction.” This comes on the back of Friday’s news that the ECB is preparing papers on proportionality of the PSPP to satisfy the GCC.

Staying with Europe, Italian PM Conte has indicated that his government would likely seek a wider budget gap as the government will focus on infrastructure projects including high-speed railways and may approve a value-added tax cut to stem the coronavirus’s impact. He said, “We will probably need to intervene for a further widening of the budget gap because the resources are not enough to cope with the impact of a horrible year both economically and socially,” while, adding that the government will present its reform plan in September. The reform plan is in response to lobby for the country’s share of a proposed EUR 750bn recovery fund.

The main highlight this week is likely to be the flash PMIs for June tomorrow, with manufacturing, services and composite PMIs coming out from around the world. Back in May, the PMIs rebounded from April’s rock-bottom prints. For example, the Euro Area composite PMI rose to 31.9 from 13.6, while in the US the composite PMI recovered to 37.0 from 27.0. For June the range of expectations across Europe/US are generally in the 40s with U.K. at the lower end and the US manufacturing possibly scraping to just over 50. Given these are diffusion indices and simply reflect whether conditions are getting better or worse then surely at some point soon these numbers are going to massively spike up regardless of the actual level of growth.

There are various other data releases but it’s not a big week for data. See the day by day calendar at the end for the full slate. Note that the IMF’s latest economic forecasts are released this Wednesday. In a website blogpost last week, their Chief Economist Gita Gopinath said that the update “is likely to show negative growth rates even worse than previously estimated.”

Looking back at last week now, Global equities finished higher but there feels like there is a bit more two way tension in asset markets now. Nevertheless, the significant amount of liquidity in the financial system and a steady drip of improving data outweighed concerns of a rise of covid-19 cases in China and Germany (albeit from low levels) as well as in the largest US states. The S&P 500 rose +1.86% (-0.56% Friday as Apple reversed a decision to reopen some stores in high case states). The index is now down -4.12% YTD. The last two weeks have seen growth stocks go back to outperforming in the US, with the tech-focused Nasdaq finishing this past week up +3.73% (+0.03% Friday). European equities also outperformed the S&P, with the Stoxx 600 rallying +3.22% (+0.56% Friday) over the five days. The rally was widespread with the DAX (+3.19%), FTSE MIB (+3.87%), FTSE 100 (+3.07%), and CAC (+2.90%) all gaining on the week. Asian indices also rose but to a lesser degree. The Nikkei rose +0.78% over the week (+0.55% Friday) while the CSI 300 was up +2.39% (+1.34% Friday), and the Kospi rose +0.42% (+0.37% Friday). The CSI 300 joined the NASDAQ as one of the few equity indices in the world that is up on the year, closing Friday +0.05% YTD.

Oil prices rallied for a 7th week out of the last 8 as OPEC+ gave reassurances on output cuts on Thursday. Expectations for demand also continues to slowly improve. WTI futures rose +9.62% (+2.34% Friday) to $39.75/barrel and Brent crude rose +8.93% on the week (+1.64% Friday) to $42.19/barrel. With risk assets rising and sentiment staying generally constructive, HY credit spreads on both sides of the Atlantic tightened on the week. European HY cash spreads were -15bps tighter on the week (+2bps Friday), while US HY cash spreads were -26bps tighter (+1bp Friday). Euro IG and US IG cash spreads were -3bps (+1bp Friday) and -12bps (-1bp Friday) tighter, respectively.

Peripheral debt tightened, with Spanish 10yr yields -12.6bps tighter to German bunds over the 5 days, while Italian BTPs were -11.4bps tighter, and Portuguese bonds tightened -8.5bps. Core sovereign bonds were little changed on the week as US 10yr Treasury yields fell -1.0bps (-1.5bps Friday) to finish at 0.694%, while 10yr Bund yields rose +2.4bps over the course of the week (-0.8bps Friday) to -0.42%.

The main highlight from last Friday was the European Council meeting where leaders were cautious, but still constructive on a Recovery Fund agreement. German Chancellor Merkel mentioned that an agreement had been reached on the mixture of grants and loans, while Austrian Chancellor Kurz said that grants would be possible, with conditionality. It feels like compromise is slowly building even if we’re not yet there. On the data front, the main two headlines were out of the UK. Public finance data for May showed the government’s debt-to-GDP ratio rose above 100% for the first time since 1963. Retail sales in the UK rose +12.0% MoM during May, well above the expected rise of 6.3% and recovering from last month’s revised -18.0% fall.