The new week in global stock markets started off well enough, largely thanks to China whose central bank weakened the yuan’s daily fixing for an eighth day, down to 7.0211, however once again stronger than the 20-trader Bloomberg consensus estimate of 7.029%, which in turn sent the USDCNH sliding from 7.108 to below 7.09, and helped prop up Chinese stocks which closed up 1.45%.
However, any vestige of optimism quickly fizzled around 4am EDT when the news hit that all flights out of Hong Kong were cancelled on Monday in an unprecedented disruption after thousands of anti-government protesters occupied the airport terminal building. The Airport Authority blamed the cancellations from 4pm local time on the protests which had “seriously disrupted” operations, with masses of demonstrators preventing passengers from checking in or clearing airport security.
And what really spooked traders was a video clip from China's nationalist, and state-owned tabloid Global Times, showing Chinese People's Liberation Army forces building up just across the border with HK, in Senzhen, ahead of what appears to be a "apparent large-scale exercise," according to the Global Times.
"Numerous" armored personnel carriers, trucks and other vehicles of the paramilitary police were seen heading towards Shenzhen over the weekend. That means the long-awaited military intervention from the mainland could be just around the corner - something that the Hong Kong people have condemned. At the same time, a Chinese official said the city was at a “critical juncture” and that there were signs of “terrorism.”
The result was a quick, and painful reversal in sentiment , which sent US equity futures below 2900 and global stocks sliding.
The change in mood wiped out the Stoxx Europe 600 Index’s jump of as much as 1%. Stocks had earlier increased in Shanghai and edged higher in South Korea and Sydney, though Hong Kong shares dropped and many other markets across Asia were shut for a holiday. Overall, Asian stocks fluctuated in thin trading, with markets in at least six countries shut. Declines in material producers countered a health care rally. Equity markets in Japan, Singapore, India, Thailand, Malaysia and Philippines were closed for holidays. The Shanghai Composite Index climbed 1.5% for its biggest advance in six weeks, supported by Kweichow Moutai and large financial firms; Bloomberg reported that Chinese policy makers are holding back from rolling out the big guns of monetary stimulus, keeping options in reserve. Hong Kong’s Hang Seng Index dropped 0.4%, as authorities canceled Monday’s remaining flights amid a mass protest at the city’s airport. Cathay Pacific Airways sank 4.9% to a 10-year low.
Safety remained the name of the game. The FX safe haven, the Japanese yen, hit its highest in nearly a year and a half at 105.32 yen against the dollar as it strengthened versus all its major peers as investors sought the safety of havens; Scandinavian currencies fell by the most versus the dollar in a broad risk-off move. The pound got a boost from the latest reports on U.K. lawmakers’ plans to prevent a no-deal Brexit, with MPs said to be drawing up plans to force the Prime Minister to request a last minute Brexit extension. The Swiss franc gained versus the euro even as SNB sight deposits jumped the most in more than two years last week, suggesting intervention. The South Korean won extended declines as data signaled exports are set to drop as the impact of the U.S.-China trade spat spreads. Argentina’s euro-denominated bonds slid after President Mauricio Macri’s poor showing in primary elections on Sunday. The Mexican peso slumped.
“Risk indicators and global markets have become more shaky and the yen is reflecting those concerns, and safe-haven shelters like the yen and the Swiss franc should continue to benefit,” said Commerzbank currency strategist Esther Reichelt.
The story was the same in bond markets, where the demand for safety was unrelenting, and sent the 10Y US Treasury yield sliding to 1.68%, approaching the lowest levels of the year. A rally in Italy’s debt gave it an extra boost after Fitch kept country’s rating steady despite the prospect of snap elections in the euro zone’s third biggest economy now looming. There were signs that League leader Matteo Salvini’s call for those snap elections was facing mounting resistance from other parties whose support will be needed for the plan to succeed.
“Fitch kept Italy’s rating unchanged and some market participants may be betting that a snap election could be delayed,” said DZ Bank rates strategist Sebastian Fellechner, referring to the fall in yields.
Economists are also watching for a batch of global data this week. Goldman Sachs became the latest to cut its U.S. growth forecast at the weekend, warning that a U.S. China trade deal now looked unlikely before the 2020 U.S. presidential election.
