Global stocks were little changed on Monday as U.S. equity indexes rebounded from session lows despite a Bloomberg report China was set to reject a broad trade deal with the Trump administration, which sent the yuan sliding. European stocks gained and Treasuries fluctuated after Friday's generally favorable US jobs data quelled some fears about an economic slowdown.
Emini S&P index futures came off session lows but still pointed to a weak start on Wall Street after Bloomberg reported that senior Chinese officials have indicated the range of topics they’re willing to discuss at upcoming talks has narrowed considerably.
The Stoxx Europe 600 index climbed as energy and telecoms shares advanced while the Stoxx 600 Automobiles & Parts Index fell as much as 1.4%, making it the worst-performing group on the broader gauge, with declines led by car-parts makers including Valeo, Continental and Faurecia. European shares rebounded from early negative prints after the latest drop in German industrial orders data (-6.7% Y/Y) underscored concerns about a looming recession in Europe’s largest economy.
Separately, morale among Eurozone investors dropped in October to its lowest level in more than six years as stimulus measures taken by central banks failed to allay recession fears, a survey by the Sentix research group showed. Besides the steady trickle of weak economic data, investors also had their eyes on U.S.-China trade talks. Bloomberg reported that Chinese officials are signaling they are increasingly reluctant to agree to a broad trade deal pursued by U.S. President Donald Trump.
Earlier in the session, Asian stocks rallied following Friday's torrid Wall Street short-squeeze , with MSCI’s broadest index of Asia-Pacific Shares outside Japan rising 0.1%. Japan's Nikkei stock index opened higher but reversed course and fell 0.2%. A key Japanese economic index fell in August and the government downgraded its outlook for the economy to "worsening", suggesting export-reliant Japan could slip into recession. Shanghai markets are yet to re-open after China's holidays, while Hong Kong was also shuttered for a holiday, leaving traders with limited options to respond to escalating violence in the city, where protesters set fires and vandalized train stations and banks over the weekend. The yuan dropped in offshore trading by the most since late September.
Stocks globally took a battering last week, falling to their lowest level in over a month on fears of a U.S. economic slowdown. But positive U.S. jobs data on Friday helped spark a turnaround. “I think the fact that the U.S. jobs report was broadly positive really put the brakes on the fear factor that was circulating last week - that the U.S. has been hit hard by the trade war,” said David Madden, market analyst at CMC Markets in London.
So far concerns about a Trump impeachment have yet to appear in markets: an impeachment drive by U.S. Democrats over a whistleblower’s allegations that Trump leveraged $400 million in aid to secure a promise from Ukraine’s President to investigate political rival Joe Biden will continue this week. Several U.S. diplomats will head to Capitol Hill for closed-door testimonies. On Sunday, lawyers said a second whistleblower had come forward to substantiate the first complaint from an unnamed U.S. government official, which touched off the investigation.
“I think it’s fair to say the second whistleblower coming forward will be an issue for Trump. This strengthens China’s bargaining position in the trade war,” Madden said.
Investor focus will now shift back to foreign trade this week as Chinese Vice Premier Liu He and an entourage of officials head to Washington to resume talks with their U.S. counterparts. As economic indicators flash warnings, traders have been ramping up bets for further Federal Reserve rate cuts. They’ll search for new clues on the policy path when minutes from the latest Fed meeting are released in coming days.
In geopolitics, Turkish President Erdogan and US President Trump discussed in a telephone conversation the plan to establish a safe area east of the Euphrates in Syria. Erdogan expressed unease with the US military and added that security bureaucracies are not doing what is necessitated by the agreement between US and Turkey. President Trump agreed to meet with Erdogan in Washington next month, upon Trump’s invitation. US White House confirmed the call between the two Presidents and notes that US will not be involved or stand in the way of Turkey's long planned operation into Northern Syria. Turkey will now be responsible for all ISIS fighters captured in Northern Syria.
In Brexit news, PM Boris Johnson is reportedly willing to go to the Supreme Court to avoid having to write a letter asking for a delay to Brexit, as set out in the Benn Act, according to sources. Senior UK Government figures are reportedly considering a series of proposals to “sabotage” EU’s structure if Brussels does not agree to a new deal or lets UK PM Johnson leave the bloc without one, according to sources. Plans under consideration include blocking the EU’s 2021-27 budget which is due to be agreed early 2020.
