S&P futures hit 3,284 overnight, the highest level since February and before the covid crisis unleashed tens of millions of layoffs, while Nasdaq futures rose 1% after solid Tesla earnings levitating along with European stocks as better-than-expected corporate earnings offset worries about a sharp escalation in tensions between the United States and China and a continuing rise in COVID-19 cases. US futures are now up 300 points in the past month in an almost diagonal line; the dollar slipped for a fifth session, gold soared and bond yields were unchanged.

Global stock have rallied to their strongest levels since February this week, in many countries erasing their entire slump in March when the coronavirus pandemic sent markets into freefall, as investors bet that the record stimulus will continue to propel stocks higher, even if its impact on economies is questionable. The MSCI world equity index rose 0.2%, close to Tuesday’s level, which was its highest since late February.

Notable overnight earnings:

• Microsoft (MSFT) Q4 2020 (USD): EPS 1.46 (exp. 1.34); Revenue 38bln (exp. 36.5bln). Intelligent cloud: 13.37bln (exp. 13.09bln). More personal computing: 12.91bln (exp. 11.46bln). Productivity and business processes (which includes Team): 11.75bln (exp. 11.89bln). Search was negatively impacted by reduction in advertising spend in Quarter. Fell 2.3% in after-market trade; -1.9% in the pre-market
• Tesla (TSLA) Q2 2020 (USD): EPS 0.50 (exp. -0.11/-1.09 reported); Revenue 6.04bln (exp. 5.37bln). Q2 production: 82,272 (in line with prior guidance). Q2 deliveries: 90,891 (prev. guided at 90,650). Continues to see over 500k deliveries in FY20. Notes the next Gigafactory site has been selected and preparations are underway. Initially rose 5.5% before paring back to ~+2% in the after-market; +5.5% in the pre-market

"We expect the rally to broaden out, and we do see upside for stocks in the second half of the year,” Mark Haefele, chief investment officer of global wealth management at UBS AG in Zurich, said on Bloomberg TV. “As large asset allocators, when we look across, there are very few alternatives to equities right now.”

The gains came despite Washington’s order to Beijing to close its consulate in Houston, Texas amid accusations against China of spying. These had weighed on risk sentiment earlier in Asia, initially pulling shares lower before Asian stocks rebounded. China said the order was an “unprecedented escalation” by Washington, and a source said Beijing was considering shutting the U.S. consulate in Wuhan in retaliation. U.S. President Donald Trump said that other consulate closures were “always possible”.

“The forces of liquidity are just unparalleled ... we’re seeing what happened post the GFC (global financial crisis), but we’re seeing it on steroids,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore. "It’s rare that you see both monetary and fiscal policy turned on, and then when they are they only turn on for a little bit."

European equities drifted higher, brushing off simmering tensions between China and U.S. in an otherwise quiet morning. The pan-region Euro Stoxx 50 climbed 0.42% while the German DAX gained 0.43% and the FTSE 100 by a similar margin; the Stoxx 600 rose on gains in carmakers and consumer products, led by Unilever NV’s jump of as much as 8.7% after its sales fell less than expected. The auto sector was the best performer, and utilities lagged; Italy's FTSE MIB index underperformed peers. Positive corporate earnings surprises in Europe helped the mood, including from Unilever, French-Italian chipmaker STMicroelectronics and automaker Daimler.

Earlier in the session, Asian stocks traded mostly lower, but finished mixed, as the region failed to derive support from Wall Street’s firm performance, in which the SPX reached five-month highs and the Dow Jones posted its third straight session of gains. After-market earnings State-side saw Tesla soar some 7% after reporting a surprise EPS, whilst Microsoft retreated 3% as quarterly revenue guidance disappointed, and as investors took chips off the table following the stock’s recent rally.

"You almost have a tug of war in markets between positives and negatives and its finally balanced. It looks like markets are pricing a V-shaped recovery so you can expect small negatives to have an outsize impact on markets,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management. “But the pullback is likely to be shortlived as there are people waiting for a dip."