As a result of the ongoing uncertainty, traders have increased bets for central bank easing in recent weeks as the U.S. with markets now expecting 4 rate cuts by December 2020, although as Andrew Sheets, chief cross asset strategist at Morgan Stanley, said over the weekend, “we remain cautious, as we believe that a number of challenges remain... among them, the risk that high policy expectations make disappointment more likely, and that even if those aggressive expectations are met, easing isn’t expected to improve growth or inflation materially.”
In commodities, oil prices dipped on growth and trade worries, having risen sharply on Friday on a drop in European inventories and production cuts by the Organization of the Petroleum Exporting Countries. Brent crude futures were at $58.16 a barrel by 0829 GMT, down 37 cents from their previous settlement. WTI futures were at $53.89 per barrel, down 61 cents from their last close. Both benchmarks fell last week, with Brent losing more than 5% and WTI falling about 2%.
“The market is facing a buyers’ strike,” said Michael Tran, commodity strategist at RBC Capital Markets, noting the low level of investors’ long positions betting on higher prices. “Despite the laundry list of disruptions and additional barrels at risk, investor length is currently near a multi-year low.”
Finally, with risk solidly off, gold surged, rising solidly above $1500, and dragging silver, if not bitcoin, along for the ride.
- S&P 500 futures down 0.5% to 2,905.75
- STOXX Europe 600 up 0.2% to 372.32
- MXAP down 0.08% to 152.14
- MXAPJ down 0.3% to 488.80
- Nikkei up 0.4% to 20,684.82
- Topix up 0.4% to 1,503.84
- Hang Seng Index down 0.4% to 25,824.72
- Shanghai Composite up 1.5% to 2,814.99
- Sensex up 0.7% to 37,581.91
- Australia S&P/ASX 200 up 0.09% to 6,590.27
- Kospi up 0.2% to 1,942.29
- German 10Y yield fell 1.1 bps to -0.587%
- Euro down 0.3% to $1.1169
- Brent Futures down 0.7% to $58.14/bbl
- Italian 10Y yield rose 26.7 bps to 1.449%
- Spanish 10Y yield fell 2.9 bps to 0.232%
- Brent Futures down 1% to $57.92/bbl
- Gold spot up 0.4% to $1,503.00
- U.S. Dollar Index up 0.2% to 97.70
Top Overnight News from Bloomberg
- Parliament leaders in Italy will meet on Monday to decide when Prime Minister Giuseppe Conte will have to face a no-confidence vote as the anti-establishment Five Star Movement and the center-left Democratic Party consider an alliance
- Chinese policy makers are holding back from rolling out the big guns of monetary stimulus, keeping options in reserve as the trade standoff with the U.S. risks morphing into a global currency war
- New Zealand’s Treasury Department has identified a lower bound for the official cash rate as it studies the monetary policies that could be used to combat an economic downturn.
- Argentina’s President Mauricio Macri unexpectedly lost a primary vote by a landslide, foreshadowing a defeat in October’s presidential election and a possible return to the policies of his predecessor, Cristina Kirchner
- Since becoming U.K. prime minister less than three weeks ago, Boris Johnson has announced spending pledges at a rate of about 2b pounds ($2.4b) per week, fueling speculation he’s planning for an early election
- The Times reports some U.K. lawmakers are drawing up plans to compel PM Johnson to request a last-minute Brexit extension from the European Union
- Sharp and Foxconn Industrial Internet are increasing production in Vietnam before U.S.’s plan to impose duties on all remaining imports from China from September, according to Taipei-based Economic Daily News
- White House trade adviser Peter Navarro tells CNBC he doesn’t want China to devalue their currency “but they’re going to and we’re going to take strong action against them”
- Bullish bets on gold have hit a three-year high amid concerns of a currency war, and Goldman and Citi see prices climbing further
- The anti-establishment Five Star Movement and the center- left Democratic Party are ready to consider an alliance aimed at postponing early elections, according to several Italian media outlets
- Ratings: Italy affirmed at BBB by Fitch, outlook maintained at negative; Portugal affirmed at Baa3 by Moody’s, outlook upgraded to positive from stable
Asian equity markets began the week with a cautious tone amid several market closures and after last Friday’s losses on Wall St. due to ongoing trade uncertainty. ASX 200 (+0.1%) was lower with the index weighed by weakness in commodity names including profit taking in gold miners and as iron ore prices resumed an aggressive pullback from last month’s record levels, although the losses in the index were stemmed due to resilience in the top weighted financials and as JB Hi-Fi led the outperformance in the Consumer Discretionary sector post-earnings. Elsewhere, Hang Seng (-0.4%) kept afloat and Shanghai Comp. (+1.5%) was underpinned after the PBoC set a firmer than expected reference rate and injected liquidity through reverse repos for the 1st time in 2 weeks. In addition, strength was seen in brokerages after China instructed a revision to margin financing and margin trading regulations, although trade concerns lingered following President Trump’s recent suggestion that talks with China may be cancelled. As a reminder, Japan, Singapore and India were among the numerous holiday closures across the region and Middle East.
