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[Markets] Dow Jones Heads For 5th Weekly Loss On China Trade War Worries China trade war fears drove early losses Thursday, as the Dow Jones industrials leaned toward their longest decline in nearly eight years. Published:5/23/2019 8:47:31 AM
[Markets] Futures: Dow Jones Eyes 200-Point Drop On China Trade War Worries China trade war fears drove early losses Thursday, as the Dow Jones industrials leaned toward their longest decline in nearly eight years. Published:5/23/2019 8:13:32 AM
[Markets] "Sea Of Red": S&P Futures, Bond Yields Tumble As All Out Trade War Becomes "Base Case"

Yesterday's modest selloff has become an all-out rout, dragging world stocks lower with US equity futures tumbling and global equity markets a "sea of red" as fears grow that the China-U.S. trade conflict is fast turning into a technology cold war and as Wall Street's denial is finally shifting to acceptance that a lengthy, all-out trade war is now inevitable, and the only way out and for someone to concede is for markets to plunge. Sure enough, that's what they are doing this morning.

“It’s tin hats on and battening down the hatches for a fair bit of volatility for the next few months,” said Tony Cousins, Chief Executive of Pyrford International, the global equities arm of BMO Global Asset Management. “We are as defensively positioned as we could be,” he said, adding it was impossible to predict what steps Trump was likely to take next in the trade war with China.

Analysts at Nomura warned in a note, “Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end 2020.”

While there were no major escalations overnight, China’s Commerce Ministry warned on Thursday that the United States needs to correct its wrong actions if it wants to continue negotiations with China, adding that talks should be based on mutual respect. The United States has escalated trade frictions greatly, and increased chances of a global economic recession, spokesman Gao Feng said at a weekly briefing, adding that Beijing will take necessary steps to safeguard Chinese firms’ interests.

Clearly this is merely the latest verbal escalation in what is now an out of control global trade war, however, the bigger reason for the accelerating rout is that as Bloomberg notes this morning, after months of predicting a trade deal between the world’s two largest economies, "economists at some of the biggest financial institutions are growing increasingly pessimistic." Goldman Sachs, Nomura and JPMorgan Chase "are among those that have rewritten their forecasts as U.S. President Donald Trump threatens to impose a 25% tariffs on around $300 billion of additional Chinese imports."

It could be even worse: one expert predicted tensions could endure until 2035. “We don’t think that there is an overnight solution,” said James Johnstone, co-head of emerging and frontier markets at RWC Partners LLC. “The accommodation of China as a rising power is something that the Americans and the West have been contemplating for a long time. This will be a 20-30 year accommodation.”

Asian stocks dropped for a third day, caving to a four-month low led by technology and communications firms, as the rhetoric between Beijing and Washington remained fierce while Europe’s bourses also fell as Brexit worries and gloomy data from Germany and the euro zone added to the nerves.

Most Asian markets were down, with Hong Kong and Taiwan leading declines. MSCI’s broadest index of Asia-Pacific shares outside Japan touched its lowest in four months. The Topix gauge fell 0.4%, with SoftBank Group Corp. and Sony Corp. among the biggest drags. The Shanghai Composite Index retreated 1.4% dropping near their lowest since February, driven by Ping An Insurance Group and Kweichow Moutai. The Indian market bucked the global picture after Prime Minister Narendra Modi’s party scored a historic victory in the nation’s general election with official data showing Modi’s Bharatiya Janata Party (BJP) ahead in 292 of the 542 seats available.

In Europe, trade fear was also rampant, with the Stoxx Europe 600 falling as much as 1%, hitting its lowest level since May 15, amid mounting worries over U.S.-China trade tensions. The Stoxx autos sector was hit the hardest, falling 3.1% to lowest since February; energy sector down 1.7%, industrial sector down 1.6%, tech sector down 1.6%. More ominously, the upward channel that was created early this year, has been breached.

European equities will likely fall further as today's dismal batch of euro-area economic data weighs on already low sentiment and future profits, especially for all-important cyclical sectors. The biggest surprise was German Manufacturing PMI which slumped once again, dropping from 44.4 to 44.3, below the 44.8 expected. Separately, IHS Markit said the euro-zone business situation could "deteriorate further in coming months." Germany also reported the latest dire IFO Busienss Climate report, which slumped to a 4 year low of 97.9, down from 99.2 in April, mainly driven by the assessment of current business conditions in the trade, services and, to some extent, manufacturing sectors. By contrast, the assessment of future economic conditions remained unchanged.

U.S. stock futures also pointed to a weak start with the S&P 500 e-minis faltering 0.5%, after the Communist Party’s flagship People's Daily newspaper published two commentaries assailing American moves to curb Chinese companies, warning the "world won't tolerate the US breaking rules" even if so far more nations are joining the US in its "campaign" against Huawei so far, including Japan, Australia, the UK, New Zealand, and South Korea likely to fold next (See "World Trade War I: US Asks South Korea To Join Anti-Huawei Campaign").

In rates, bonds rallied amid a cocktail of risk-off factors, including pressure on U.K. PM Theresa May to resign, weak euro-area data and continuing concern over U.S.-China trade. Portuguese 10y yield drops below 1% for the first time on record, following Spain, while Italian bonds drop amid equity weakness. Over in the US, 30Y Treasury yields dropped to lowest level since January 2018, with the rally starting during Asia hours after China published commentary saying the U.S. wants to start a "technology cold war." As noted above, German and euro-area PMIs for manufacturing and services miss forecasts, pushing bunds higher and bull-flattening core European yield curves; France underperforms as PMIs beat expectations.

In currencies, trade friction saw the safe haven yen in demand again as the dollar dipped to 110.11 yen and away from the week’s top of 110.67. The dollar was close to session highs, up on the euro at $1.1130 and touched a 1-month high on a basket of currencies at 98.235. Minutes of the U.S. Federal Reserve’s last meeting out on Wednesday underlined its readiness to be patient on policy “for some time” given the uncertain global outlook. The chance of a rate cut seemed to diminish as many Fed policy makers saw recent weakness in inflation as “transitory”, though the latest escalation in the trade war means markets are still wagering on an eventual easing.

Meanwhile, the sterling slide continued as it hit a 4-1/2-month low of $1.2603 weakening against the euro for a record 14th day as the prospect of Prime Minister Theresa May being forced from power brought yet more uncertainty over the U.K.’s Brexit strategy.

Theresa May came under intense pressure after her latest Brexit gambit backfired and fueled calls for her to quit, while prominent Brexit supporter Andrea Leadsom resigned from the government on Wednesday and with British media reporting May could announce her departure date as early as Friday the bets on a more hard Brexit replacement are rising.

Elsewhere, the Aussie declined and China’s yuan dipped even after the People’s Bank of China set its daily fixing at a stronger-than-expected level for a fourth straight day.

In commodity markets, spot gold was a bit higher at $1,274.73 per ounce. Oil prices added to losses suffered overnight after an unexpected build in U.S. crude inventories compounded investor worries about demand. U.S. crude was last down 48 cents at $60.94 a barrel, while Brent crude futures lost 57 cents to $70.41.

Looking at today's calendar, expected data include jobless claims, PMIs, and new home sales. Medtronic, Royal Bank of Canada, and Intuit are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.8% to 2,833.50
  • STOXX Europe 600 down 1.3% to 374.40
  • MXAP down 0.7% to 152.74
  • MXAPJ down 0.9% to 499.21
  • Nikkei down 0.6% to 21,151.14
  • Topix down 0.4% to 1,540.58
  • Hang Seng Index down 1.6% to 27,267.13
  • Shanghai Composite down 1.4% to 2,852.52
  • Sensex unchanged at 39,111.07
  • Australia S&P/ASX 200 down 0.3% to 6,491.79
  • Kospi down 0.3% to 2,059.59
  • German 10Y yield fell 2.4 bps to -0.11%
  • Euro down 0.2% to $1.1132
  • Italian 10Y yield fell 1.1 bps to 2.26%
  • Spanish 10Y yield fell 1.8 bps to 0.85%
  • Brent futures down 1.4% to $70.02/bbl
  • Gold spot up 0.2% to $1,275.59
  • U.S. Dollar Index up 0.2% to 98.26

Top Overnight News

  • The U.S. unilaterally escalated trade tensions and if it wants talks to resume, it needs to correct what it did and show sincerity, according to China’s Ministry of Commerce. The comments are the latest sign that China has no intention of making concessions
  • U.S. naval ships transited through the Taiwan Strait as faltering trade talks and the Trump administration’s move to restrict Chinese tech companies’ access to the American market fuels tensions.
  • May’s premiership is hanging by a thread as a high-profile U.K. Cabinet minister quit and a growing revolt over Brexit looked set to force her from power
  • Euro-area private-sector output remained subdued in May. A Purchasing Managers’ Index inched up to 51.6 from 51.5 in April. The bloc is currently headed for “lackluster” growth of around 0.2% in 2Q, according to IHS Markit
  • German business confidence in May was the weakest in more than four years as global trade tensions weighed heavily on the economy. The drop in the Ifo index was bigger than forecast and takes the closely-watched gauge to its lowest since November 2014.
  • Investors see a U.S. rate cut by the end of the year, but minutes of the Fed’s last policy meeting released Wednesday showed officials expect patience on rates to be appropriate for “some time”
  • U.K. PM May’s premiership is hanging by a thread as a high-profile Cabinet minister quit and a growing revolt over Brexit looked set to force the British leader from power
  • After months of predicting a trade deal between the world’s two largest economies, economists at some of the biggest financial institutions including Goldman Sachs Group Inc. are growing increasingly pessimistic
  • Early counting in the world’s biggest election show Indian Prime Minister Narendra Modi’s ruling coalition is heading for another five-year term in office
  • Oil extended losses after a surprise jump in American crude inventories alleviated concerns over a supply crunch, while the demand outlook remained bleak as there was no let up in U.S.- China tensions