In rates, Treasuries were little changed after edging higher led by long end. Volumes were depressed with cash markets closed in Asia for Japan holiday. Yields across the curve are back to within 1bp of Wednesday’s closing levels, 10-year around 0.595%; earlier advance flattened 5s30s to within ~2bp of its 100-DMA, support since March 12. US session includes $14BN in 10-year TIPS new-issue auction and size announcement for next week’s 2-, 5- and 7-year sales.

In commodities, the euro was up 0.1%, close to the 21-month high of $1.1601 it touched on Wednesday as agreement between European Union members on a large economic recovery fund continued to provide lift. The dollar was down marginally against a basket of currencies and unchanged versus the Japanese yen.

In commodities, gold advanced for a fifth day rising just shy of $1,890 and its September 2011 all time highs just above $1,900. Gold was last trading at $1,878 per ounce, a new nine-year peak, with prices up more than 23% on the year; Investors have flocked to the safe-haven metal as they seek shelter from a potential reversal in pumped-up stock prices and a possible rise in inflation following so much monetary and fiscal stimulus.

Oil prices initially edged up, with U.S. crude adding 14 cents to $42.04 a barrel and global benchmark Brent crude up 12 cents to $44.41 per barrel, before paring sharply sliding just after 6am ET.

Investors will be keeping a close watch on U.S. weekly jobless claims figures due at 830am for the latest indications of how the novel coronavirus pandemic has affected the American economy. The U.S. recorded more than 1,100 new coronavirus deaths for a second straight day on Wednesday. Despite the virus being far from under control, analysts say unprecedented stimulus measures to boost battered economies continue to provide structural support for riskier assets.

On today's calendar we have weekly initial jobless claims, June’s US leading index, July Kansas City Fed manufacturing index, and the Euro Area advance July consumer confidence. There will be monetary policy decisions from central banks in Turkey and South Africa, while we will hear from the BoE’s Haskel. Finally we are in the thick of earnings season now and will see results from Roche, Intel, AT&T, Unilever, Union Pacific, Daimler, Twitter and Hyundai.

Market Snapshot

• S&P 500 futures up 0.5% to 3,282.50
• STOXX Europe 600 up 0.7% to 376.22
• MXAP up 0.3% to 166.87
• MXAPJ up 0.4% to 553.10
• Nikkei down 0.6% to 22,751.61
• Topix down 0.6% to 1,572.96
• Hang Seng Index up 0.8% to 25,263.00
• Shanghai Composite down 0.2% to 3,325.11
• Sensex up 0.7% to 38,152.40
• Australia S&P/ASX 200 up 0.3% to 6,094.50
• Kospi down 0.6% to 2,216.19
• Brent futures up 0.8% to $44.63/bbl
• Gold spot up 0.7% to $1,884.14
• U.S. Dollar Index down 0.2% to 94.83
• German 10Y yield rose 0.3 bps to -0.487%
• Euro up 0.09% to $1.1580
• Italian 10Y yield fell 5.8 bps to 0.91%
• Spanish 10Y yield fell 1.1 bps to 0.323%

Top Overnight News

• Italy approved a 25 billion euros ($29 billion) proposal for extra spending as it battles to resuscitate its economy from the Covid-19 pandemic
• Saudi Arabia is accelerating plans to sell off state assets and may introduce income tax to reverse the economic toll of the slump in oil prices
• The U.K. government’s lack of economic planning for the fallout of the virus was an “astonishing” failure of governance, lawmakers say
• Investors who have mopped up 12% returns from Russian government debt in the past three months are waiting to find out if an expected reduction this week will be the last