Top Asian News
- Cathay Pacific Shares Tumble to a 10-Year Low
- China Says H.K. at ‘Critical Juncture’, Has Signs of ‘Terrorism’
- China Says Its Own Cryptocurrency Is ’Close’ to Release
European equities have given up the gain seen at the open and now trade mixed [Eurostoxx 50 +0.1% vs. +0.9% at the open], which follows a cautious handover from the Asia-Pac session whilst Japanese markets were closed on holiday. The bout of risk-aversion coincided with reports of escalating violence in Hong Kong, with its airport cancelling all flights as protestors stage a sit-in, whilst separate reports noted that People's Armed Police are reportedly gathering and heading towards Shenzhen (a city bordering Hong Kong) in advance of apparent large scale exercises. Back to Europe, bourses are mixed with some mild underperformance in the FTSE 100 as a firmer Sterling weighs on exporters. Sectors are mixed with no clear outperformer/laggard. In terms of individual movers: Osram Licht (+9.9%) shares spiked to the top of the pan-European index after AMS (-9.5%) offered EUR 4.1bln to acquire the Co. The bid is 10% higher than that of the Bain & Carlyle consortium; Osram have said they will review the offer. On the flip side, Anglo American (-1.4%) and ThyssenKrupp (-2.8%) rest near the foot of the Stoxx 600 amid the respective declines in copper and iron ore prices. Finally, luxury good makers also bear the brunt of the US/China trade spat, LVMH (-2.6%), Kering (-1.4%); with the Global Times editor noting, over the weekend, that as long as the US forces a deal on China with maximum pressure, then “there will never be a deal”.
Top European News
- Thomas Cook Drops as Emergency Bailout Will Exceed $1 Billion
- Italy’s Parliament Leaders to Meet as Sworn Enemies Eye Tie-Up
- Italian Bonds Rally After Fitch Keeps Credit Rating on Hold
- Burford Says Evidence Points to Market Manipulation of Shares
In FX, the Euro was not the worst G10 performer, but one of the major movers amidst all round selling that appeared to start vs Sterling as Eur/Gbp recoiled from circa 0.9325 towards 0.9250. A corporate order has been touted, but Eur/Jpy also crossed 118.00 and seemed to trip stops and technical levels on its way down to almost 117.50. Meanwhile, the single currency succumbed to accelerated declines through 1.1200 vs the Dollar and alongside ongoing Italian political jitters chart points may also have exacerbated the fall as the 21 DMA at 1.1176 gave way and the headline pair has struggled to sustain rebounds beyond Fib resistance at 1.1220 in recent sessions. However, the 10 DMA at 1.1161 is holding in for now at least.
- AUD/NZD/NOK/SEK - A broad deterioration or erosion of risk sentiment against the backdrop of heightened unrest in Hong Kong and the ongoing Yuan depreciation (Usd/Cnh now probing 7.1100) has hit the Aussie and Kiwi especially hard, with Aud/Usd down to around 0.6750 and Nzd/Usd under 0.6450. Note also, dovish Central Bank vibes continue to undermine the Antipodean currencies with research from the NZ Treasury overnight raising eyebrows given -0.35% tagged for the OCR in a crisis situation. Elsewhere, the Scandi Crowns are not deriving any indirect support from the aforementioned Euro weakness or relatively hawkish monetary policy stances ahead of Thursday’s Norges Bank meeting, as Eur/Nok and Eur/Sek rebound to just over 9.9900 and 10.7300 respectively, with the former also propelled by another downturn in oil prices.
