After Monday's dramatic intraday reversal which saw the S&P500 surge more than 100 points from session lows and closing above its 200-day moving average, ES futures continued their levitation overnight and were trading at 3,110 last, propelled both by Monday's Fed announcement it would start to buy corporate bonds on Tuesday, and a late Bloomberg report that Trump was seeking a $1 trillion infrastructure proposal to stimulate the economy which would focus on 5G and rural broadband, although reports added it would still under discussion and would need the backing of Congress.

As Bloomberg notes, government stimulus has been a key feature of the global equities rally, despite soaring unemployment and signs that a second wave of the virus has started to emerge. Now there are signals that more economic support is on the way. "The size and the pace of Fed balance sheet expansion is something that will put a floor under global equity markets,” Stephen Gallo, BMO Capital Markets head of European FX strategy, said on Bloomberg TV.

At the same time, investors mostly ignored news of a sharp escalation in Korean tensions, as well as a deadly clash between Indian and Chinese border troops, while expecting a record rebound in May retail sales. Investors will be keeping a close watch on a live telecast of Fed Chair Jerome Powell’s two-day testimony before the Congress which is expected to begin at 10 a.m. ET. Powell’s remarks follow the grim outlook from the U.S. central bank last week that brought back volatility into stock markets after bets of a swift economic rebound helped the Nasdaq confirm a bull market.

As a result of more stimulus hopes, S&P futures rose 1.2% overnight, lifting the S&P 500 index to 9% below its record high hit four months earlier after coming within 5% of that level early last week. U.S. stocks ended a volatile session higher on Monday with the S&P 500 closing above its 200-day moving average, a key technical indicator of long-term momentum.

Travel-related stocks, also known as the "Robinhood darlings", jumped with Delta Air Lines, United Airlines, Carnival Corp, Norwegian Cruise Lines and Royal Caribbean jumping between 8% and 10% in premarket trading.

In Europe, the Stoxx 600 Index rallied the most in a month lef by construction stocks following a Bloomberg report that the Trump administration is weighing a $1t infrastructure program as part of plans to boost the economy. Stoxx 600 Construction & Materials index gains as much as 4.2%, the most since May 18, led by gains for CRH, HeidelbergCement and LafargeHolcim
Ashtead jumps as much as 19%, touching a record high, boosted by the U.S. plans and 4Q results that Jefferies said were slightly ahead of guidance. Ground engineering specialist Keller up as much as 15% after update.

Asian stocks gained, led by materials and industrials, after falling in the last session. All markets in the region were up, with South Korea's Kospi Index gaining 5.3% and Japan's Topix Index rising 4.1%. The Topix gained 4.1%, with TEMONA and Furukawa Battery rising the most. The Shanghai Composite Index rose 1.4%, with Nanjing Iron & Steel and Shanghai Yimin Commerce Group posting the biggest advances.

In geopolitical news, there was a sharp escalation out of North Korea which said it was mulling plan to enter demilitarized zones and its army is preparing to implement government orders. Subsequently, North Korea demolished the inter-Korean joint liaison office. South Korea's Blue House said Seoul will "strongly respond" if North Korea further worsens the situation, with traders now looking at a US response.

Separately, an Indian Army Colonel and 2 Army soldiers were killed in action during a clash with Chinese troops at one of the standoff points in the Galwan Valley, Ladakh, India Today Senior Editor Aroor; after reports of fresh tensions at standoff points in Easter Ladakh at Pangong Tso/Galwan, according to The Hindu's Peri. Some reports note that Indian soldiers attacked Chinese soldiers at the border. Thereafter, the Global Times reported that the Chinese Foreign Ministry said that China and India have agreed to resolve bilateral issues through dialogue to ease the border situation and maintain peace and tranquillity in border areas. More recently, the Chinese Global Times editor tweeted “China also suffered casualties in the Galwan Valley in the physical clashes with Indian soldiers, China doesn’t want to have a clash with India, but we don’t fear it”.