APAC stocks traded mostly lower, but finished mixed, as the region failed to derive support from Wall Street’s firm performance, in which the SPX reached five-month highs and the Dow Jones posted its third straight session of gains. After-market earnings State-side saw Tesla soar some 7% after reporting a surprise EPS, whilst Microsoft retreated 3% as quarterly revenue guidance disappointed, and as investors took chips off the table following the stock’s recent rally. ASX 200 (+0.3%) opened softer as traders remained cautious over the outbreak in Australia’s Victoria State, but the index later nursed losses as the Australian Treasurer unveiled the biggest budget deficit since World Word II, providing a barrage of support to firms and citizens. Japanese participants were away as the country observes Marine Day Holiday. KOSPI (--0.6%) underperformed for a bulk of the session as South Korea entered a technical recession, prominent chip-maker SK Hynix traded in the green throughout most of session after a stellar earnings report, whilst the group expects chip prices to bottom out H2 and sees smartphone shipments growing by a double-digit percentage in 2021 – however Co. shares succumbed to downside in South Korea in the latter part of trade. Elsewhere, Shanghai Comp (-0.2%) opened lower by almost 1% before initially extending on losses amid Beijing’s rising tensions with the US, and as participants await Beijing’s response to the Chinese consulate shutting in Houston with possibly more on the way. Hang Seng (+0.8%) is propped up by its largest weighted financial and energy stocks ahead of the launch of its tech index on Monday.

Top Asian News

• Malaysia Clamps Down on Film-Making With TikTok in The Fray
• Cellnex Says Four Shareholders to Subscribe 18.7% New Shares
• Hyundai Motor Earnings Top Estimates on Resilient SUV Demand
• Indonesia’s Palm Oil Reserves Seen Slumping to 16-Month Low

European have kicked the session off on the front foot (Eurostoxx 50 +0.6%) in a retracement of some of yesterday’s losses in what has been a busy/upbeat morning of earnings for the region thus far. Furthermore, some positivity could also be gleaned from a lack of additional retaliatory measures between the US and China, albeit rhetoric from either side remains particularly hostile. From an earnings perspective, Unilever (+7.8%) have propelled the Personal & Household Goods sector towards the top of the leaderboard after the Co. reported a beat on expectations for sales amid increased demand for hygiene products amid COVID-19. Autos are also a key gainer in Europe following earnings from Daimler (+4.8%) with the Co. targeting making a profit in 2020; BMW (+3.5%), Continental (+2.4%) and Volkswagen (+2.0%) are all firmer in sympathy. Elsewhere, Publicis (+12.7%) is the clear outperformer in the Stoxx 600 today after its latest earnings report saw the Co.’s sales decline at a slower rate than forecast by analysts. Of note for the tech sector, STMicroelectronics (+2.1%) are another post-earnings gainer in the region after posting a beat on EPS and revenues and raising FY20 revenue guidance. To the downside, Swiss heavyweight Roche (-2.2%) is acting as a drag on the healthcare sector after reporting a 10% decline in sales with the Co. citing a firmer CHF and the fallout from some patients opting to stay away from hospitals for non-COVID treatments amid fears of catching the virus.

Top European News

• ECB, Hungarian Central Bank Set Up Repo Line for Euro Liquidity
• Italy Eyes $29 Billion in Extra Spending to Rescue Economy
• Boris Johnson Makes Scottish Pitch as Separatist Mood Rises
• CEZ Has Almost 50% Upside for J&T as Nuclear-Project Risks Abate

In FX, there was a faint respite for the Greenback and consolidation, but the overriding bearish theme/trend remains intact as the DXY teeters off another low closer to the 94.650 ytd base within a 94.781-95.015 range. Indeed, only the Brexit plagued Pound is actually softer vs the Buck in major circles as others hold close to recent highs and broad risk sentiment is propped by stimulus alongside COVID-19 vaccine progression over concerns about the virus itself and simmering geopolitical, trade and diplomatic tensions. Ahead, the latest look at weekly initial claims could or should provide a distraction, especially as the jobless tally feeds into July NFP and the FOMC looms next week.