- JPY/GBP - The Yen is strong across the board and back in demand as a safe-haven, with Usd/Jpy down to 105.15 and eyeing 105.00 ahead of flash crash lows beneath the big figure, but perhaps wary of decent option expiry interest at the round number (1.6 bn) that could provide support. Meanwhile, the Pound is also bid on the cross flow noted above, and with Cable holding firm between 1.2015-75 parameters after reports that a group of UK MPs are trying to ensure another Brextension rather than risk PM Johnson leading the country out of the EU on October 31 with no deal.
- EM - Widespread losses vs a mostly buoyant Buck as the DXY continues to pivot 97.500, but some protection for the Rouble from risk aversion and soft Brent via Fitch upgrading Russia to BBB last Friday. However, Usd/Rub is still firmer within a 65.2535-5700 range.
In commodities, WTI and Brent futures have succumbed to the firmer Dollar and the risk averse tone around the market thus far. The former breached 54/bbl to the downside whilst the latter hovers around the 58/bbl handle. Newsflow has been relatively light for the complex, although the Kuwaiti oil minister stated that the country is committed to fully implement OPEC’s output pacts and noted that fears concerning a global slowdown are “exaggerated”. Analysts at ING see stronger non-OPEC supply growth in 2020 which will subsequently lead to OEPC taking further action or face the risk of further declines in prices. Elsewhere, Gold prices are choppy and ultimately unchanged on the day as the yellow metal balances a cautious risk tone against a firmer Buck. Spot Gold now hovers around the 1500/oz level (having hit a current intraday low of 1487.50/oz). Meanwhile, copper prices fell back below the 2.60/lb level as a firmer Greenback and fragile risk tone weighed on the red metal. Finally, Dalian iron ore futures fell to a two-month low, notching its 8th straight session of losses amid the ongoing supply worries and a bleak demand outlook as China’s top steel-producing province looks to tighten emission requirements.
US Event Calendar
- 2pm: Monthly Budget Statement, est. $120.0b deficit, prior $76.9b deficit
DB's Craig Nicol concludes the overnight wrap
It may have been a fairly predictable start to the Premier League season over the weekend - other than Arsenal’s clean sheet - however markets are proving to be anything but predictable in August so far. Risk assets have spent most of it flip-flopping around trade headlines while bond yields have continued a surreal race to the bottom and with the peak summer holiday weeks upon us and liquidity therefore becoming an even bigger issue in theory, the risk is that volatility is here to stay for a while yet.
By the way if you were on holiday last week and wanted a snapshot of the updated crazy world of European bond yields then a few of the highlights last week include long-term mortgage rates in Denmark trading at zero, Austria’s 100y bond trading at a high in points terms of 192 versus 117 at the start of the year, the entire Dutch yield curve trading negative and 10y Spanish and Portuguese bonds trade to within 20bps of 0% at one stage.
Quite incredible. In terms of what to look forward to this week there’s a couple of potentially interesting data releases with the first of those on Tuesday when we get the July CPI release in the US. The consensus expects a +0.2% mom reading for the core however our US economists expect a softer +0.13% mom reading mainly reflecting some unwind of the drivers that drove the strong reading in June. It’s worth noting that markets are still pricing in 63bps of cuts by the Fed this year so it’ll be interesting to see if this data makes much of a dent in that.
We won’t have to wait long for the next interesting data release with a first look at Q2 GDP due in Germany on Wednesday. The consensus is for Germany’s economy to have contracted by -0.1% qoq which would mean it would join Sweden and now the UK - following Friday’s data - with negative Q2 GDP prints and therefore one more consecutive negative quarter away from a technical recession. While we’re on Europe, Italy is creeping back onto everyone’s screens as expectations build of a snap election after the League’s Salvini effectively called time on the fractious coalition government. It’s worth noting that the binding constraint on parliament approving Italy’s budget is December 31st so a government needs to be in place by year-end. The big potential vol risk is that we get an election in mid-October as the Brexit process approaches the end game. So it’s worth keeping an eye on the various rhetoric this week.