Asian stock indices were mostly lower amid spillover selling from Wall St as US-China trade uncertainty remained at the forefront of market focus with the US mulling restrictions on several Chinese firms and as comments from China suggested and unwillingness to back down, as well as the potential for a prolonged trade dispute. ASX 200 (-0.3%) and Nikkei 225 (-0.6%) were negative with Australia dragged by weakness in its largest weighted financials sector and with energy names pressured after a more than 3% drop in WTI, while risk appetite in Tokyo was suppressed by a stronger currency and weak Nikkei Manufacturing PMI data which slipped into contraction territory. Hang Seng (-1.6%) and Shanghai Comp. (-1.4%) conformed to the negative tone due to the trade tensions and with some sabre-rattling from China in which Foreign Minister Wang Yi labelled US pressure on Huawei as pure economic bullying and warned they will fight to the end if the US uses extreme pressures, while China's top four official Wang Yang also suggested businesses should be prepared for a lengthy trade war. Indian markets bucked the trend and gained over 2% to record highs as the early election results showed PM Modi’s BJP and National Democratic Alliance were ahead in world’s largest democratic election with the BJP on course to achieve a majority on its own if the early results hold up. Finally, 10yr JGBs were higher as they tracked the upside in T-notes and with price action underpinned by safe-haven demand amid the mostly negative risk sentiment in the region.

Top Asian News

  • Huawei’s Own Operating System Could Be Ready This Year: CNBC
  • Modi’s Lead Signals Single-Party Majority in India Vote Count
  • Thomas Cook Tumbles on Downgrade Showing Default Is Possible
  • Japanese Shop for Bonds Overseas as Trade War Spurs Gains in Yen

Major European stocks are sliding [Eurostoxx 50 -1.7%] following on from a weak Asia handover wherein mainland China shed over 1.3% and Hang Seng declined in excess of 1.5%, as trade woes remain a grey cloud above markets. Equities in Europe saw a more pronounced decline amidst the release of disappointing EZ Flash PMIs and a downbeat Ifo Survey which was followed by Ifo economists stating that the export dynamic is very weak, business uncertainty remains very high and a recovery in the auto sector is not seen for the time-being. Heavy, broad-based losses are seen across the sectors; albeit healthcare, utilities and consumer staples to a lesser extent given their defensive properties. The IT sector (-2.3%) bears the brunt of a barrage of companies halting shipments to Huawei given the quarrel with the US over security, with Japanese tech giants Panasonic and Toshiba the most recent, albeit the latter announced that it has resumed shipments to the company. Nevertheless, STMicroelectronics (-4.2%), Infineon (-2.6%), Micro focus (-1.2%), SAP (-2.2%), ASML (-1.7%) shares are all pressured. In terms of individual movers, Deutsche Bank (-2.2%) shares found little reprieve as its AGM began following reports that a New York district judge has rejected US President Trump’s efforts to prevent Deutsche Bank and Capital One from complying with a congressional subpoena for the President’s financial records. Co. spokesperson said the bank remains committed to providing appropriate information regarding the investigation. At the AGM, the Co. noted that they are prepared to make tough cutbacks to their investment banking sector, and on DWS (-0.8%) they stated that they remain open to other strategic options. Finally, shares in Thomas Cook (-6.8%) plummeted after Fitch downgraded the Co.’s Long-Term Issuer Default rating to “CCC+” from “B”, outlook negative.

Top European News

  • French Companies See Fastest Growth in Six Months as Orders Rise
  • Universal Is Said to Eye Industry Bidder as Buyout Firms Balk
  • German Business Confidence Weakest Since 2014 on Gloomy Backdrop
  • Europe’s Biggest IPO of 2019 Gets Thumbs Up From Barclays, HSBC

JPY/CHF/SEK/NOK - The major outperformers as the Yen and Franc benefit from more safe-haven positioning, while the Scandi Crowns derive protection from broad risk-off sentiment with the aid of supportive and upbeat data to justify relatively hawkish Riksbank and Norges Bank policy stances. Usd/Jpy is eyeing bids ahead of 110.00 that are said to be fairly thick and layered, while Usd/Chf is pivoting 1.0100 and the Eur/Chf cross 1.1250. Elsewhere, Eur/Sek has backed off further from recent decade highs (10.8500) towards 10.7300 and Eur/Nok is testing 9.7500 in wake of better than expected jobless rates in April and March respectively (and with Swedish unemployment falling sharply in particular).

  • DXY - The Dollar is firmer vs the rest of the G10 after FOMC minutes underlining a patient and perhaps longer pause in normalisation than previously anticipated or flagged as it transpires that the transitory assessment on soft inflation is shared by other members aside from Powell with only a minority worried that it might unhinge expectations and warrant a rate cut. On the flip-side, there is a consensus that even if the economy develops in line with expectations it might be prudent to hold off from further tightening given ongoing risks, like trade. Hence, the index is forming a firmer base above 98.000 and inching closer to ytd peaks of 98.346 at 98.274, thus far.
  • CAD/GBP/EUR/AUD/NZD - All on the backfoot relative to the Greenback, as noted above, with the Loonie unwinding more of its brief post-Canadian retail sales gains and back below 1.3450 amidst a deeper retracement in oil prices and the ongoing US-China trade spat. Meanwhile, the Pound also has the Brexit situation to contend with and a near state of political limbo given that UK PM May is still widely expected to bow to increasing pressure if not this week then sometime after the WAB returns to Parliament and rejected yet again. On that note, the HoC leader Leadsom has now resigned in protest to lift the number of MPs that have departed to 36, and with the EU elections underway Cable continues to decline, just holding above 1.2600 vs Wednesday’s circa 1.2625 base. Similarly, the single currency has slipped under yesterday’s trough and through decent option expiry interest at 1.1150 (1.4 bn) to test support ahead of the 2019 base and more expiries at the 1.1100 strike (1 bn), and more downbeat Eurozone surveys have not helped as all bar the French PMIs missed consensus and Germany’s Ifo readings were mostly downbeat. Looking down under, the Aussie and Kiwi remain rooted near or at new lows for the year, as Aud/Usd is capped ahead of 0.6900 and Nzd/Usd slips further from 0.6500 awaiting NZ trade data.
  • EM - The Lira has been hit by more US-Turkey sanction jitters and dire sentiment news, this time in the form of a sub-100 manufacturing index, and Usd/Try topped 6.1500 in response before paring some gains. However, the Rand is also under pressure after soft SA data that could tip the SARB towards more dovish guidance later, as Usd/Zar rebounds to 14.4900.

In commodities, the energy complex continues its decline in the aftermath of this week’s surprise builds in US crude stocks coupled with a bleak demand outlook amid the ongoing US-China trade spat. WTI (-1.7%) futures reside just below the 60.50/bbl (having already fallen below its 50 DMA at 62.13/bbl) ahead of its 200 DMA at 60.24/bbl. Meanwhile, its Brent (-1.8%) counterpart recently slipped under its 50 DMA at 70.44/bbl, while gains are capped amid a rising Buck alongside a downbeat risk sentiment and bearish supply data as mentioned above. Elsewhere, gold (+0.2%) edges higher despite a firmer Dollar as investors seek the safe-heaven asset amid trade developments, dismal EZ flash PMIs and German confidence hitting the lowest level in over four years. Meanwhile, the risk-gauge copper (-0.4%) extends its losses with the red metal losing more ground below the 2.70/lb level ahead of its 200 DMA at 2.61/lb. Finally, ING highlights that LME nickel spreads have been tightening recently with the June/July spread trading around USD 32/t vs. USD 50/t last week. This is due to declining inventories which have fallen over 42k tonnes thus far this year, leaving inventories around the lowest levels since 2013.

US Event Calendar

  • 8:30am: Initial Jobless Claims, est. 215,000, prior 212,000; Continuing Claims, est. 1.67m, prior 1.66m
  • 9:45am: Bloomberg Consumer Comfort, prior 59.9; Bloomberg Economic Expectations, prior 50
  • 9:45am: Markit US Manufacturing PMI, est. 52.7, prior 52.6; Services PMI, est. 53.5, prior 53
  • 10am: New Home Sales, est. 675,000, prior 692,000; New Home Sales MoM, est. -2.46%, prior 4.5%
  • 11am: Kansas City Fed Manf. Activity, est. 6, prior 5

DB's Jim Reid concludes the overnight wrap


If I could give advice to readers getting a new kitchen at any point in their lives it would be to read the instructions on the work surface you’ve bought. We didn’t and I left a cast iron pan lid to dry by the side of the sink. When moving it a couple of days ago we discovered a nice brown ring in the new work surface. I sighed, got a cloth and wiped it down. Not one bit of the stain disappeared. I rubbed harder and it made no difference. I then proceeded to put all sorts of surface cleaner on it and again nothing changed. I then got the notes left by the kitchen provider and point 1 said “don’t leave wet cast iron pans on your quartz work surface as it will leave a permanent stain”. That’s pretty much the main thing you can’t do and I did it. Anyway yesterday we got the quote to have it professionally sanded down which apparently is the only way to get rid of it. I nearly fell over backwards in amazement. I’m wondering whether we can make a feature of the brown ring instead!!! Double Sigh!!

One wonders what stains will be left after the next four days of EU Parliamentary elections here in Europe. They used to be fairly dull affairs but with the rise of anti-EU and populist party support, and the bizarre situation where the UK is taking part but likely to leave the Union this year, the next few days should be a fascinating political backdrop for a turbulent few years ahead for Europe. We also have the latest flash global PMIs today, which will be the first glance at the impact of the trade spat on global businesses. Overnight, Japan’s preliminary May manufacturing PMI slipped into contractionary territory at 49.6 (vs. 50.2 last month). Joe Hayes, economist at IHS Markit, said that "the re-escalation of US-China trade frictions has heightened concern among Japanese goods producers."