In rates, ttreasuries were off the lowest levels of the day although yields remain cheaper by up to 5bp at long end of the curve in a bear-steepening move. Plans for more U.S. stimulus via a $1 trillion infrastructure proposal lifted stocks, weighed on Treasuries as it implied far more issuance to come. Yields cheaper by 0.5bp to 5bp across the curve with front-end out to 7-year sector outperforming, steepening 2s10s by 1.7bp, 5s30s by ~5bp; 30-year yields topped at 1.542%, highest since June 10

In FX, the dollar fell versus most of its Group-of-10 peers following the U.S. infrastructure proposal to revive the virus-hit economy. "Dollar de-basement risks are mounting again and Treasury yields going much higher because of the expected infrastructure spending,” said Mizuho head of strategy Vishnu Varathan. "Markets are anticipating a lot more money flooding into the market with this spending and that the U.S. will have to sell a lot more bonds." The pound led G-10 gains after talks between U.K. Prime Minister Boris Johnson and the EU’s top officials. Bunds slipped while Italian bonds led outperformance by euro peripheral debt.

Elsewhere, WTI climbed toward $38 a barrel in New York, with Brent trading at $40.58 last amid signs of improving demand and declining production.

Looking at the day ahead, there are a number of data highlights from the US, including May’s retail sales, industrial production and capacity utilization, and finally June’s NAHB housing market index. Elsewhere, Fed Chair Powell will be speaking before the Senate Banking Committee, while we’ll also hear from Fed Vice Chair Clarida, the ECB’s Visco and Bank of Canada Governor Macklem. Oracle is reporting earnings.

Market Snapshot

• S&P 500 futures up 1.2% to 3,102.50
• STOXX Europe 600 up 2% to 360.21
• MXAP up 3.2% to 158.26
• MXAPJ up 2.6% to 507.74
• Nikkei up 4.9% to 22,582.21
• Topix up 4.1% to 1,593.45
• Hang Seng Index up 2.4% to 24,344.09
• Shanghai Composite up 1.4% to 2,931.75
• Sensex up 0.6% to 33,412.76
• Australia S&P/ASX 200 up 3.9% to 5,942.30
• Kospi up 5.3% to 2,138.05
• German 10Y yield rose 1.7 bps to -0.429%
• Euro up 0.09% to $1.1333
• Brent Futures up 1.6% to $40.36/bbl
• Italian 10Y yield rose 1.2 bps to 1.33%
• Spanish 10Y yield fell 3.2 bps to 0.529%
• Brent futures up 2% to $40.50/bbl
• Gold spot up 0.2% to $1,729.35
• U.S. Dollar Index down 0.1% to 96.60

Top Overnight News

• The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds
• Stocks rose globally alongside U.S. equity futures after news about American monetary and fiscal stimulus plans bucked up investor sentiment in face of worries over a second virus wave
• The U.K. and European Union moved a step closer to reaching a deal over their future relationship, with the bloc’s top officials confident Boris Johnson is willing to compromise and the prime minister saying the prospects for an accord are “very good”
• U.K. jobless claims more than doubled to almost 3 million during the virus lockdown, adding urgency to Bank of England and government efforts to cushion the blow
• The Bank of Japan increased its lending support aimed at struggling companies while leaving its main monetary policy settings untouched as it continues to monitor the economic fallout from the coronavirus pandemic
• Japanese fund managers sold the most U.S. agency bonds in six years in April after buying an unprecedented amount the previous month, according to data from the Treasury Department