• NZD/CAD/AUD/NOK/SEK - The best G10 performers, with the Kiwi hovering just below 0.6700 ahead of NZ trade and clawing back some losses relative to the Aussie amidst the ongoing rise of virus cases in Victoria. Aud/Nzd has slipped back to pivot 1.0700 as Aud/Usd straddles 0.7150 in wake of the Treasury’s fiscal and economic update pegging the budget deficit at Aud 184.5 bn, with S&P noting that the projections are in line with Australia’s triple A rating and negative outlook given that risks remain skewed to a downgrade. Meanwhile, the Loonie has extended post-Canadian inflation data gains through 1.3400 and the Scandinavian Crowns have recovered from midweek retreats with a degree of traction from oil and an improvement in Norwegian Industrial Sentiment rather than higher than expected jobless rates.
• EUR/CHF/JPY/GBP - 1.1600 is proving elusive for the Euro, and perhaps due to apprehension awaiting the EP judgement on the EU’s MFF, but the Franc continues to grind higher after breaching 0.9300 and Yen has recoiled into an even tighter band just under 107.00 amidst holiday-thinned volumes on Japanese Marine Day. Conversely, Sterling has lost momentum on the 1.2700 handle again in advance of an update from chief EU Brexit negotiator Barnier as the post-transition trade deal stalemate rumbles on and the UK is said to be open to holding emerency talks next week. More immediately, CBI trends and business confidence are due before a speech by BoE’s Haskel.
• EM - The Cnh is poised around the 7.0000 mark awaiting further repercussions between the US and China on the consulate spat, while the Try has shrugged off a decline in Turkish consumer sentiment in the run up to the CBRT and Zar is braced for another SARB rate cut, but unsure about the likely size.
• Mexican Finance Ministry's Pension System Chief said there will be a 2yr grace period after pension reforms before employers are required to make additional contributions, expects reform to become law by early next year. (Newswires)

In commodities, WTI and Brent are firmer this morning and once again tracking the generally positive sentiment as we are yet to see a firm retaliation from China regarding the US’ Houston consulate announcement yesterday, alongside a predominantly positive morning for European earnings. As has been the playbook for the week fundamentally new crude newsflow has been sparse and there is nothing scheduled for either today or tomorrow. Most recently, reports note that Russia’s Putin has ordered a study into hedging oil prices, but no decision has been taken on the matter yet. Next week, aside from the usual weekly reports, the schedule for oil is again light but performance/commentary via the earnings releases from a number of European heavyweight oil names will draw attention and provide an insight into the broader complex’s outlook; Co’s scheduled to report include Shell and Total while BP is on the docket for the week after. Turning to metals, where spot gold remains elevated this morning and has printed yet another multi-year high at USD 1888.65/oz eclipsing levels at the USD 1885/oz mark and leaving, aside from the evident psychological figure, just the all time high of USD 1921.75/oz left. Focus has also been on silver which in contrast is modestly subdued today in an easing of the recent rally. On the precious metals, Citi highlight that the gold/silver price ratio is approaching a test of the 80x level which has, for the most part, held since 2018; a level they suggest is likely to be breached imminently.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 1.3m, prior 1.3m; Continuing Claims, est. 17.1m, prior 17.3m
• 10am: Leading Index, est. 2.1%, prior 2.8%
• 11am: Kansas City Fed Manf. Activity, est. 5, prior 1

DB's Jim Reid concludes the overnight wrap

There’s been a decent markets tug of war develop over the last 36 hours. On one hand we’ve had continued rising tensions between the US and China, the worry over when additional US stimulus will arrive and also the still rising covid caseloads across many different areas around the world. On the other hand we’ve seen more clarity on the pathway for Europe plus positive vaccine news still bubbling in the background. The easiest way the market has found to deal with all this seems to have been to buy the Euro which was +0.37% yesterday and +1.24% this week and also to buy precious metals. Silver and Gold rallied +7.94% and +1.60% yesterday (near 7 and 9 year highs respectively) and are now up +20.08% and +4.14% since last Thursday’s close. Having said that the S&P 500 survived a few attacks to be up +0.57% and higher for the 4th successive day.

