07/21/2020
After a marathon weekend of negotiations, European Union member states are reportedly close to agreeing on a 750-billion-euro pandemic recovery package and a $1.05 trillion seven-year budget. Originally scheduled to conclude on Saturday, negotiations extended through Sunday, and will resume later on Monday, when it is hoped the agreement will be finalized. Reports indicate that the original proposal of grants totaling 500 billion euros has been reduced to 390 billion, with the rest consisting of low interest loans. Language detailing the uses and approvals of the program remain to be finalized. The euro has risen in response to the reported progress, climbing to its highest level against the dollar in over a year at 1.1456. Stocks are fractionally higher in early Monday trading, and yields on Greek, Spanish and Italian bonds are lower. While this agreement will help to solidify the political structure of the European Union, and brighten the prospects for its economic recovery, failure of these negotiations could have been just as harmful. And as the champions of the rescue package, Germany’s Merkel and France’s Macron will be viewed as the political winners.

In the U.S., the Senate is now back in session and negotiations on another economic stimulus bill will be the immediate focus. Majority leader McConnell has said he would like to get something done in July, while the White House has said by early October. The House passed its own $3.0 trillion proposal back in May. It is generally expected that a final package between $1.0 and $2.0 trillion in size will be approved, with the details of where the spending will be directed yet to be determined. 

U.S. Equities on the Rise Again; Economic Data Shows Slowdowns in Certain Sectors 

Last week U.S. equities rose for the third straight week, climbing 1.2 percent. And despite the second quarter being the best since 1998, the third quarter is off to a surprisingly good start of its own. So far in July the S&P 500 is up 4.0 percent, and the VIX index drifted lower for the fifth straight week, despite concerns over intensifying coronavirus infection and hospitalization rates in three of the most populous states. But the economic data has been generally strong, most recently last week’s reports on June industrial production and retail sales. But some of the high frequency data sources have recently shown some slowdown in the pace of improvement, including jobless claims, restaurant reservations, and air travelers, along with consumer sentiment. This week’s economic calendar includes new and existing home sales, and flash PMIs.
 
Bond yields were little changed on the week as the ten-year remained anchored near 0.60 percent for the fourth straight month. The ten-year ended the week at 0.63 percent, and credit spreads narrowed for the third straight week. 

Earnings Season Ramps Up This Week

Second quarter earnings season ramps higher this week, and according to Factset is on pace to decline 44 percent compared to last year, so there was little change in the expected aggregate result. Last week the big banks reported generally better than expected results driven by trading and underwriting as big corporate clients shored up their balance sheets. But the big banks also set aside sizeable reserves against potential future losses, betraying their own trepidation about the pace of the economic recovery. This week’s notable reports include IBM, United Airlines, Coca- Cola, CSX, Microsoft, Tesla, American Airlines, Amazon, Intel, and Royal Caribbean.
  
Important Disclosures:
Sources: Factset, Bloomberg

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