The tone this morning in Asia is on the negative side with the Nikkei (-0.71%), Hang Seng (-1.30%), Shanghai Comp (-0.84%) and Kospi (-0.04%) all down. Chinese companies like Iflytek (-5.56%), Hikvision (-4.68%), Xiamen Meiya Pico Information Co. (-5.57%) and Zhejiang Dahua Technology Co Ltd (-2.98%) are all down as they are reported by Bloomberg to be among five firms that the US is considering blocking access to vital American technology. China’s onshore yuan is down -0.10% to 6.9135 while the Indian rupee is up +0.38% alongside Indian equity markets (c. +1%) as early trends in vote counting show that the Modi government is poised to retain power. Elsewhere, futures on the S&P 500 are down -0.37%.

Before we get onto other markets over the last 24 hours lets preview the European elections and the rest of the PMIs. As discussed the EP elections actually take place over the next four days, with each of the 28 countries voting on the day they normally hold national elections. The UK and the Netherlands will kick off proceedings today, but most of the big EU countries (including Germany, France, Italy, Spain and Poland) don’t vote until Sunday. In spite of some countries finishing before then, the votes won’t actually be counted until the polls right across Europe have closed, so Sunday night is when we can start to expect results, with the final outcome on Monday.

DB Research have published a number of previews on the elections, with Kevin Koerner and Barbara Boettcher releasing a five-part countdown, looking at the Brexit delay, the race for the Commission Presidency, the different Eurosceptic parties, what’s happening in Germany, and a final preview yesterday (links here , here , here , here and here ). Meanwhile, Clemente De Lucia and Mark Wall have published a note on the implications for the populist coalition in Italy and market sentiment (link here ).

An interesting (or worrying depending on your view) fact about the EP elections is that in every vote since they began in 1979, EU-wide turnout has fallen, from a high of 62% at the first set in 1979 to just 43% last time round in 2014. Rightly or wrongly, they’re simply not seen as anywhere near as important as national elections but for the EU to succeed it will be difficult if Eurosceptic politics dominate in Brussels. Indeed, populists are expected to perform strongly in the first EP election since the migrant crisis and Britain’s vote to leave the EU in 2016.

According to the polls, we can expect to see some pretty striking results across the continent, with Kevin and Barbara writing that Eurosceptic parties of both left and right could get more than 35% of the seats if the current polls are correct, while for the first time ever the two main centre-right and centre-left groupings are projected to not have a majority between them, although pro-European forces as a whole are expected to. Here in the UK, Nigel Farage’s Brexit Party, which explicitly backs a no-deal Brexit, is polling in first place, while polls have put the governing Conservatives as low as fifth, something for which there is quite literally no precedent. The Brexit party, having only been formed a few months ago, are now poised to come first in a national election. Has a political party ever gone from non-existence to first place in a national poll so quickly?

In Italy, the right-wing Lega is expected to come first, with its leader Deputy Prime Minister Salvini having railed against EU deficit rules and clashed with other countries over taking in migrants. In France, President Macron’s party has been running neck-and-neck with Marine Le Pen’s Rassemblement National, with the final polls putting Le Pen’s party marginally ahead. This will be one to watch when results come through Sunday night/ Monday morning.

Staying with Europe, we have a busy day ahead, which includes the important flash May PMIs this morning. While the data will regardless be followed closely, the complication is that we won’t know the exact survey period until the data is out. So how much of the trade escalation period that gets captured is unknown and it may well differ for each country. This therefore adds a relatively high degree of uncertainty to the data – and makes the revisions in the final readings very important. Nevertheless, the consensus is expected to nudge up modestly for the Euro Area by 0.2pts to 51.7 with equal moves higher for the manufacturing (to 48.1) and services (to 53.0) sectors. Germany’s manufacturing reading will also be under the spotlight after only improving 0.3pts last month to 44.4 – only the second monthly improvement over the last 16 months. The consensus is for it to improve to 44.8 today. It’s worth noting that we’ll also get the May IFO survey in Germany today, which will also be closely watched for the trade escalation impact.

Over in markets, the tug-of-war around trade headlines continued for most of yesterday with risk assets on the back foot once again. The news about the US government considering banning China’s video-surveillance firms now a number of global phone companies announcing that they are no longer selling Huawei handsets was the latest twist in the saga. There was at least one glimmer of hope, however, as US Treasury Secretary Mnuchin suggested that Mr. Trump and Mr. Xi would likely meet at the end of June. He also kept the door open for exemptions to the latest round of tariffs. There was also speculation, fueled by yet another tweet from Xu Xijin, that China may consider blocking exports of rare earths to the US. These are essential for high-tech manufacturing, though the impact of an export ban would probably be so disruptive for both parties that it is probably not imminent. DB’S Michael Hsueh wrote about the subject here , where he explains the issue, the history, and the likely implications of any new limitations. Overall the S&P 500, DOW and NASDAQ slipped -0.28%, -0.39% and -0.45%, respectively, while the beaten-up Philly semiconductor shed another -2.12% to take it’s MTD decline to -13.57%. Energy stocks lagged as well, falling -1.58% as WTI oil fell -2.70% after US inventories rose more than expected again last week. The 4.7 million barrel build was the fourth bigger-than-expected build over the last five weeks. Things were a bit steadier in Europe where the STOXX 600 edged down -0.10% and DAX -0.18%.

The bulk of those moves came prior to the FOMC’s meeting minutes last night which offered a few interesting new comments. None of the macro discussion was news, and it has already been overtaken by the trade war escalation over the last few weeks. But on policy, it was noteworthy that the minutes discussed the future composition of the Fed’s balance sheet. It said “all else equal, a move to (a) shorter maturity portfolio would put significant upward pressure on term premiums and imply that the path of the federal funds rate would need to be correspondingly lower to achieve the same macroeconomic outcomes.” Though there doesn’t seem to be a lot of urgency in announcing any new plans, there is scope for the Fed to shorten the maturity profile of its holdings if it wanted to, since they are currently around 98 months versus the 69 months of the overall universe of outstanding treasury debt. Treasury yields were already lower before the minutes and ended down -4.1bpts, while the dollar traded flat. Curves were broadly flatter, with the 2y10y spread -1.2bps lower at 15.5bps, while EM FX finished marginally lower. Speaking of EM, it’s worth noting that Turkish assets were hit hard again yesterday. The BIST 100 index tumbled -1.92% and officially entered a bear market having dropped over 20% from the March highs, while the Turkish Lira sold off -0.78% (a further -0.40% this morning), taking it past 6.10 again. The Turkish lira is now down -13.63% YtD and is the second worst-performing currency behind the Argentine Peso, which is down -16.07% YtD.

In other news, the mood music over at Downing Street continues to lean towards PM Theresa May’s resignation sooner rather than later. That was certainly what all the headlines suggested yesterday and at one stage it even looked like she may resign as soon as last night. Various newsflow from journalists confirmed that there was pressure for the PM to pull the WAB in its current form. Theresa May will reportedly meet Graham Brady from the 1922 Committee on Friday, where he may push for her resignation. A possible catalyst to drive this timeline will be cabinet pressure, with Leader of the House Leadsom resigning last night. Sterling got hit another -0.35% yesterday, which means it has now dropped on eleven of the last thirteen sessions – for a cumulative decline of -3.88%. The Telegraph deputy political editor said overnight that the 1922 Executive now wants PM May to announce that she will step down as Conservative Party leader by June 10, at its Friday meeting. Sterling is trading down -0.14% this morning.

Those Brexit developments came as core CPI missed on the downside in April after staying put at +1.8% yoy versus expectations for a rise to +1.9%. Recreational and cultural items appeared to be to blame along with package holidays.

As for the Fedspeak, the minutes understandably overshadowed other remarks. NY Fed President Williams reiterated his positive view of the economy, saying that risks from abroad have receded. Nevertheless, he also said that he doesn’t see a need “to move interest rates one way or the other.” Boston President Rosengren said that the trade war “is one of the biggest risks,” while Dallas President Kaplan cited the yield curve as evidence that “expectations for future growth are sluggish.” He suggested that changes are needed to improve the outlook, which skirted close to but stopped short of arguing for a rate cut.

To the day ahead now, which this morning kicks off in Germany shortly after this hits your emails with the final Q1 GDP revisions. A reminder that the preliminary reading showed growth of +0.4% qoq. After that we get May confidence indicators in France before attention turns to those flash May PMIs. Not long after we then get the May IFO survey in Germany before focus turns to the US with claims, the flash PMIs, April new home sales and May Kansas Fed manufacturing survey all due. This evening we’re also due to hear from the Fed’s Kaplan, Daly, Bostic and Barkin when they speak on a panel, while over at the ECB we’ve got Guindos and Nowotny due. The ECB minutes from the meeting earlier this month are also due today. Of course, as mentioned at the top the EU Parliamentary elections also kick off today.

 

 

 

Published:5/23/2019 6:44:12 AM
[Markets] The Dow Fell 101 Points Because Apple Could Be Drawn Into the Trade War The Dow Jones Industrial Average tumbled 0.39% to close at 25,776.61. The S&P 500 slipped 0.28% to end at 2856.27, and the Nasdaq Composite fell 0.45% to close at 7750.84. Published:5/22/2019 5:10:51 PM
[Markets] Stocks & Bond Yields Tumble As Trade Turmoil Sparks Breakdown In Boom-Bust Barometer

Fed Minutes fail to fend off the selling pressure as the Trump administration cranks up the pressure on China...