Concluding the overnight session, US Treasuries were largely steady Monday, with the curve steeper and the long-end having underperformed during Asian session and early European trading, which was muted. There were gains during the Asia session amid reports that China may be increasingly reluctant to agree to a broad trade deal, but these were broadly unwound as S&P 500 futures pared earlier decline. Yields rose by around 2bps at the long-end of the Treasury curve, up to 1.5375%, while the 2s10s remains within a basis point of Friday’s close.
Euro zone government bond yields were little changed with the German 10-year Bund yield falling 0.4 basis points to -0.59%. Portuguese bonds were also supported by news on Friday that DBRS has upgraded Portugal’s credit rating.
In currencies, the dollar was 0.1% higher against a basket of peers. The euro was 0.1% lower at $1.0967 while Sterling fell as investors fear Britain and the European Union are no closer to agreeing a Brexit withdrawal deal. The Swedish krona and the Australian dollar led G-10 currency losses as risk appetite weakened amid signs that Washington and Beijing may struggle to make headway in trade talks this week. The Norwegian krone slipped on a manufacturing slump. The Swiss franc rallied amid a risk-off tone in markets
- S&P 500 futures down 0.3% to 2,946.00
- STOXX Europe 600 up 0.05% to 380.40
- MXAP up 0.04% to 155.59
- MXAPJ up 0.07% to 497.65
- Nikkei down 0.2% to 21,375.25
- Topix down 0.01% to 1,572.75
- Hang Seng Index down 1.1% to 25,821.03
- Shanghai Composite closed for holiday
- Sensex up 0.1% to 37,723.81
- Australia S&P/ASX 200 up 0.7% to 6,563.56
- Kospi up 0.05% to 2,021.73
- German 10Y yield fell 1.4 bps to -0.6%
- Euro down 0.1% to $1.0966
- Brent Futures up 0.6% to $58.71/bbl
- Italian 10Y yield rose 0.5 bps to 0.493%
- Spanish 10Y yield fell 1.9 bps to 0.113%
- Brent Futures up 0.6% to $58.71/bbl
- Gold spot down 0.2% to $1,502.14
- U.S. Dollar Index up 0.2% to 98.96
Top Overnight News
- Chinese officials are signaling they’re increasingly reluctant to agree to a broad trade deal pursued by President Donald Trump, ahead of negotiations this week that have raised hopes of a potential truce
- German factory orders declined further in August, aggravating an industrial slump that has pushed Europe’s largest economy to the brink of recession
- The European Central Bank’s latest stimulus salvo is failing to spark animal spirits, with investor sentiment in the region falling to the lowest level in more than six years. The Sentix economic index for the euro area dropped to -16.8 in October, the weakest level since April 2013
- Prospects of a Brexit deal faded after talks between the two sides stalled and European leaders cast doubt on reaching an agreement in time for the Oct. 31 deadline.
- The Japanese government cut its formula-based assessment of the economy to indicate that economic conditions were worsening in August, an outcome signaling a higher risk that Japan could be entering a recession.
Asian equities traded mixed after initially opening higher following the US jobs report, which was robust enough to temper recession fears but lacklustre enough to keep the Fed on track to cut rates again in October, albeit upside in the region is capped amid reports that China is narrowing scope for a trade deal with the US ahead of talks in Washington this week. ASX 200 (+0.7%) was kept afloat by mining names after base metals posted gains late Friday, meanwhile Nikkei 225 (-0.2%) traded lower throughout the session as exporters were pressured by an unfavourable currency. Elsewhere KOSPI (U/C) shrugged off the breakdown of North Korea/US denuclearisation dialogue on Sunday as South Korea focused on the upcoming large-cap earnings, with heavyweight Samsung Electronics expected to announce its Q3 guidance tomorrow. As a reminder, Hong Kong and Mainland China were closed due to public holidays. In Hong Kong a second teenager has been shot in the leg by police and is in a serious condition, according to Sky News citing sources. It is not clear if the teenager was shot by a rubber bullet or a live round.