Asia-Pac bourses notched considerable gains as the region took impetus from Wall Street's recovery after the pace of infections slowed in key US states and the Fed announced its Secondary Market Corporate Credit Facility will begin purchasing corporate bonds. ASX 200 (+3.9%) and Nikkei 225 (+4.9%) surged from the open with energy and tech leading the firms gains in Australia and Viva Energy the biggest gaining stock following its guidance, while stocks in Tokyo also rallied as they coat-tailed on the recent favourable currency moves and with focus on the BoJ announcement in which the central bank kept policy settings unchanged as expected but noted the size of market operations and lending facilities to address the pandemic is likely to increase to around JPY 110tln from the current JPY 75tln. Hang Seng (+2.4%) and Shanghai Comp. (+1.4%) were also positive amid some moderation in the US-China related headlines with the US to permit Chinese carriers to continue to operate 4 flights from China per week and with the US to also allow companies to work with Huawei to develop 5G standards despite its blacklisting, although gains for the mainland were relatively reserved compared to its peers after the PBoC’s net liquidity drain. Finally, 10yr JGBs were lower in which they briefly fell below the 152.00 level amid spill over selling from USTs and as stock markets surged, while the losses in bonds also followed the BoJ decision to maintain its monetary policy settings as expected.

Top Asia News

• Rupee Declines With Stocks on India-China Border Face-Off

European equities drift lower as trade is underway, but the region remains in firm positive territory [Euro Stoxx 50 +2.4%] despite the slew of geopolitical developments in early EU hours including further souring in inter-Korean relations alongside clashes between nuclear powers India and China. Some participants point yesterday’s recovery to the recent Fed decision to directly purchase corporate bonds, but scepticism remains regarding the stock market “shrugging off” stacking negative fundamentals and rising uncertainty – with the latest BofA June Fund Manager survey also noting that a record 98% of investors say the stock market is the most overvalued since 1998. Nonetheless, broad-based gains are seen across Europe of some 2%, whilst sectors also point to risk appetite in the market as cyclicals outpace defensives. In sectoral breakdown mimics the “risk-on” sentiment as Material, Banks and Travel & Leisure stand as the top performers, whilst Health, Retail and Media lag. In terms of individual movers, the strong performance in the Travel sector sees Carnival (+8.8%), easyJet (+7.3%), IAG (+7.7%) and Tui (+6.7%)  leading the gains – with the latter also noting that the easing of travel restrictions allows the group to partially restart its summer 2020 programme. Ashtead (+7.0%) trimmed earlier gains but holds a spot among the leaders following its trading update. Commerzbank (+2.5%) is unfazed by the spat with its second largest shareholder Cerberus, who recently stated the German bank has not executed or embraced any actions put forward by Cerberus.

Top European News

• U.K. and EU See Brexit Deal a Step Closer After Johnson Call
• U.K. Jobless Claims Double to Almost 3 Million Amid Lockdown
• European Construction Stocks Bounce on U.S. Infrastructure Plan

In FX, the DXY is trying to form a base around 96.500 following its late reversal through the 97.000 level on Monday when flagging risk sentiment due to heighted 2nd wave coronavirus fears was given a double boost by the Fed announcing individual corporate bond buying under the SMCCF program and US President Trump’s admin working on a draft proposal for a Usd 1tn infrastructure bill. However, subsequent flare ups on the Korean border, between China and India, Saudi Arabia and the Houthis, Iran and the US, have sapped momentum from riskier assets like stocks and the Dollar has reclaimed some of its losses as a result along with similar rebounds in fellow safe havens. Ahead, US retail sales and ip data before Fed chair Powell’s Senate testimony.