 

Chinese stocks were lower overnight (but ChiNext remain green on the week?)..

 

European markets were mixed with Germany modestly higher against weakness in the periphery...

 

US markets tumbled on the day with Trannies tanking worst... Another weak close took The S&P red on the week and Dow very modestly higher...

 

Today was the 7th day in a row of the opening-ramp...

 

We noticed that the machines kept wanting to lift Nasdaq futures back to the scene of the crime last night when NYT headlines reported the HIKvision blacklist...but each one failed

 

"Most Shorted" stocks tumbled today (so get yourself ready for a squeeze tomorrow?)

 

Semis slumped back to Monday lows...

 

Tesla bonds and stocks tumbled further on the day (with default odds now near 50%)...


Treasury yields tumbled on the day, pushing 30Y (outperforming) back to unch on the week

 

10Y Yields dropped back below 2.40% again today...

 

The yield curve extended its flattening trend after FOMC Minutes...

 

The Dollar is pinging around like a penny stock this week, but bounced very modestly higher after the hawkish tone from the Minutes...

 

Cable just keeps falling as rumors of May's demise rise...

 

Cryptos were quiet again today with Bitcoin treading water just below $8k (after briefly breaking above it overnight)...

 

Copper and Crude were clubbed like baby seals (trade war and inventory build respectively) with PMs flat on the day...

 

WTI almost tested a $60 handle intraday...

 

Finally, as Bloomberg's Ye Xie notes, the so-called boom-bust barometer is flashing a warning sign to the stock market.

The indicator, which tracks the ratio between the CRB industrial material price index and weekly jobless claims, peaked in mid-April and has since sunk like a stone. A similar decline a year ago foreshadowed the market rout in late 2018.

The recent decline in the index, which was created by Ed Yardeni at Yardeni Research, is driven by lower commodity prices and higher jobless claims. While it's easy to dismiss the jump in jobless claims as noise, the drop in industrial material prices do reflect weaker global manufacturing as the trade war moves from simmer to boil.

And global money supply support is disappearing...

Published:5/22/2019 3:09:19 PM
[Markets] Dow industrials end down 100 points as trade-war fears continue Dow industrials end down 100 points as trade-war fears continue Published:5/22/2019 3:09:19 PM
[Markets] US STOCKS SNAPSHOT-Wall St dips after renewed U.S.-China trade fears Wall Street's major indexes dipped on Wednesday as inflamed trade tensions between the United States and China weighed on investor sentiment. The Dow Jones Industrial Average fell 100.85 points, or 0.39%, ... Published:5/22/2019 3:09:19 PM
[Markets] Dow slips at opening bell as Wall Street awaits Fed minutes Dow slips at opening bell as Wall Street awaits Fed minutes Published:5/22/2019 9:08:33 AM
[Markets] The Dow Is Dropping as Market Awaits Evidence That the Fed Is Still on Its Side 6:44 a.m. The Dow Jones Industrial Average looks set to open little changed as the market waits for the minutes from the last FOMC meeting. Dow futures have dipped 9 points, while S&P 500 futures have declined 0.1%, and Nasdaq Composite futures have 0.2%. The stock market hasn’t dropped all that much since the trade was escalated this month, and one reason is because investors are betting that the Federal Reserve will cut rates if necessary. Published:5/22/2019 9:08:33 AM
[Markets] Apple's EPS at risk of 29% hit if its products are banned in China, Goldman says Apple Inc.'s per-share earnings are at risk of shrinking by about 29%, or $3.35, if its products are banned in China in retaliation for measures taken by the U.S. government against Huawei, Goldman Sachs said Wednesday. "This represents 100% of estimated Apple earnings exposure to Mainland China and Hong Kong combined with some offset assumed for Sales & Marketing cost savings," analysts led by Rod Hall wrote in a note to clients. Based on the company's own disclosures, Apple's sales into Mainland China made up about 96% of total Greater China sales in 2013 and 2014; the company stopped making disclosures after 2015, but Gartner data suggests about 39 million iPhone shipments in Greater China in 2019, 83% of which went to Mainland China, 13% to Hong Kong and less than 5% to Taiwan. There is also risk for the company in its supply chain, most of which is based in mainland China, including the final assembly of the iPhone at Foxconn facilities. "We are not assuming restrictions on iPhone production in Mainland China at this point. Should China restrict iPhone production in any way we do not believe the company would be able to shift much iPhone volume outside of China on short notice, though actions that would push Apple production outside of China could have negative implications for the China tech ecosystem as well as for local employment," said the note. Goldman rates the stock as neutral and cut its price target to $178 from $184. Shares were down 1.4% premarket, but have gained 18% in 2019, while the Dow Jones Industrial Average , which counts Apple as a member, has gained 11% and the S&P 500 has gained 14%. Published:5/22/2019 7:39:36 AM
[Markets] Lowe's stock tumbles after profit missed expectations, full-year guidance slashed Shares of Lowe's Companies tumbled 10% in premarket trade Wednesday, after the home improvement retailer missed fiscal first-quarter profit expectations and slashed its full-year outlook. Net income for the quarter to May 3 rose to $1.05 billion, or $1.31 a share, from $988 million, or $1.19 a share, in the year-ago period. Excluding non-recurring items, adjusted earnings per share came to $1.22, below the FactSet consensus of $1.33. Net sales rose to $17.74 billion from $17.36 billion, above the FactSet consensus of $17.64 billion, and same-store sales growth of 3.5% beat expectations of a 3.0% increase. Gross margin fell to 31.46% of sales from 33.11%. For fiscal 2019, the company cut its adjusted EPS guidance range to $5.45 to $5.65 from $6.00 to $6.10, but affirmed its net sales and same-store sales outlooks. Chief Executive Marvin Ellison said that while the same-store sales performance showed that the consumer is healthy, "the unanticipated impact of the convergence of cost pressure, significant transition in our merchandising organization, and ineffective legacy pricing tools and processes led to gross margin contraction in the quarter which impacted earnings." The stock has rallied 20.3% year to date through Tuesday, while the SPDR S&P Retail ETF has gained 5.1% and the Dow Jones Industrial Average has advanced 10.9%. Published:5/22/2019 6:06:39 AM
[Markets] Tesla Stock Could Plummet to $10, According to a Dire Morgan Stanley Scenario Tesla stock is down 38% year to date, far worse than the 10% gain of the Dow Jones Industrial Average and a 1% gain in the Russell 3000 Auto & Auto Parts Index. Published:5/22/2019 4:39:36 AM
[Markets] Dow industrials finish up nearly 200 points as tech fuels rally Dow industrials finish up nearly 200 points as tech fuels rally Published:5/21/2019 3:15:14 PM
[Markets] Stocks are posting solid afternoon gains, with Dow up 200 and Nasdaq ahead 100 Stocks are posting solid afternoon gains, with Dow up 200 and Nasdaq ahead 100 Published:5/21/2019 2:15:45 PM
[Markets] US STOCKS SNAPSHOT-U.S. stocks open higher on Huawei reprieve U.S. stocks opened higher on Tuesday, with the Dow rising more than 100 points, as technology stocks rebounded after Washington temporarily eased trade restrictions imposed last week on China's Huawei. ... Published:5/21/2019 8:43:56 AM
[Markets] Boeing Shares Spike On Report 'Bird Strikes' Involved In Ethiopian Airlines Crash

Boeing shares are spiking, lifting the Dow, after the Wall Street Journal reported that US aviation authorities now believe a 'bird strike' may have triggered the sequence of events that led to the crash of Ethiopian Airlines flight 302.

Four weeks after faulty sensor data led a 737 MAX jet to crash in Indonesia last year, a high-ranking Boeing Co. executive raised and dismissed the possibility of a bird collision triggering a similar sequence of events that could cause a second accident.

Fears about the potential for a 'bird strike' to damage sensors on the jet appear to have been validated, though Ethiopian authorities aren't convinced.

US aviation authorities regard a collision with one or more birds as the most likely reason for trouble with the sensor, according to industry and government officials familiar with the details of the crash investigation.

Ethiopian authorities disagree but haven’t provided any specifics to support their conclusion.

Boeing shares spiked 3% in premarket trading on the news, though WSJ's report doesn't exactly absolve Boeing. The company must now answer why, if senior executives feared 'bird strikes' could be a problem, it persisted in allowing MCAS, its anti-stall software that's believed to have contributed to two deadly crashes, to rely on only one sensor.

Boeing

Algos clearly interpreted the news as positive...after all, every American who has seen the movie 'Sully' probably remembers how much damage a flock of birds can do.

Published:5/21/2019 7:44:46 AM
[Markets] United Continental's stock set to gain after affirming full-year profit guidance Shares of United Continental Holdings Inc. were indicated up about 0.8% in premaket trade Tuesday, after the air carrier affirmed its full-year profit outlook. The company disclosed in an 8-K filing with the Securities and Exchange Commission, that it still expects 2019 adjusted earnings per share between $10.00 to $12.00, surrounding the FactSet consensus of $11.10. The company said it still expects second-quarter adjusted pre-tax margin of between 11% to 13%. The stock has lost 2.4% year to date, while the NYSE Arca Airline Index has gained 8.0% and the Dow Jones Industrial Average has advanced 10.1%. Published:5/21/2019 6:46:11 AM
[Markets] After "Hammer Blow" From Google, A "Paralyzed" Huawei Scrambles To Develop Its Own Operating System

On Monday, Beijing woke up to a new, and far more dire trade war reality for its flagship telecom company: Google which in 2005 bought Android, whose software has since become the most popular mobile operating system in the world, said it would stop supplying Huawei with Android software in order to comply with a US government ban.