Back to the previous metal rally, yesterday we published a CoTD that showed that commodities struggle to outpace inflation over the long run. Gold is an exception but only really since we abandoned precious metal currency systems for the last time in 1971 and moved to a fiat one. Since then it is up 7 times in real terms. Although I’m a Gold bug I would acknowledge that the S&P 500 is up 22 times in real total return terms since. Since 1860 on this same measure Gold has only doubled in real terms whereas US equities are up 40,000 times. I wish my great, great, great, great grandfather had set up a trust fund for me... oh and been American. Anyway, Gold is definitely a fiat money hedge but on a total return basis equities have tended to do much much better in the long run. If you didn’t see the note it is here and email Jim-Reid.ThematicResearch@db.com if you want to be added to the CoTD.

On earnings, Microsoft reported slower growth in their cloud-computing business, with revenues rising 47% and below analysts’ estimates of 49% and far below last quarter’s 59% rise. Overall EPS was $1.46 a share, compared with estimates of $1.36 a share. The stock was down just over -2% after the close. Tesla was the other big tech name announcing after the close, and the automaker reported a $104mn net profit for the second quarter. This compares to a $408mn loss a year ago, with Tesla's shares up as much as +7.8% in after-hours trading. Meanwhile, this also makes Tesla eligible to become part of the S&P 500 as it has now posted profits in 4 consecutive quarters, thereby meeting a key inclusion criteria and thus could attract index based fund flows. Last week we highlighted the rise of Tesla vs the rest of the auto industry in a CoTD (see here ) and out of c.1200 responses to our flash poll 91% said Tesla was overvalued, while 6% said not and 3% were not sure.

Asian markets are trading mixed overnight with the Hang Seng (+0.37%) and Asx (+0.18%) up while the Kospi (-0.91%), and notably, the Shanghai Comp (-1.19%) is down amidst renewed US-China tension over the closure of Chinese Embassy in Houston, Texas (more below). As we go to print, the SCMP is reporting that China is considering asking the US to close its consulate in Chengdu, the capital of Sichuan province in retaliation. So watch this space. Elsewhere Japan’s markets are closed today and tomorrow for holidays. Futures on the S&P 500 are trading flat with silver (-2%) and gold (-0.13%) reversing some of their recent gains.

Covid-19 news outside of the US, particularly in Asia, continues to worsen. India now has more official covid-19 related deaths than Spain (just under 29,000), as the country now has the seventh most fatalities and the third most overall cases. Given the population size this shouldn’t be too much of a surprise but the outbreak continues to be ongoing in the second largest country on the planet by population. Indonesia saw a record high of 139 fatalities in the last day taking the total to 4,459 while cases rose by 1,882 to 91,751. Tokyo Governor Koike told residents to avoid going outdoors as much as possible during the upcoming four-day weekend after the city’s cumulative cases rose above 10,000 and new cases across Japan hit a new daily record. In Australia, Victoria state saw 403 new cases in the past 24 hours vs. a record 484 the day before.

The US had some marginally good news with Florida reporting that the positivity rate of first time testing fell to 10.6% on Tuesday, from 13.6% the day prior. Texas registered a record 240 fatalities in the past 24 hours though with a growth of 5.7% vs. the 7 day average of 3.2% and recorded 12,544 new cases with a growth of 3.6% vs. the 7 day average of 3.3% In terms of mitigation, the Governors of Ohio and Minnesota have now asked residents to compulsorily wear masks in public starting today, while Ohio also instituted a travel advisory for those coming from high risk areas.

The still high caseload across the US means that the need for additional stimulus is still fairly acute, however optimism surrounding a bill being enacted in the next 2-3 weeks is fading. Congressional Democrats and Republicans remain nearly $2tr apart in funding. Senate Minority Leader Schumer said late yesterday that it would not make sense for Democrats to start talking to their Senate counterparts until Republican leadership had a bill to work off. Overnight, Bloomberg has reported that McConnell may introduce the GOP stimulus plan today with a series of bills that would serve as an opening to negotiations with Democrats. This comes after Republicans and the White House reached agreement overnight on the spending portion of their stimulus plan.