• GBP - Aside from the broader upturn in risk appetite, Sterling has received an independent boost via latest Brexit news as the Times reports that the EU may be ready to back down on fishing rights rather than somewhat inconclusive UK labour and earnings data. Indeed, Cable is holding relatively firmly above 1.2600 and Eur/Gbp is back down below 0.9000, albeit the former off best levels close to 1.2690 and the 200 DMA (1.2692) and the latter rebounding from a dip under 0.8950.
• EUR/AUD/CHF/CAD - All moderately firmer against the Greenback, with the Euro reclaiming 1.1300+ status and eclipsing a couple of HMAs (100 and 200) on the way up to around 1.1350, and maintaining gains after an encouraging ZEW survey, while the Aussie has retained a grip on the 0.6900 handle in wake of RBA minutes reaffirming an on hold stance with a bias to do more if needed. Elsewhere, the Franc remains above 0.9500, but flattish vs the Euro either side of 1.0750 following a modest Swiss Government GDP forecast upgrade, though still predicting a deep 2020 contraction and the trough in Q2, while the Loonie is meandering between 1.3510-1.3600 parameters amidst consolidation in oil prices off recent lows as the IEA raises its global demand estimate by nearly 500k bpd for this year.
• JPY/NZD/SEK - Marginal G10 underperformers with the Yen pivoting 107.50 vs the Buck after the BoJ left key policy metrics unchanged as expected, but increased COVID-19 lending by Jpy 35 tln, the Kiwi relinquishing 0.6500 ahead of NZ Q1 current account balances and the Swedish Crown ruffled by the Swedish Labour Board lifting its 2020 jobless forecast appreciably and the Riksbank reporting a deterioration in bond market functioning to leave Eur/Sek elevated above 10.5000.
• EM - No surprise to see pressure on the Krw beyond 1210 vs the Usd in light of North Korea destroying the Inter-Korean joint liaison office, according to South Korea’s Ministry of Unification, but regional currencies in general are jittery, bar the Zar and Mxn that have reversed some of Monday’s declines to revisit resistance ahead of psychological/round number levels at 17.0000 and 22.0000 respectively.
• RBA Minutes from June 2nd Meeting affirmed the target for 3yr yields would be maintained and the central bank will also not increase the cash rate until progress was made on its employment and inflation targets. The minutes stated that members recognized the global economy was in a severe downturn and that the Australian economy was experiencing its largest contraction since the 1930s, while it is prepared to scale up bond purchases if needed but also noted it had only purchased government bonds only on one occasion since the prior meeting. Furthermore, members noted yields on bonds with 1-2 years to maturity had risen to be a few basis points higher than the yields on 3-year bonds and if this should continue, they would consider purchasing bonds in the secondary market to ensure that these short-term yields are consistent with the target for three-year yields. (Newswires)

In commodities, WTI and Brent front month futures continue to grind higher since the European cash open as participants digest a string of geopolitical headlines alongside the IEA monthly oil market report. Firstly, tensions ramped up in the Korean Peninsula after North Korea destroyed the inter-Korean liaison office, as well as a standoff between nuclear powers India and China in which a number of soldiers lost their lives in the clash – which China blames India for instigating. Meanwhile, the IEA raised its 2020 global oil demand growth forecast by 500k BPD amid demand from China and India. 2021 oil demand is forecast to rise by 5.7mln BPD, which remains below 2019 levels. Furthermore, the agency does not expect demand to return to pre-crisis levels until at least 2022. This is in stark contrast to the EIA STEO report last week which downgraded its respective 2020 global demand forecast by 120k BPD. The two reports, however, synchronise on the view that US crude is set to fall this year: the IEA expects a decline of 900k BPD and the EIA a fall of 670k BPD.  WTI July gains a firmer footing above USD 37/bbl (vs. 36.38/bbl low) whilst its Brent Aug prices extends above USD 40/bbl (vs. 38.95/bbl low). Next up in terms of scheduled events, traders will be eyeing the weekly Private Inventory data for a glimpse at crude stocks over the last week. Further head, the JTC will be convening tomorrow ahead of the JMMC meeting on Thursday. Spot gold meanwhile retains an underlying bid above USD 1730/oz amid the aforementioned developments in the geopolitical sphere ahead of Fed Chair Powell’s testimony, albeit the statement is unlikely to divert much from the FOMC script, but the Q&A section of the event will garner attention. Copper prices meanwhile track stocks higher but found resistance at USD 2.625/lb as the red metal remains within Friday’s range.