Speaking to the FT, Tim Watkins, head of Huawei in Western Europe, said the company had been “astounded” by the ban, but said Huawei was “as well prepared as we could have been."

Perhaps... yet even so analysts said being cut off from Android was what the FT dubbed "a hammer blow" to a company whose smartphone business has been soaring in recent years, and rose 50% year-on-year to 59 million in the first quarter, while its rivals Samsung and Apple dropped 10% and 23% respectively. In all of 2018, the company shipped some 200 million smartphones, most of them preloaded with Android software.

“Huawei seemed to have unstoppable momentum but with one single blow this could undermine their ambition to become the world’s largest smartphone maker,” said Ben Wood, principal analyst at CCS Insight. Another telecom consultant quoted by the FT, said that the move by Google was the clearest sign yet that Huawei’s partners are “abandoning ship”. He predicted that Washington would begin to “really squeeze the supply line properly now”.

Even without further squeezing, Huawei is in deep trouble: the world’s second-largest smartphone maker is already facing the prospect of being shut out of the world’s most popular smartphone operating system after being placed on a “banned entity” list by the White House, which forbids US companies to supply it with technology.

But with China reportedly being the party that instigated the collapse in trade negotiations in their late stage, surely Beijing, and Huawei was prepared for this contingency?

Not really.

According to a separate report by the FT, Huawei said "it will be able to roll out its own mobile phone operating system “very quickly” if its smartphones are cut off from Google’s Android software."

Which they now are. And while Huawei is confident that it will have its own (reverse-engineered knock off) operating system "soon", the bottom line is that the Chinese telecom giant has no Plan B available right now.

This is a major problem for the company which on Tuesday will launch its new flagship Honor phone in London. But, as the FT reports,  "networks such as Vodafone and EE are reviewing whether they can press ahead with Huawei handsets at the heart of their launch strategy for 5G, the next generation of mobile internet."

Scrambling to find alternatives, Huawei has promised its customers that their current phones would continue to work, and have access to Google’s Play Store to buy apps, although it is unclear based on what it can make such a representation. Indeed, as Tim Watkins warned: "The future is not so certain.” Huawei has cast itself as the victim of the ongoing trade war between the US and China, and Watkins said the company was “caught in the middle”.

Watkins also said the group had been preparing for the worst, after becoming a target for the US last year, and that it had been working on its own operating system, which “can kick in very quickly”. He noted that the OS has been trialled in some parts of China.

It was unclear if the name of the new OS will be iSpy 1.0.

Joking aside, creating a new operating system is not a trivial matter: China's online retail giant, Alibaba, tried to build “China’s Android” but ended up locking horns with Google over just how different its Aliyun OS was from Android. Its successor, ALIOS, is based on Android. Similarly, Samsung has failed to gain much traction for its Linux-based Tizen operating system.

Plan B

Huawei, which in addition to Android on mobile phones uses Microsoft’s Windows on its laptops and tablets which will likely be targeted next, has long sought to develop its own operating systems. In an interview with Germany’s Die Welt newspaper, and subsequently confirmed by Huawei, Richard Yu, chief executive of the consumer division, said the company would “be prepared” in the event of any blacklisting.

“That’s our plan B. But of course we prefer to work with the ecosystems of Google and Microsoft,” he told the German publication in March. Microsoft declined to comment.

Adding to Huawei's headaches, the company relies on chips made by Qualcomm and Intel and following earlier news that these US tech giants may be next to shut off supplies to Huawei, Watkins said the company has stockpiled five years of spare parts for its phones and one year’s worth of components.

That's great, the only problem is that such a strategy virtually paralyzes Huawei's future development. Worse, Citi analysts published a research report saying the potential software ban "could paralyse Huawei’s smartphone and equipment business."

To be sure, the worst case scenario could result in a far more dire outcome: if Google blocks Huawei from Android, which is used on nearly three-quarters of the world’s mobile phones and offers more than 2.5m apps, the Chinese company will still be able to use the basic, open-source version of the software.

But its future smartphones may lose access to apps including YouTube, Gmail and Maps, and to the Google Play store and to security updates. This is likely to have a severe effect on their attractiveness to consumers outside of China, where many Google apps are already banned.

The hit to the company's top and bottom line would be severe: while Huawei does not break out its smartphones business, last year it said that the consumer business contributed 48% of company revenue. Richard Windsor, an independent analyst, said losing the Google ecosystem “is very likely to cost Huawei all of its smartphone shipments outside China” — which, according to data consultancies including Counterpoint Research, is about half its total.

No wonder then that Huawei's bonds are plunging at the fastest pace on record...

... as the company's offshore creditors flee for both fundamental reasons, as the company's cash flow is expected to grind to a halt, as well as concerns they may be forced to liquidate any securities belonging to the Chinese telecom.

Saxo Bank's head of equity strategy, Peter Garnry, said Google’s move was "the starting signal of a technology cold war”, adding: “What we are witnessing is a potential reconfiguration of global trade." Although, in an ironic twist, the strategist believes that "US companies with significant revenue exposure to Greater China (both the mainland and Hong Kong) are the ones facing the most downside risk from any further escalation of the trade war."

If Garnry is correct, watch for China to do everything in its power to respond by hitting the US where it hurts the most: the sale and production of iPhones. We can only wonder if Tim Cook will be as unprepared as Huawei is, when China blocks not only the sale of iPhones and apps on the mainland, but also bars all the assembly of iPhones for the foreseeable future...

Published:5/20/2019 7:41:53 PM
[Markets] The Dow Drops 84 Points Because This Is Way More Than a Trade War Tech was one of the hardest-hit sectors Monday. The Dow Jones Industrial Average fell 0.33% to close at 25,679.90. The S&P 500 tumbled 0.67% to end at 2840.23, and the Nasdaq Composite dove 1.46% to close at 7702.38. Published:5/20/2019 4:40:21 PM
[Markets] Dow Jones Escapes Game Of Thrones-Esque Torching Of Tech Stocks; 4 Stock Market Leaders Up These four stock market leaders beat big declines in the tech sector. Health care and telecom stocks helped cut the Dow Jones Industrial Average decline. Published:5/20/2019 3:39:40 PM
[Markets] Tech Wrecks, Semis Slammed As Trump's Trade Turmoil Hammers Huawei

It just got real in the trade war...

 

China started ugly but was rescued back to merely unattractive...

Huawei bonds plunged...

 

European markets were ugly with Italy leading the way...

European technology stocks had the worst day since Apple’s revenue warning in early January as the Huawei hammering rippled through markets...

But Europe also suffered as Deutsche Bank hit new record lows...

 

The Nasdaq led today's declines in US markets (thanks to blowback from Trump's Huawei move and Google's decision)...

Futures show the action really accelerated during European hours as Google and others cut ties from Huawei...

Trannies managed to get back green briefly (and Dow tried desperately)...

 

S&P's Buy-The-F**king-Open pattern continues...

 

Dow futures seem to have found support around 25,500-600...

 

Small Caps broke below their 100-DMA (already below the 50- and 200-DMA)

 

As Tech wrecked...

Semis sucked...

 

Sprint spiked on FCC T-Mobile approval headlines then dropped on DOJ un-approval rumors...

 

Tesla stock tumbled below $200 for the first time since Dec 2016 (bonds collapsed to record high yields)...

And TSLA CDS spiked...

 

Credit and equity protection costs were notably higher... (the former blowing out more)...

 

Despite equity weakness, bonds were also sold today with the curve around 2-3bps higher in yield (except the long-end outperformed)...

NOTE - the selling started the moment US cash equity markets opened.

The yield curve was yanked steeper today, drastically avoiding the inversion signal...

 

The dollar slipped lower on the day...

 

Yuan was higher on the day but well off the overnight spike highs...

 

Colombia's Peso was pummeled to Feb 2016 lows...

 

Cryptos were weaker today but held on to their gains over the weekend...

 

Bitcoin reached a new cycle high overnight but gave back some during the day, sliding back below $8000...

 

WTI managed to hold on to gains today thanks to three surges off the lows...

 

Silver outperformed gold on the day...

 

Finally, the outlook for U.S. companies doing business with China is growing more gloomy...

Published:5/20/2019 3:10:53 PM
[Markets] Disney reiterated as outperform at Imperial ahead of analyst day on new Star Wars theme park Imperial Capital reiterated its outperform rating on Walt Disney Co. stock on Monday, ahead of the entertainment giant's next investor day scheduled for Wednesday that will introduce analysts to the new Star Wars Galaxy Edge theme park. Analyst David Miller maintained his stock price target of $147, or 9% above its current trading level, and said he expects the park due to open at the end of the month in Anaheim, Calif. to enjoy extremely high volumes, which are already built into his park estimates for the third and fourth fiscal quarters, as well as for fiscal 2020.The Anaheim park is smaller in scale than the one Disney is building in Orlando, Fla, but it means the company will have the benefit of two big park events on both coasts in one calendar year. Outside of the park news, Disney is facing higher losses at Hulu, in which it now owns a 70% stake, with a new put/call arrangement with Comcast Corp. for the remaining shares. Miller shaved 4 cents off his fiscal 2020 GAAP EPS estimate to reflect the bigger stake. Disney has a path to profitability for the streaming service, which has 25 million subscribers. Disney shares were down 1.2% Monday, but have gained 22% in 2019 to date, while the S&P 500 has gained 13% and the Dow Jones Industrial Average , which counts Disney as a member, has gained 10%. Published:5/20/2019 1:40:00 PM
[Markets] China Trade War: Trump, Fed Complacency Is Bad News For Dow Jones President Trump and Fed policymakers seem too sure about the ability of the U.S. economy to withstand a China trade war. That's bad news for the Dow Jones. Published:5/20/2019 12:40:10 PM
[Markets] Al Gore Forecast There Would Be No Ice At The North Pole By 2013

Via ArmstrongEconomics.com,

Al Gore in 2009 forecast that there would be no more ice by 2013.

