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Market Update

U.S./China relations fray

July 27, 2020


Major U.S. equity indices moved lower for the week as rising tensions between the U.S. and China and increasing hospitalization rates in the nation’s COVID-19 hotspots dominated headlines and soured investor sentiment.

Prior week summary

The major U.S. equity indices moved lower for the week, snapping a three-week stretch of gains for the S&P 500, as rising tensions between the U.S. and China and increasing hospitalization rates in the nation’s COVID-19 hotspots dominated headlines and soured investor sentiment. Relations between the world’s two economic superpowers have frayed in recent weeks with President Trump criticizing China’s initial response to the COVID-19 outbreak in Wuhan, China, and signaling a lack of interest in negotiating the terms of the Phase 2 trade deal in the near term. Further escalating tensions, the U.S. State Department ordered China to vacate their Houston consulate on Wednesday after citing medical research theft and visa fraud as reasons for the ordered closure of the consulate. China was quick to respond to the Trump administration’s move to close the Houston consulate and ordered the closure of a U.S. consulate in Chengdu, China on Friday suggesting that the U.S. consulate was engaging in “activities inconsistent with their status” and describing the decision as a “legitimate and necessary response.” Speaking on Friday, Chinese Foreign Minister Wang Yi, blamed Washington for the recent rise in tensions saying, “Current difficulties in China-U.S. relations are completely created by the U.S.,” and suggested that Washington’s aim is to, “disrupt China’s development by all means fair or foul.”

As of Sunday evening, the U.S. infection count sits just under 4.4 million confirmed cases, over a quarter of the global tally, with nearly 150,000 individuals succumbing to the virus. The recent surge in cases throughout the southern U.S. and California continued last week with Florida overtaking New York as the second hardest-hit state by case count, topping 400,000 confirmed cases, and setting fresh records for daily increases in new cases. While the seven-day moving average for new cases has recently ticked down, Florida has seen both the death rate and hospitalization rate increase in the last two weeks. Florida Governor Ron DeSantis looked to provide an encouraging word on Friday saying, “I think that we're seeing some positive momentum. I do think that we are going to head in a better direction here shortly," and added, "I would much rather be in a plateau than be in an escalation. We clearly stabilized with the cases. We're definitely trending in a better direction. We're trending much better today than we were two weeks ago."

On Capitol Hill, the GOP finalized the details of their COVID-19 relief package on Sunday after negotiating the terms of the deal for much of the week. The package is expected to cost $1 trillion and looks to provide funds for a second round of stimulus checks and to modify the unemployment insurance boost that currently sits at $600 per week and is set to expire at the end of the month. The Senate proposal looks to set in motion negotiations with House Democrats, who passed a $3.4 trillion relief package in May, on a finalized bill in the coming days. Speaking on the timeline for the negotiations, Treasury Secretary Steve Mnuchin, told reporters on Sunday, “We can move very quickly with the Democrats on these issues. We’ve moved quickly before and I see no reason why we can’t move quickly again. And if there are issues that take longer, we’ll deal with those as well.”

The look forward

Market participants are gearing up for a busy week of economic data releases with updated figures on consumer spending, durable goods orders, initial jobless claims, and the first reading of second-quarter GDP dotting the economic calendar. The FOMC will hold its two-day policy meeting on Tuesday and Wednesday.

Rates Snapshot

Market implied policy path (Overnight indexed swap rates)


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