US Event Calendar

• 8:30am: Retail Sales Advance MoM, est. 8.35%, prior -16.4%
• 8:30am: Retail Sales Ex Auto MoM, est. 5.5%, prior -17.2%
• 8:30am: Retail Sales Control Group, est. 5.2%, prior -15.3%
• 9:15am: Industrial Production MoM, est. 3.0%, prior -11.2%; Manufacturing (SIC) Production, est. 5.0%, prior -13.7%
• 10am: Business Inventories, est. -1.0%, prior -0.2%
• 10am: NAHB Housing Market Index, est. 45, prior 37

DB's Jim Reid concludes the overnight wrap

Sorry to go back to last week’s meanderings, but Chill Acoustic - the radio station I’ve very happily listened to while working from home for the last three months - is still stuck on the same track it was 6 days ago. This has ruined my flow and is starting to hit my productivity as I have to keep going back to check if it’s been fixed. So if anyone knows how on earth I can get them to fix this I’m all ears. I’m not sure if anyone actually controls this radio station. It has 19 twitter followers, hasn’t posted a tweet or a Facebook post for a couple of years and has a seemingly unmanned email address. I suspect I was the only global listener for most of the last three months. It was great while it lasted.

Unlike “Chill Acoustic”, the mood music for markets at the end of yesterday was very different to that at the start. Indeed, a day that started with fears of a second wave ended with waves of liquidity completely reversing the session from the London open. At roughly 7am London time, S&P futures were down -3.29% from Friday’s close but rallied around +4.7% from these lows as the day progressed. The actual S&P 500 closed +0.83% with tech outperforming (NASDAQ +1.43%). The market was slowly recovering from the lows prior to the US open but in the second half of the session a pair of headlines saw the index push higher into the close. First was a report that the US may allow domestic companies to work with China’s Huawei to develop new 5G standards, which could be seen as ameliorating some of the recent tension. The S&P rose around 0.6% on this, but then the real move came in the early afternoon when headlines flashed through that the Federal Reserve would start purchasing a broad portfolio of US corporate bonds. The index rose over 1.3% on that news even if it was hard to find something new in that announcement. Overall it was a remarkable turnaround, given where futures had been earlier in the day. News overnight suggesting that the White House is considering $1tn in infrastructure spending has propelled futures further too (more on that shortly).

As another way to look at the switch in sentiment, at around noon (NY time), 80% of S&P 500 stocks were down on the day, and all sectors except Consumer Staples were in the red, however by the end of the day 77.6% of the index was higher and every sector was up. Furthermore, when S&P futures hit their overnight low, the VIX volatility index hit its highest intraday level (44.37) since April 22, before actually closing down -1.7pts at 34.4pts. While in Europe the STOXX 600 also recovered from its opening lows to close down only -0.27%, but the index missed the real late surge in risk.

Asian markets have made strong headway this morning also. The Nikkei (+3.93%), Hang Seng (+2.95%), Kospi (+4.34%) and Asx (+3.64%) have all posted big gains, while the Shanghai Comp has advanced a more modest +0.87%. As mentioned above, news that the White House is considering a $1tn infrastructure proposal has seemingly also given risk assets a boost. The prospect of further stimulus was already known however the size and timing was more up in the air. According to a Bloomberg story, the preliminary version of the proposal would see funding reserved for traditional infrastructure work like roads and bridges as well as 5G wireless infrastructure and rural broadband. The current infrastructure funding law is due for renewal by the end of September and the House Democrats have already proposed their own $500bn proposal over five years. For now there is no detail on how long the administration’s draft would authorize spending. Nevertheless, long-end Treasuries are up 6bps post the news, while the short-end is little changed.