The BBC reported those crazy forecasts back in 2007.

Former US Vice President Al Gore cited Professor Maslowski's analysis on Monday in his acceptance speech at the Nobel Peace Prize ceremony in Oslo.

"Our projection of 2013 for the removal of ice in summer is not accounting for the last two minima, in 2005 and 2007," the researcher from the Naval Postgraduate School, Monterey, California, explained to the BBC.

"So given that fact, you can argue that may be our projection of 2013 is already too conservative."

"The implication is that this is not a cycle, not just a fluctuation. The loss this year will precondition the ice for the same thing to happen again next year, only worse.

"There will be even more opening up, even more absorption and even more melting.

"In the end, it will just melt away quite suddenly. It might not be as early as 2013 but it will be soon, much earlier than 2040."

I have explained many times that the forecasting methods used is to assume whatever trend is in motion will remain in motion forever. In other words, is the Dow Jones were to rally by 25% in one year, then they would predict that same percentage movement will continue forever.

The methodology is completely void of any cyclical understanding of how everything functions according to a cycle in the universe.

Published:5/19/2019 2:13:25 PM
[Markets] Dow Suffers Worst Streak Since 2016 Despite Best Dip-Buying In A Decade

Quite a week...

China was ugly overnight after defending any dip all week - have to make sure the stock market does not reflect weakness after the trade deal fell apart!!

 

But Europe soared this week as US delayed auto tariffs...

 

China remains the best performer YTD, barely...

 

The late-day headlines from CNBC that "trade talks have stalled" - merely repeating what was said overnight numerous times - triggered the algos to dump after early gains (thanks to op-ex gamma hedging and US-Canada tariff headlines)...Small Caps were the week's biggest laggard...

The Dow is down four weeks in a row - something it has not done since May 2016!!

The midweek ramp was all one big short-squeeze and the machines ran out of ammo today...

 

Another failed IPO today...

 

Trade deal hope was dashed this week...

The ratio between Morgan Stanley's China Trade Sensitive Basket and the S&P 500 has dropped to the lowest since U.S. President Trump and Chinese President Xi announced a truce at the G-20 meeting in Argentina in December.

Credit ended the week wider (despite ripping back midweek from Monday's gap wider)...VIX was around unch...

 

Stocks and bonds decoupled this week (as stocks short-squeezed higher midweek)...

 

Treasury yields were bid on the week and accelerated lower in the last hour as repeated headlines of trade talks being stalled sparked more bond buying...

 

10Y Yields fell back close to YTD lows this week

 

Notably crude and inflation breakevens decoupled late in the week...

 

The yield curve closed the week just above inversion...

 

But before we leave bond-land, both US and Europe priced in more dovishness from their respective central banks this week (41bps of cuts in 2019 for the Fed and 35bps of cuts for the ECB)...

 

The Dollar Index rose on the week - its best week in over 2 months...

 

The last two weeks have seen offshore yuan collapse over 3.1% getting closer to 7.00 - the biggest 2-week plunge since Aug 2015's devaluation

 

Cable was a disaster this week with GBPEUR down 10 days in a row - the longest losing streak in 19 years

 

The Loonie rallied on the day after US dropped steel tariffs...

Emerging-market stocks fell for a second day and a gauge of EM currencies erased 2019 gains as China signaled its reluctance to resume trade talks with the United States

 

Cryptos had a violent week but ended significantly higher, led by a 33% rise in ethereum...

 

With Bitcoin reaching almost $8500 before crashing Friday...

 

The dramatic outperformance of Ethereum in the last few days has erased all of Bitcoin's outperformance over the last 6 weeks...

 

WTI rallied on the week (copper did not) despite a strong dollar and trade talks breakdown but silver was the biggest loser...

 

Finally, in case you thought something had change in recent days - despite the collapsing fun-durr-mentals and the death of trade talks - you were right. Bloomberg's Luke Kawa notes that over the past 10 sessions (or since the trade war resurfaced) the S&P 500 has averaged a drop of 0.5% overnight and a gain of 0.3% during the day. That 0.8 percentage point average gap over the two-week stretch constitutes the biggest disparity between poor overnight retreats and intraday advances since July 2009.

In other words, as the US-China trade deal began to collapse confidence in the markets, 'someone' was panic-buying US equities during the day after 'someone else' was dumping them overnight at historically high levels.

With global money supply now collapsing, stock markets are gonna need more dip-buying to support this debacle...

Published:5/17/2019 3:20:44 PM
[Markets] Wall Street mixed as strong consumer data dampened by trade jitters Wall Street struggled for gains in an up-and-down session on Friday as mixed headlines on trade dampened positive consumer sentiment data, sending investors into the weekend with little enthusiasm. The Dow inched up, while the Nasdaq lost ground and the bellwether S&P 500 was nominally lower, hovering more than 2% below its record high reached on April 30. China added fuel to the fire of the increasingly rancorous trade war with the United States with a defiant front-page commentary on the Communist Party's People's Daily, ratcheting up tensions the day after U.S. President Donald Trump officially blacklisted Chinese telecom Huawei Technologies Co Ltd from doing business with U.S. companies. Published:5/17/2019 1:52:12 PM
[Markets] Dow claws back from 205-point skid to trade higher as stock market stages late-morning turnaround The Dow Jones Industrial Average on Friday pivoted from a solid loss to a firm gain, erasing a more than 200-point opening drop in late-morning dealings. The Dow was up 64 points, or 0.3%, at 25,929, after hitting an intraday low of 25,657.78, representing a roughly 205-point decline for the blue-chip gauge. The move coincided with a broad pivot for the other two main U.S. benchmarks, with the S&P 500 index rising 0.3% at 2,883, and the Nasdaq Composite Index advancing 0.2% at 7,914, with both indexes wiping out earlier declines. All week, investors have been wrestling with developments on trade between the U.S. and its international counterparts, with tensions between the U.S. and China particularly elevated. Published:5/17/2019 10:20:04 AM
[Markets] Dow falls 160 points at the open, jeopardizing multiday rally as China trade tensions flare up U.S. stock benchmarks Friday morning opened solidly lower, putting the thee main indexes on a path to book weekly losses and halt a three-session advance amid further investor concerns about trade relations between the U.S. and its international counterparts. The Dow Jones Industrial Average traded about 158 points, or 0.6%, lower at 25,712, the S&P 500 index declined 0.6% at 2,858, and the Nasdaq Composite Index retreated 0.7% at 7,840 at the open. For the week, the Dow was set for a weekly decline of 1%, the S&P 500 was poised for a weekly slide of 0.8%, while the Nasdaq was on track to fall 1%, according to FactSet data. Heightened trade tensions appeared evident in comments from state-controlled media, including the Communist Party's People's Daily and Xinhua News Agency, which published scathing attacks on U.S. actions in recent days. "The U.S. has made an irrational act in trying to blackmail China with tariff hikes, which will be proven over time to be shortsighted and doomed to fail," read an editorial in the Xinhua early Friday. Meanwhile, the British pound was under pressure against the dollar amid growing uncertainty about Britain's plans to exit from Europe's trading bloc. In corporate news, shares of Pinterest Inc. were looking at double-digit percentage losses, after the social-media company announced Thursday evening that its first-quarter losses of $41.4 million were three times as large as analysts had expected. Published:5/17/2019 8:49:23 AM
[Markets] Dow industrials suffer triple-digit loss at Friday's opening bell Dow industrials suffer triple-digit loss at Friday's opening bell Published:5/17/2019 8:49:23 AM
[Markets] Deere's stock sinks after profit miss, downbeat sales outlook Shares of Deere & Co. sank 4% toward a 5-month low in premarket trade Friday, after the agriculture, construction and turf care equipment maker reported fiscal second-quarter earnings that missed expectations and provided a downbeat outlook. Net income for the quarter to April 29 fell to $1.13 billion, or $3.52 a share, from $1.21 billion, or $3.67 a share, in the year-ago period. The FactSet consensus for net EPS was $3.60. Total revenue grew 5.8% to $11.34 billion, just shy of the FactSet consensus of $11.36 billion. Agriculture and turf revenue rose 3% to $7.28 billion, compared with the FactSet consensus of $7.32 billion; construction and forestry revenue rose 11% to $2.99 billion, topping expectations of $2.97 billion; financial services revenue increased 11% to $886 million, beating the FactSet consensus of $852 million. For fiscal 2019, Deere expects sales to increase 5%, while the FactSet consensus of $35.69 billion implies 7% growth. "Ongoing concerns about export-market access, near-term demand for commodities such as soybeans, and a delayed planting season in much of North America are causing farmers to become much more cautious about making major purchases," said Chief Executive Samuel Allen. The stock has lost 2.1% year to date through Thursday, while the Dow Jones Industrial Average has gained 11%. Published:5/17/2019 5:48:53 AM
[Markets] Rickards: "Prepare For 'Economic' Trench Warfare"

Authored by James Rickards via The Daily Reckoning,

What if China isn’t half so desperate for a deal as the president believes?

Are we in for an extended siege of economic trench warfare?

Today we explore possibilities… and their implications.

We first direct our gaze to Wall Street.

Investors came crouching from their shelters this morning… as if expecting an aftershock to the quake that drove them underground yesterday.

With Monday’s 617-point battering — piling atop last week’s losses — three months of stock market gains have vanished into the ether.

The S&P 500 endured its 15th-largest decline in history yesterday. It has shed $1.1 trillion since May 5 alone.

Markets Bounce Back

But the Earth held today. And investors cleared away some of yesterday’s wreckage.