Back to the US/China tensions, yesterday morning it was announced that the US would be giving China 72 hours to close the Chinese consulate in Houston, Texas. The reason the US State Department provided was that it sought “to protect American intellectual property and Americans’ private information.” This comes just a day after the Justice Department in the US accused Chinese hackers of trying to steal vaccine IP from private companies on behalf of the country’s intelligence services. According to China’s Foreign Ministry spokesman Wang Wenbin, the US’s actions are an “unprecedented escalation,” and that China would “react with firm countermeasures” if the orders were not revoked. Meanwhile, US Secretary of State Mike Pompeo is scheduled to make a speech today at 4:40pm EDT at the Richard Nixon Presidential Library in California on ‘Communist China and the future of the free world’. So this could be one to watch in the light of recent events. Interestingly, he was quoted by the Washington Times making a rather hawkish statement on China, saying "We put together a series of remarks aimed at making sure the American people understood the ongoing, serious threat posed by the Chinese Communist Party to our fundamental way of life here in the United States of America".

In other US-China news, today there will be a hearing in the US Senate on the potential need for the US to create its own cryptocurrency to challenge and keep up with China’s recent action in the field. In a sign of tensions elsewhere Bloomberg is reporting that the Chinese state TV has now taken English football off the airwaves after China/U.K. tensions have climbed in recent weeks.

Back to markets yesterday and outside of precious metals, commodities struggled a bit. Oil dropped over -1.5% early on with the move lower in risk sentiment and also EIA data showing a rise in production and modest decline in demand. However it recovered to nearly flat with Brent Crude at -0.07% and WTI at -0.14%. The recovery in oil may have been partly to do with the dollar’s drop. Copper prices pulled back -1.11%, the metal’s second biggest drop since mid-June when risk assets globally pulled back on news of a potential second wave of covid-19 cases in the US.

Elsewhere, core sovereign bonds rallied slightly yesterday as safe haven assets generally outperformed, with 10yr Treasury yields falling -0.3bps to close at 0.597%, their lowest level since 21 April, while the dollar weakened by -0.14% to its March lows helping the earlier Euro move we discussed. This move in Treasuries could portend the need for the Fed to do more in coming months if the US fiscal stimulus is indeed delayed as outlined above. Bund yields fell by -3.0bps, while in the UK 10yr gilt yields fell by -1.6bps to a fresh record low of 0.12% as negotiations between the UK and EU are set to run into and through Prime Minister Johnson’s July deadline for an outline agreement.

ECB President Lagarde commented on the recent fiscal stimulus agreed to by the European Council, saying that it “is clearly a demonstration of solidarity, of transfer to those that need it most.” She added that “It could have been better, but it’s a very ambitious project actually,” in reference to the allocation of loans and grants in the package.

The data from yesterday was fairly light. We saw US existing home sales for June, which came in 4.72m (vs. 4.75m expected) up from 3.91m last month. The US FHFA house price index for May fell -0.3% (vs. +0.3% expected), while last month’s reading was revised one tenth of a per cent lower to +0.1%. Meanwhile north of their border, Canada’s June CPI month-over-month reading was higher than expected at +0.8% (vs. +0.4% expected) compared to last month’s +0.3%.

Today we will see Germany August GfK consumer confidence, France July business confidence, US weekly initial jobless claims, June’s US leading index, July Kansas City Fed manufacturing index, and the Euro Area advance July consumer confidence. There will be monetary policy decisions from central banks in Turkey and South Africa, while we will hear from the BoE’s Haskel. Finally we are in the thick of earnings season now and will see results from Roche, Intel, AT&T, Unilever, Union Pacific, Daimler, Twitter and Hyundai.