Top Asian News
- Hong Kong Activists Urge New Rallies as Stricken City Cleans Up
- HSBC to Cut Up to 10,000 Jobs in Cost-Cutting Drive: FT
- Singapore Convicts 2 Traders of Fraud in Futures Contracts
- India’s Shadow Banking Crisis Tests Stock Bulls’ Faith in Rally
Major European indices (Euro Stoxx 50 +0.2%) are little changed, after a weekend report alleged that China is narrowing scope for a trade deal with the US ahead of principle-level talks in Washington this week, with Chinese officials this week expected to offer a deal that doesn’t include anything on industrial policy or subsidies. Some desks tried to frame the reports as a positive, arguing that such concessions from China at this stage were very unlikely anyway, and adding that the article also talked about the possibility of the US and China making progress on a “mini deal” (where China could agree to making large-scale agricultural/energy purchases from the US and alter some IP practices in exchange for the US rolling back a partial amount of the existing tariffs). Such a mini deal, as hinted by the report, would likely exceed expectations for the talks, as most investors look for something more akin to a truce rather than any meaningful de-escalation. However, US President Trump has repeatedly shot down the prospect of any mini-deal, saying he would rather a full and comprehensive deal. As such, China’s refusal to engage with key US demands is likely to be seen as a negative for the long-term prospects of a comprehensive trade deal between the two sides. The sector layout is reflective of fragile risk sentiment; the defensive Utilities (0.3%), Consumer Staples (+0.4%) and Health Care (+0.6%) sectors are well supported while Consumer Discretionary (-0.1%), Tech (U/C) and Industrials (-0.1%) are underperforming. In terms of individual movers; Osram Licht (-4.3%) shares sunk after ASM (-3.3%) failed in its takeover bid for the Co., but said it would explore further strategic options to pursue the acquisition, with ASM shares pressured over investor concerns about the companies continued pursuit of the German lighting company. HSBC (-0.4%) shares were under pressure on the news that the Co. is to undertake a cost-cutting programme, which may affect 10k jobs. Bayer (2.5%) shares moved higher on the news that its October 15th trial date for the its US glyphosate case had been delayed until February 2020 (indicatively February 10th). Finally, LSE (U/C) opened higher after the Co. set a Wednesday deadline for the Hong Kong Exchange to place a revised takeover offer.
Top European News
- Lira Weakens as Turkey Readies Military Incursion Into Syria
- Euro-Area Investor Sentiment Drop Highlights ECB Stimulus Limits
- EU Summit Could Be a Game Changer on Brexit, Pound Options Show
- Greece Sees Growth in 2020, Putting It on Track for Fiscal Goals
in FX, the Aussie and Kiwi are bearing the brunt of renewed trade and geopolitical tensions having benefited from initial/brief Greenback weakness in the aftermath of last Friday’s ‘Goldilocks’ US jobs report. China is reportedly setting a limited agenda for talks in Washington this week, while discussions between the US and North Korea about denuclearisation were cut short over the weekend as an envoy from Pyongyang called for the Trump administration to withdraw hostile policy. Moreover, Turkey is back in the headlines with a resumption of drilling off Cyprus and operations in Northern Syria, while efforts to quell protests in Hong Kong have failed to prevent more violence and clashes. Aud/Usd is back below 0.6750 and Nzd/Usd has lost grip of the 0.6300 handle even though the Aud/Nzd cross is straddling 1.0700 amidst a bearish call from ANZ for the Kiwi to hit 0.5900 vs the Buck by Q1 next year.
- SEK/GBP - The other major underperformers as the Swedish Krona continues to lament last week’s contractionary manufacturing and services PMIs alongside relatively downbeat Riksbank rhetoric via Jansson, while Sterling is suffering from fresh UK political and Brexit jitters following a lukewarm reception to PM Johnson’s proposals for the Irish border and ultimatum from the EU to alter the alternative plan by the end of the week. Eur/Sek just notched a new 2019 peak over 10.8700 and Cable has slipped back below 1.2300 with Eur/Gbp nestling above 0.8900.
- CHF/JPY - In contrast to other G10 currencies, and despite the Dollar’s overall recovery from post-NFP lows (DXY nudging 99.000 again vs 98.720 at one stage on Friday), the Franc and Yen are both holding firm with Usd/Chf pivoting 0.9950, Eur/Chf hovering above 1.0900 and Usd/Jpy meandering between 107.02-106.58. Safe-haven positioning is impacting to an extent, while the Franc is also consolidating after recent quite hefty losses and the Yen is contained by decent option expiries in close proximity (1.5 bn at 106.70, 1.2 bn from 107.00-10 and 1.1 bn from 107.40-50).
- EUR/CAD - The single currency is still hugging a tight line just under 1.1000 against the Greenback, and not too perturbed by yet more evidence of Eurozone economic woes in the form of German factory orders and Sentix sentiment, but the headline pair may constrained by expiry interest like Usd/Jpy given 1.4 bn sitting at 1.0950-60 and 1.1 bn at 1.0990-1.1000 into the NY cut. Elsewhere, the Loonie is trying to cap losses south of 1.3300 following Friday’s collapse in both measures of the Canadian Ivey PMI.