The Dow Jones rebounded 207 points.

The S&P reclaimed 23 of the 70 points it lost yesterday. The Nasdaq gained 87.

Markets were encouraged by President Trump’s comments that he will strike a deal with China “when the time is right.”

[ZH: and have erased the losses by the European close today]

He will have an opportunity at the G20 summit in late June. There he will meet China’s Xi Jinping, for whom his “respect and friendship is unlimited.”

But is China sweating dreadfully for a trade deal as Trump assumes?

China Braces for Escalation

China does — after all — ship some $500 billion of products to these shores each year.

It cannot afford to sit on them like a broody hen.

But you might have another guess, says the director of monetary policy at the People’s Bank of China:

As for the change in the domestic and external economic environment, China has sufficient leeway and a deep monetary policy toolkit, and so has full ability to deal with [economic] uncertainties.

But here we cite a government mouthpiece, a marionette in human form. You no more trust his word than you would trust a dog with your dinner.

Just so.

But affirms Brad Setser, senior fellow for international economics at the Council on Foreign Relations:

Trump’s escalation comes at an awkward time, but if push comes to shove, they’re quite capable of supporting growth through more investment and credit.

There may be justice here.

Twice as Much Stimulus as During the Financial Crisis

If you believe the Federal Reserve is a gargantuan spigot of credit, the People’s Bank of China brings it to shame.

ING estimates China has pledged 8 trillion yuan in economic support — twice as much “stimulus” as it offered during the global financial crisis.

And the Organization for Economic Cooperation and Development (OECD) estimates China’s fiscal stimulus this year equals 4.25% of GDP… up from 2.94% last year.

Meantime, Chinese domestic consumption has been on the increase.

Growth through increased consumption — say the economics wiseacres in practice among us — reduces dependence on exports.

Is most of this stimulus woefully wasteful? Does it finance vastly unproductive economic activity?

Yes and yes.

Is the way to wealth through consumption — rather than production?

No, it is not.

But if Chinese authorities believe they can offset lost exports by bellowing credit and vomiting money… they may choose to dig in for the long haul.

A nation is never as happy as when it’s at war — even trade war.

War gives the people enemies to hate… and leaders to love.

What better way to distract a people from their own government’s eternal swinishness, its infinite rascality?

Despite all contrary appearance, the United States government does not run a corner on either.

In fact, China’s state media took to the warpath Monday.

It shouted for a “people’s war” against Mr. Trump’s “greed and arrogance.”

And why not? It could argue…

‘China is a proud, accomplished and ancient nation, with roots sunk deep into history.

It is the “Middle Kingdom,” the center to which all the world’s divergent rays bend.

Who are these upstart Americans to shove us around?’

Economic “Trench Warfare”

We would remind the president — respectfully — that wars are far easier to start than finish.

The boys will be home by Christmas, they gloated in August 1914.

Four years later they were still in the trenches — or in boxes.

Could the United States and China soon be locked in the extended stalemate of economic “trench warfare”?

The strategists at Deutsche Bank’s chief investment office fear so:

Unless a deal can be struck quickly in the coming weeks, markets will need to prepare themselves for an extended period of economic trench warfare. And large listed U.S. companies in particular could well find themselves in the line of fire.

China has previously chosen to “wait, strategically inflict pain, delay and hope U.S. pressure eventually goes away.”

But China has heaved aside that option, argues Deutsche Bank.

Now it is reaching for its shovel… and preparing to hunker in.

In conclusion:

The nature of trade wars (like actual wars) is that they foster nationalist sentiment and jingoism. The first shots are fired in the hope of quick victories. And before you know it, both sides are stuck in the trenches, with no obvious and politically feasible way out.

The coming weeks may well yield the answer.

But how will markets hold up if diplomacy collapses?

All Pressure May Fall on Trump

A failed trade deal was sufficient to send stocks careening this past week.

President Trump has all his cargo loaded on two wagons — the stock market and economy.

If either cracks an axle, if either collapses under the strain, his reelection prospects collapse in turn.

Therefore, argues analyst Sven Henrich of Northman Trader, all pressure rests upon the presidential shoulders of Donald J. Trump:

Because for Trump there’s an election to worry about. The Chinese don’t have an election to worry about and that puts the time pressure on Trump, not the Chinese. The Chinese will continue to intervene and yesterday they showed backbone and followed through on retaliation. But because the U.S. election cycle clock is ticking Donald Trump cannot afford a trade war extending into the end of the year, especially if the consequences of such a protracted trade war would spill into the larger economy.

Will the Great Negotiator be the one to blink first?

Published:5/16/2019 7:50:57 PM
[Markets] US STOCKS SNAPSHOT-Wall St rises for third straight day on data, earnings Wall Street closed higher on Thursday as upbeat earnings and strong economic data put investors in a buying mood, with technology companies leading the charge. The Dow Jones Industrial Average rose 214.72 ... Published:5/16/2019 3:15:47 PM
[Markets] GLOBAL MARKETS-Stocks rise after strong earnings, deal news; data lifts U.S. yields World stock markets were buoyed by deal-making news and solid earnings from Dow components Cisco and Walmart on Thursday while strong economic data pushed U.S. bond yields higher even as investors struggled to make sense of the latest developments in global trade relations. News that U.S. President Donald Trump is expected to delay auto tariffs appeared to improve the trade tone on Wednesday, but later in the day the Trump administration hit Chinese telecoms giant Huawei with severe sanctions. Published:5/16/2019 1:15:36 PM
[Markets] US STOCKS-Wall St gains on better-than-expected earnings, robust economic data U.S. stock indexes extended gains to trade more than 1% higher on Thursday, as optimism was driven by upbeat earnings from Cisco and Walmart as well as robust economic data that underlined the strength of the domestic economy. Cisco Systems Inc jumped 7%, the most among the S&P and the Dow, after the network gear maker gave an upbeat sales forecast and said minimal sales exposure to China has helped cushion the impact from trade dispute. Published:5/16/2019 11:49:54 AM
[Markets] Dow turns positive for the week as it seeks to book third straight gain Dow turns positive for the week as it seeks to book third straight gain Published:5/16/2019 11:49:54 AM
[Markets] US STOCKS-Wall St gains on earnings boost, strong economic data U.S. stock indexes rose 1 percent on Monday and were on pace to extend a two-day winning streak, lifted by better-than-expected earnings from Cisco and Walmart, and robust economic data that underscored the strength of the domestic economy. Cisco Systems Inc rose 6.1%, the most among the S&P and the Dow indexes, after the network gear maker gave an upbeat sales forecast and said minimal sales exposure to China have helped cushion the impact from trade dispute. Published:5/16/2019 10:17:02 AM
[Markets] Dow intraday gain tops 200 points as stock-market rebound continues Dow intraday gain tops 200 points as stock-market rebound continues Published:5/16/2019 9:46:32 AM
[Markets] S&P 500, Nasdaq's rallies put stock-market benchmarks on pace to erase weekly losses Strong early gains for the S&P 500 index and the Nasdaq Composite on Thursday put both benchmarks on track to wipe out firm weekly declines after being buffeted by trade-war fears. The S&P 500 index was up 1.1% at 2,882, with a weekly gain of a little less than 0.1% in late-morning dealings, while the Nasdaq was up 1.3% at 7,922, on pace for a weekly advance of just under 0.1%. Meanwhile, the Dow Jones Industrial Average was holding on to a weekly slide of 0.3% but has eaten away at a firmer slide at the start of the week, with Thursday gains of 215 points, or 0.8%, partly led by a rally in share of Walmart Inc. . Gains for the equity benchmarks took flight after a bath of economic data came in better than expected, including a measure of manufacturing activity in the Philadelphia area and readings of jobless claims and housing starts. Investors dialed back hopes for a trade deal between Washington and Beijing after President Trump signed an executive order Wednesday allowing the U.S. to ban telecommunications network equipment, a move officials said targeted Chinese technology companies Huawei and ZTE. That came a day after the Trump administration postponed a decision on whether to impose tariffs on autos, sparking a small market rally for U.S. and European stocks. Published:5/16/2019 9:46:32 AM
[Markets] Stocks Rise on Strong Earnings From Walmart, Cisco Systems The Dow Jones Industrial Average rose after strong earnings reports from some market heavyweights pushed aside concerns - for now - about the U.S.-China trade war. advanced after the networking giant posted fiscal third-quarter earnings that topped Wall Street forecasts. Stocks climbed Thursday after strong earnings reports from some market heavyweights helped push aside investors' concerns - for now - about the U.S.-China trade war. Published:5/16/2019 9:15:18 AM
[Markets] An Angry Trader Rages "Don't Judge A Market By Its Latest Gyration"

A clearly frustrated - and rightfully so - Richard Breslow, vents his former fund manager and FX trader feelings in a brief note that we suspect will ring very true for many readers amid this farcical market where 'bad news is good news', 'constructive' can catalyze 500-point Dow ramps, and retaliatory trade tensions are buying opportunities because of the central banks' brainwashed-conditioning of the world's investors' risk attitudes...

Trade tensions have eased. Trade tensions have ratcheted up.

Things will get better. They have to. It’ll get worse before it gets better. Neither side can afford to back down.

Use game theory to figure this whole situation out. Use it to create a game plan.

React to every comment. It’s the only way to survive.

Buy the dip. Derisk.

And, of course, what is really the punchline: The global economy is set to grow and is in a “good place;” the numbers are cratering fast.

Which is it?

All of the above have featured in the discussion just this week.

The answer is we can’t know. It’s an old saw to point out that markets don’t like uncertainty. It’s overused and misused. But in this case it’s valid. And it is causing various asset classes to send out conflicting signals. That’s making a consistent, or even coherent, investment thesis hard to construct.

