Futures tied to the S&P 500 ticked up 0.5%, suggesting the benchmark could rise after the opening bell. The index climbed 5.5% in July. Trading volumes are expected to slide in coming weeks with the onset of the summer vacation season, leading to an increase in volatility.
Overseas, the pan-continental Stoxx Europe 600 rose 1.2%, bolstered by survey data showing signs of recovery in euro area factories.
Investors are trying to determine whether stocks’ valuations are justified at current levels against the backdrop of a sharp economic downturn, rising U.S.-China tensions and the continuing struggle to contain the coronavirus pandemic. This has taken on fresh urgency as political disagreements on a deal for further fiscal support in the U.S. risks undermining fragile consumer and business confidence.
“The market is at a pretty important inflection point,” said James McCormick, a strategist at NatWest Markets. “The outlook for equities and other risk assets is becoming more difficult going forward. We’ll learn a lot about the sustainability of the recovery in the next three to four months.”
Democrats and Republicans remained at odds in weekend negotiations on a new economic relief package, including aid to replace the federal $600-a-week boost to unemployment benefits that expired Friday. The White House had hoped to pass a short-term extension of the federal unemployment insurance, but Democrats want to negotiate a comprehensive package of relief, including state and local aid.
“The slowness with which Washington is coming to an agreement on a fiscal policy shows some fatigue. A deal will likely come, but after some big fiscal cliffs have been passed,” said Mr. McCormick.
Secretary of State Mike Pompeo’s comments over the weekend that the White House may take action against Chinese software companies stoked concerns about deteriorating relations between the world’s two largest economies. Heightened tensions between Beijing and Washington have weighed on investor confidence for weeks, with growing expectations that the U.S. government will take a harder line in relations with Beijing in the run up to November’s presidential election.
“It seems the closer the election gets, the fiercer tensions are likely to be,” said Oliver Jones, senior markets economist at Capital Economics. “The China hawks in Washington appear to have the upper hand.”
The video-sharing app TikTok, owned by a Chinese company, has become one flashpoint after U.S. officials expressed concerns that TikTok could pass on the data it collects from Americans to China’s authoritarian government. President Trump on Friday signaled that he was considering a ban of the popular app. Microsoft said Sunday that it will move forward with plans to buy its U.S. operations following a call between Microsoft CEO Satya Nadella and Mr. Trump.
Shares in Microsoft rose 3% ahead of the opening bell in New York.
Among European equities, HSBC Holdings slid 4.8% in London. The bank’s second-quarter profit fell 96% as the disruption caused by the pandemic complicated its efforts to refocus on Asia while dealing with the rising U.S.-China political tensions. Siemens Healthineers fell 4.4% in Frankfurt after the medical technology company said it would acquire Varian Medical Systems for $16.4 billion, or roughly 25% above its current market value.
In the Asia-Pacific region, China’s major equity benchmark, the Shanghai Composite Index, rose 1.8% by the close of trading after a private gauge of manufacturing activity on the mainland rose in July to its highest level in more than nine years, boosted by accelerated production and recovering demand.
Japan’s Nikkei 225 led Asian equities’ gains, climbing 2.2% to end the trading session in positive territory for the first time since July 21. Sentiment improved due to a weaker Japanese yen against the U.S. dollar’s broad rebound, according to Chang Wei Liang, a macro strategist at DBS Bank. A weaker yen helps lift profitability of Japanese exporters, supporting stocks.
The ICE Dollar Index, which tracks the greenback against a basket of other major currencies, ticked up 0.5% while remaining near its lowest level in over two years. The dollar had made a sharp U-turn this summer following a long rally, and its slide added further support to the booming market rally, lifting U.S. stocks and commodities.
In bonds, the yield on the benchmark 10-year U.S. Treasury ticked up to 0.548%, from 0.536% Friday.
Cases of the new coronavirus infections in the U.S. reached a record in July, with more than 1.9 million new cases, and continued to climb over the weekend. A White House official said even Americans who live in isolated settings aren’t immune from the virus, and urged people to take precautions. There has also been a surge in infections in Europe, fueled by young people crowding into beaches and bars.
A closely watched metric of economic activity signaled that European factories are staging a recovery. Purchasing Managers Index data for manufacturing in the euro area broke through the key level indicating growth, a score of above 50, for the first time in a year and half, when the bloc’s manufacturing sector entered recession. It had plummeted during the coronavirus pandemic.
However, economists cautioned that industrial production was still well below pre-pandemic levels at the end of the second quarter. The compiler of the survey, IHS Markit, also said “severe job-cutting” continued as firms were operating under capacity.
The Institute for Supply Management releases is due to release its U.S. manufacturing index for July at At 10 a.m. ET. Factory activity is expected to show an improvement for the third straight month as manufacturers rebound from shutdowns and supply-chain disruptions.
—Frances Yoon contributed to this article.
Write to Anna Isaac at email@example.com