- EM - Broad losses vs the Usd, with the Try undermined by the aforementioned Turkish factors and not deriving much in the way of support from President Erdogan lauding the CBRT for its policy actions, albeit anticipating more easing ahead. The Lira has been sub-5.7550, but now paring back.
- ANZ forecasts NZD/USD to 0.5900 by end of March 2020 and 0.6100 by end of June next year, citing RBNZ lower cash rate and uncertainty surrounding capital decision, ANZ sees the OCR at 0.75% in May 2020 (currently 1.00%)
In commodities, crude markets advanced on Monday, erasing losses seen at the futures open on Sunday night, where prices had initially been pressured by seemingly negative US/China trade headlines over the weekend; WTI Nov’ 19 and Brent Nov’ 19 futures have reclaimed the USD 53.00/bbl and USD 58.50/bbl levels to the upside respectively. Supply side factors could be providing some support; Chinese State Oil Company pulled out of a USD 5bln deal to develop a portion of Iran’s offshore natural gas field amid the country’s escalating tensions with the US. Moreover, on Friday, reports emerged that the Buzzard oilfield in the North Sea has been shut temporarily for pipework repairs, with no timeline on how quickly operations will return to normal. The Buzzard field is the key contributor to the Forties blend, says Platts, and output at the field has been running at around 120k bpd. ING conclude that “an extended outage would likely provide some relative support to Brent”. Elsewhere, Russian Energy Minister Novack said Russia should lower oil industry taxes and put into production some 10bln tonnes of oil reserves, before adding that Russia's oil output will decline in the coming years if it does not change taxation laws. Novak also said he considers a mid-term oil price in the USD 50s are fair. In terms of metals, Copper and Gold prices moved lower on Monday but are cautious within recent ranges ahead of this week’s key risk events, which include US/China trade talks, FOMC and ECB Minutes, US CPI and a slew of Fed speak including a triple appearance from Fed Chair Powell. ING observe that the PBOC added 0.19mln/oz of gold to its reserves in the month of September, taking total reserves to 62.64mln/oz, a tenth consecutive month of gold purchases by China, which the bank says reflects the diversification drive away from the US dollar at a time of trade friction with the US. “Gold demand from Central Banks and ETFs has been stronger this year on economic and geopolitical concerns” the bank adds, “however higher prices have started to weigh on retail demand”, which recently is most evident in the large fall in demand by its usual largest buyer, India.
US Event Calendar
- Oct. 7-Oct. 11: Monthly Budget Statement, est. $82.5b, prior $119.1b
- 3pm: Consumer Credit, est. $15.0b, prior $23.3b
DB's Jim Reid concludes the overnight wrap
If you bump into me today check yourself over afterwards as the school fun run I went to yesterday was a “colour run”. The whole family got repeatedly sprayed and covered with various colour dyes and we spent the rest of the day finding it everywhere even after a bath. My bed this morning looked like one of those murder scenes on telly where the outline of the dead body has been chalked out. Well a multi-coloured version.
Following a turbulent and colourful week for markets which saw further evidence of deteriorating growth but increased Fed cut expectations that led to a v-shaped recovery in US equities, the focus this week turns to the scheduled trade talks between the US and China. It’s not a big week for data with US CPI (Thursday), PPI (Tuesday) and UoM consumer confidence (Friday) the highlights even if they will be seen as backward looking and less relevant to the current Fed debate. Comments from Fed Chair Powell and numerous other Fed officials will also be in focus, along with the FOMC minutes (Wednesday). Finally Brexit talks reach a crucial juncture with time ticking down.
On trade, Chinese Vice Premier Liu He is due to visit Washington for talks with meetings expected to take place on Thursday and Friday with the mood music in recent days seemingly more positive. However Bloomberg published a story last night that suggested that the Chinese are “increasingly reluctant to agree to a broad trade deal” and that the “range of topics they’re willing to discuss has narrowed considerably”. The same report also added that Vice Premier Liu He is likely to bring an offer that won’t include commitments on reforming Chinese industrial policy or government subsidies that have been the target of longstanding US complaints. So if the article is true the stakes have been raised ahead of these talks.
This news is holding back the Asian session after a strong end to the week in NY on Friday. The Nikkei (-0.24%) is trading down while the Kospi (+0.15%) is up in thin trading. Markets in China and Hong Kong are still closed for their week long holiday. The offshore Chinese yuan is trading weak (-0.31%) this morning while yields on 10y USTs are down -1bps. Elsewhere, futures on the S&P 500 are down -0.45%.