Some of the newsflow in the Italian press over the weekend suggests that Five-Star and the Democratic Party are considering what would be an unexpected and somewhat unlikely tie-up in a bid to delay Salvini’s plan to take full control (per Bloomberg). In the meantime, it’s worth noting that parliamentary leaders are due to meet today to set a timetable for the vote of no confidence against PM Conte called by Salvini, however it’s expected that this vote won’t take place until later this month.
There has been little reaction in the euro (+0.07%) to that news, while sentiment more broadly in markets in Asia is a bit mixed with the Shanghai Comp (+0.70%) and Kospi (+0.42%) up, but the Hang Seng (+0.01%) flat and ASX (-0.20%) lagging behind. It’s worth noting that volumes are low however with a number of Asian markets closed for a holiday today including Japan, Singapore, India, Malaysia, Philippines and Thailand. As for FX, the Japanese yen is trading up +0.23% and starting to test the 2018 lows of 104.74 while the Chinese onshore yuan is trading flattish at 7.0622. Elsewhere, futures on the S&P 500 are up +0.18%.
As for the rest of the week ahead we’ve also got US retail sales while the manufacturing and consumer sentiment surveys - including from the NY Fed and Philly Fed - will be worth keeping an eye on as they will be the first of the data releases to incorporate the recent announcement of 10% tariffs on the remainder of imported goods from China. In Europe we’ll also get Germany’s ZEW survey on Tuesday and various data out of the UK over the course of the week including on the labour market, retail sales and inflation. In China we’re also expecting the July activity indicators on Wednesday and credit data at some stage.
Turning to recap last week, there were no shortage of macro stories to drive markets. As discussed above, the surprise move by Italy Deputy PM Salvini to move toward new elections drove a sharp selloff in BTPs, with 10-year yields ending the week +26.4bps higher (+27.2bps Friday), and that despite rallying -16.5bps earlier in the week before the announcement. Italian stocks dropped -3.43% (-2.48% Friday), and Italian bank shares retreated -5.60% (-4.49% Friday).
Away from Italy, core government bond markets rallied sharply, as the US-China trade war escalated and economic data was broadly weaker than expected. Ten-year yields in the US and Germany fell -10.1bps and -8.1bps (+2.7bps and -1.6bps Friday) respectively. Duration opened the week well bid, sparked by the move in the Chinese yuan beyond 7.0 per dollar, in an apparent escalation of the trade war. The US subsequently responded by designating China as a currency manipulator, which could open the door to higher tariffs in future. On the data front, the US non-manufacturing PMI was weak at 53.7 versus expectations for 55.5, while industrial production in Germany (-1.5% mom versus expected -0.5%) and France (-2.3% mom versus -1.2% expected) were both soft. In the UK, the first print for second quarter GDP growth showed a -0.2% qoq contraction compared to consensus forecasts for a flat reading.
Along with the rally in treasuries and bunds, these trends combined to push measures of the US yield curve flatter, with the 2y10y down -3.7bps (flat on Friday) to 9.4bps, its flattest level since June 2007. The 3m10y flattened -2.8bps (+5.1bps Friday) and the Fed’s 18 month forward spread fell -3.2bps (+5.1bps Friday). Brent crude prices fell on concerns over global growth, ending -5.43% lower, though it rebounded on Friday (+2.00%) on reports that Saudi Arabia may cut production.
The S&P 500 retreated -0.46% (-0.66% Friday), though that still represented a strong rebound from the -3.75% trough reached on Monday. Other global equities retreated similarly, with the NASDAQ and DOW down -0.56% and -0.75% (-0.34% and -1.00% Friday) respectively. In Europe, the STOXX 600 fell -1.74% (-0.84% Friday), while indexes in Asia underperformed. The Shanghai Composite was down -3.25% (-0.71% Friday) and the Hang Seng declined -3.64% (-0.69% Friday). Other risk assets were also pressured, with cash HY spreads +28.0bps and +10.4bps wider in the US and Europe (-3.0bps and +2.6bps Friday). EM currencies underperformed, with the South African rand weakening -3.06% (-1.39% Friday) amid continued reports of a potential IMF program. Conversely, safe havens rallied, with the yen +0.85% stronger (+0.36% Friday) and gold touching new six-year highs and ending +3.89% higher (-0.27% Friday).