In other news, the BoJ left rates and asset purchases unchanged this morning while revising up the estimated size of its virus-response measures and pledged to do more to help the economy if needed. The central bank now estimates the size of its overall package of virus measures at JPY 110tn ($1tn), up from JPY 75tn as the government had expanded its aid for businesses in measures linked to one of the BoJ’s lending programs. Elsewhere, North Korea’s state media is reporting that the regime is reviewing a plan to send its army into some areas of the demilitarized zone separating the country from South Korea.

Moving on. As mentioned above, a big part of the late day rally yesterday was the expected news that the Fed was about to start buying corporate debt. This should not be seen as new as this was already lined up as part of the Secondary Market Corporate Credit Facility (SMCCF). Up to this point the central bank has been just purchasing ETFs, but they are now making it official that they'll start buying individual securities this week. What was new information, is that the Fed will be essentially creating its own index against which it will manage its SMCCF bond portfolio. To remind readers the criteria of the bonds that are purchasable remain the same – less than 5yrs to maturity, a US company, IG rated or a fallen angel as of March 22 or later.

The other main story bubbling in the background are the rise in cases across various US states. Cases in the US are slowing overall, but the hot spots we have highlighted in recent days continue to remain the main focus – namely Florida, Texas, Arizona and California. Florida cases were up 2.3% yesterday, compared with a 7-day average of 2.4%, while Texan cases rose 1.9% for the second day in a row. Texas also set a record with most daily hospitalizations for a fourth day in a row with over 2300 people admitted. The governor of California came out yesterday to say that the rate of positive tests continues to fall, and that they would continue to stay ahead of new problem areas. See the full run down in the full report today where we show the usual case and fatality tables including the four current in-focus US states. Elsewhere, India continues to see case growth at just under 4% per day, even as the country gets ready to reopen. India and South America remain the big risks outside the US while China reported 40 new cases on Monday and locked down more residential compounds around the area close to a market where a case had been found.

Back to markets yesterday and sovereign bond yields tracked equity prices yesterday, recovering from overnight lows throughout both the European and US sessions. By the close, yields on 10yr US Treasuries had risen +1.8bps and bunds finished down -0.7bps.There was a slight narrowing in peripheral spreads in Europe, with yields on 10yr Spanish (-2.6bps), Portuguese (-1.8bps) and Greek (-5.7bps) debt all falling over bunds. BTPs were the exception though, with 10yr yields up +1.8bps.

Onto Brexit, and there were a few headlines following the high-level meeting that took place yesterday between UK Prime Minister Johnson and the Presidents of the European Commission, Council and Parliament. Most notably, Prime Minister Johnson said afterwards to Sky News that “What we all really said today is the faster we can do this the better, we see no reason why you shouldn’t get that done in July”, and that “I don’t want to see it going on until the autumn, winter, as perhaps in Brussels they would like.” So a clear aim to conclude matters in the next few weeks, during which intensified negotiations are due to take place, with talks each week between the two sides from the week commencing 29 June to the week commencing 27 July. The press are generally reporting the fact that Mr Johnson was upbeat and keen to accelerate talks as a positive even if lots of areas of disagreements need to be sorted.

In terms of yesterday’s data, the Empire State manufacturing survey from the US beat expectations, with a -0.2 reading in June for the general business conditions indicator (vs. -29.6 expected). Although much better than expected, it’s worth bearing in mind (as with the PMIs) that this is a diffusion index, so a negative reading still means that slightly more respondents said that conditions had worsened in June compared with the previous month, rather than improved. So we shouldn’t get too carried away by the outperformance relative to expectations. It was a similar story for the new orders component, which rose to -0.6 from -42.4 the previous month.

To the day ahead now, and there are a number of data highlights from the US, including May’s retail sales, industrial production and capacity utilisation. Meanwhile there’s also June’s NAHB housing market index, along with UK unemployment data for April and the ZEW survey for June from Germany. Elsewhere, Fed Chair Powell will be speaking before the Senate Banking Committee, while we’ll also hear from Fed Vice Chair Clarida, the ECB’s Visco and Bank of Canada Governor Macklem.