Back to the week ahead and in terms of Fedspeak, most attention will be placed on Fed Chair Powell who speaks tomorrow at a NABE meeting in Denver and then on Wednesday at a Fed Listens Event in Kansas. Comments are also due from Kashkari today, Evans and Kashkari on Tuesday, Mester and Bostic on Thursday and Kashkari, Rosengren and Kaplan on Friday. Also of note from the Fed will be the FOMC minutes from the September meeting due on Wednesday. As a reminder, the dot plot projections revealed sharp divisions within the Committee however the signals from the meeting still indicated a continued dovish bias. That being said, data since has mostly deteriorated.
Brexit will continue to take center stage headlines wise but it’s still doubtful we’ll know much more about the end game by the end of the week. The EU need the U.K. to improve their proposals to intensify the talks but such improvements would likely lose Mr Johnson’s Parliamentary ability to get any deal passed. So stalemate is the most likely. The most intriguing question for the next 12 days is how Mr Johnson intends to try to bypass the extension letter he’ll be legally forced to write by October 19th if he fails to get a deal. Interestingly the one opinion poll released over the weekend gave Mr Johnson and the Tories 38% of the vote and a lead of 15%. So if this is to be believed the hard line stance is seemingly paying off electorally. However it’ll be interesting to see if he gets the blame if the U.K. doesn’t leave by October 31st and losses support or whether he can continue to win enough of the “Parliament vs the people” argument to sweep up the leave vote while the remain vote is split.
Looking back to last week, Friday’s much-anticipated jobs report, coming after jarringly poor ISM surveys earlier in the week, ended up being a bit of damp squib with something for both the bulls and the bears. The headline change in payrolls was slightly below consensus (136,000 versus 145,000), but the employment rate fell 0.2pp to a new 50-year low of 3.5%. The private payrolls figure was similar, coming in at 114,000 compared to expectations for 130,000. These misses were offset somewhat by a healthy +45,000 net revision to the previous two months. More interestingly, wage growth was flat on the month, taking the year-on-year figure to 2.9%, its weakest pace in a year. Our economists think this will make the Fed more confident that the natural rate of unemployment has fallen, which should still enable them to cut rates later this month.
Markets took the jobs report as something of a “goldilocks” outcome; job growth continues but inflationary pressures remain muted. The S&P 500, which was down -3.57% on the week at its Thursday lows, managed to retrace to end the week just -0.33% lower (+1.42% on Friday). The DOW and NASDAQ (down as much as -4.01% and -3.02%) trended similarly, ending the week -0.92% and +0.54% (+1.40% and +1.42% Friday). In Europe, the STOXX 600 had been down an even steeper -4.37%, and ended the week still -2.95%, having missed the last part of the Friday rally (+0.73% Friday). The rebound was helped by a further drop in yields, with 10-year treasury yields ending the week -15.1bps (-0.5bps Friday). Bund yields were less exciting, ending the week -1.3bps lower (+0.4bps Friday). Meanwhile at the front end, the market moved to price in more rate cuts, with two-year treasury yields down -22.8bps on the week (+1.4bps Friday). That means the 2y10y curve steepened +7.1bps on the week to 11.9bps (-2.3bps Friday).
Chair Powell’s comments on Friday were mostly uneventful, though at the margin they were not as dovish as the market was expecting, with yields rising around 1bp and the dollar weakening slightly after the headlines hit the wires. Powell cited the strong labour market, but didn’t comment on Friday’s jobs report, and said that overall the economy is in a good place. It’s likely that he wants to confer with his FOMC colleagues to gauge their views regarding an October rate cut before he gives a firm signal either way. The market is pricing around an 80% chance for a cut this month, down from around 90% at the peak on Thursday. Meanwhile, Kansas City Fed President Esther George, a hawk, said overnight that she dissented against rate cuts at the past two policy meetings because the US economy is currently doing well, but she would be prepared to support a further reduction should she see evidence of a sharper slowing of growth. She said, “the moderation of economic growth in 2019 has been in line with my own outlook that calls for a gradual decline to a trend level over the medium term. ” Fed’s Rosengren, also a hawk, spoke over the weekend and said “If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and the unemployment rate is at 3.5%, I would not see a need for additional accommodation” at the Fed’s October or December policy meetings. This even as he acknowledged that economic reports on manufacturing, services and payrolls came in weaker last week than he anticipated but cited that the labor market remains tight and said he’s confident the U.S. consumer will continue to drive growth. So the hawkish Fed officials are continuing to shy away from a pivot towards a rate cut at this month’s meeting.