And this means investment commitments will continue to be delayed. Kicking the can down the road is a tried and true policy strategy. It won’t work here. You can’t easily rotate out of a partially built factory. No one can know what are really deferred intentions waiting for the “all clear” and which have been canceled. And it appears consumer spending might be following along. Monies invested abroad in risk assets will continue to be repatriated, masking true economic forces that are meant to clear markets.

Bonds will continue to be in favor. Even from those who, in ordinary circumstances, would look at the numbers and believe yields have fallen too far. That is making the path of official rates almost impossible to accurately predict. It sure looks like the short-ends of the yield curves have settled on what monetary policies are coming.

But make no mistake, uncertainty is the true order of the day. Safe havens pause for no economic reality when concerns are heightened and can be discarded just as dramatically. The duration of purchases that investors seek will vary greatly by the identity and location of the investor. A valuable sentiment barometer to keep a close eye on. There’s a reason following TIC data is all the rage.

You will get fierce sell-offs and rallies in equities that will have too much meaning ascribed to them.

  • Short-term speculators will be forced to furiously chase the market back and forth.

  • Long-term investors will be selectively picking their most favorite stocks for adding to positions.

  • Medium-term players will have less and less of an active presence as deciding how invested they really want, and can afford, to be will remain a question they just can’t answer.

To my mind, watching the market come to terms with what is going on is important not only from an immediate trading perspective, but to prepare for what distortions will have to be unwound when conditions become clearer. And that may be the better opportunity to develop a plan that can be stuck with and, of course, to make money.

Published:5/16/2019 9:15:18 AM
[Markets] Futures Rebound Despite Trump's Huawei Ban, Yuan Slides For Record 12th Day

It has been a session of two halves. Early on European and Asian stocks fell, government bond yields slipped and the Japanese yen firmed after the U.S. government hit Chinese telecoms giant Huawei with severe sanctions, further straining Sino-U.S. trade ties, with Beijing warning that the Huawei restrictions won't be seen as a goodwill gesture and that China will take "all necessary measures" to defend its companies. Amid fresh trade war concerns, the European Stoxx 600 index fell as much as 0.5% in early European trading with the German DAX down 0.4%, while U.S. equity futures were initially down 0.4%.

The broad early weakness in European markets was offset by small gains in Chinese and Hong Kong stock indexes leading to only marginal losses on a global stock index as investors expected - what else - state authorities to step in to support the market and stabilize sentiment.

“Chinese stocks are up as markets expect authorities to intervene to support sentiment but this kind of activity is not sustainable and unless we see a clear resolution in the China-U.S. trade conflict, overall sentiment will remain weak,” said Neil Mellor, an FX strategist at BNY Mellon.

The initial weakness, however, reversed shortly after the European open, when with no fundamental reason, a wave of buying lifted the Emini, and US Treasuries erased a gain while European stocks also reversed a drop as a rally in chemicals and mining companies helped drive up the rebound.

S&P futures, trading at session lows of 2,840 at the Europen open, have jumped 25 points in a few short hours, with US equity futures now trading at session highs, even as China is expect to announce a response to yesterday's executive order by Trump which effectively banned Chinese telecom companies from operating in the US.

Officially closing Q1 earnings season, Walmart shares rose in early trading after the company reported its best first quarter in nine years while warning that higher import tariffs can boost consumer prices.

Yet even as equities rebounded, German government bond yields continued to flirt with their lowest level in nearly three years while Dutch bond yields were about to dip into negative territory, a phenomenon not seen since October 2016.

The big overnight event, for anyone who missed it, was announced late on Wednesday when the U.S. Commerce Department said it was adding Huawei Technologies and 70 affiliates to its “Entity List", effectively banning the company from acquiring components and technology from U.S. firms without government approval. The move took global markets by surprise as sentiment had steadied somewhat in the previous session on news that U.S. President Donald Trump was planning to delay tariffs on auto imports after a swathe of weak U.S. and Chinese economic data.

“Depending on how long this standoff with China lasts, that impacts growth for longer and might force the Fed’s hand,” Natixis strategist Esty Dwek told Bloomberg TV in Singapore. “I wouldn’t expect any big change in the short term, but the possibility of a cut much later in the year has risen.”

In rates, yields on 10-year U.S. Treasury bonds eased as low as 2.35%, near a 15-month low of 2.340% touched on March 28, however, just like stocks, they have since rebounded sharply, and were last seen rising as high as 2.39%. According to Bloomberg, treasuries were under pressure in early New York trading after a $630k/DV01 block trade in 10-year futures; they were mostly underpinned in Asia session and London morning as Europe outperformed, notably France following solid auctions. As a result, yields were cheaper by 0.5bp to 2.5bp across the curve with short end leading the sell-off after 2-year and 5-year yields closed at year-to-date lows on Wednesday; 10-year yields higher by ~1bp at 2.385%, 2s10s and 5s30s flatter by around 1.5bp. Looking at the short-end of the curve, Fed funds rate futures continue to fully price in a rate cut by the end of this year and more than a 50% chance of a move by September.

“The markets are inching step by step in pricing in a rate cut. That is a sea change from a year ago when the consensus was three to four rate hikes a year,” said Akira Takei, bond fund manager at Asset Management One.

In FX, the notable mover was the Chinese currency because even as mainland stocks rose on expectations of more easing, the yuan extended its slump against its peers to a twelfth session, the longest in data going back to the start of 2015. While China’s currency was steady versus the dollar, the tumble in the Bloomberg CFETS RMB Index Tracker came after the yuan erased its gain for the year amid the China-U.S trade stand-off.

The offshore yuan has retreated about 2.5% this month as one of the world’s worst performers. Despite the yuan’s drop against the basket of 24 trading partners’ currencies, Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd. in Singapore, said the index is still "within the range that is tolerable for the authorities." He added that there is only a small chance the onshore yuan will weaken past 6.9 per dollar because the government will take steps to support the currency.

Across the Pacific, falling U.S. yields initially eroded support for the greenback with the dollar down 0.1 percent against a basket of its rivals in early trading, however as futures and yields jumped, so did the greenback, and the Bloomberg dollar index was trading near session highs.

Elsewhere, the pound dropped for a ninth day versus the euro - the longest losing streak since 2000 - after news that UK PM May is to be warned that she faces the prospect of confidence vote on June 12th if she does not agree to step down before summer, according to reports in the Telegraph. In related news, UK PM May will tell the executive of the 1922 Committee she needs several more weeks to pass key Brexit legislation in meeting tomorrow, according to FT's political correspondent Laura Hughes.  ITV Political Editor Peston tweeted Labour MP Emily Thornberry said her party will vote against WAB and signalled cross-party talks may collapse as soon as tomorrow, while Conservative MPs Vaizey and Bridgen agree PM May will be out next month.

In commodities, oil prices gained on the prospect of mounting tensions in the Middle East hitting global supplies despite an unexpected build in U.S. crude inventories. Brent crude rose 0.3% to $71.99 a barrel, while U.S. West Texas Intermediate (WTI) crude fetched $62.26, also half a percent higher.

Market Snapshot

  • S&P 500 futures up 0.3% to 2,864.50
  • STOXX Europe 600 down 0.2% to 377.45
  • MXAP down 0.3% to 154.86
  • MXAPJ down 0.2% to 508.98
  • Nikkei down 0.6% to 21,062.98
  • Topix down 0.4% to 1,537.55
  • Hang Seng Index up 0.02% to 28,275.07
  • Shanghai Composite up 0.6% to 2,955.71
  • Sensex up 0.3% to 37,221.67
  • Australia S&P/ASX 200 up 0.7% to 6,327.84
  • Kospi down 1.2% to 2,067.69
  • German 10Y yield fell 1.7 bps to -0.115%
  • Euro up 0.1% to $1.1215
  • Brent Futures up 0.8% to $72.33/bbl
  • Italian 10Y yield rose 1.8 bps to 2.373%
  • Spanish 10Y yield fell 4.5 bps to 0.91%
  • Brent Futures up 0.8% to $72.33/bbl
  • Gold spot up 0.03% to $1,296.91
  • U.S. Dollar Index down 0.07% to 97.50

Top Overnight News from Bloomberg

  • Theresa May flies back to London on Thursday morning to once again face colleagues seeking to oust her, as she struggles to find a way to pass her Brexit deal. The executive of the 1922 Committee, representing Tory members of Parliament, will use a meeting at the premier’s office at 11:30 a.m. Thursday to urge her to quit as soon as possible, according to two of its members, speaking on condition of anonymity
  • Donald Trump signed an order Wednesday that’s expected to restrict Huawei and fellow Chinese telecommunications company ZTE Corp. from selling their equipment in the U.S. The Department of Commerce said it had put Huawei on a blacklist that could forbid it from doing business with American companies. This campaign could disrupt 5G rollouts globally
  • China cut its U.S. Treasuries holdings to the lowest level since 2017 in March amid the trade dispute between the world’s two biggest economies
  • The U.S. ordered its non-emergency government staff to leave Iraq amid increasing Middle East tensions that American officials are blaming on Iran, as fears rise that the region may be heading toward another conflict
  • Trump will also give the EU and Japan 180 days to agree to a deal that would “limit or restrict” imports into the U.S. of automobiles and their parts in return for delaying new auto tariffs, according to a draft executive order seen by Bloomberg
  • Global funds are taking cover in defensive trades amid a widening U.S.-China rift, with yuan sovereign bonds emerging as the top pick in developing Asia

Asian equity markets were mixed as blue-chip earnings and the US blacklisting of Huawei as well as 70 of its affiliates overshadowed the positive lead from Wall St, where sentiment was underpinned by reports that President Trump plans to delay the decision on tariffs for auto imports by up to 6-months. ASX 200 (+0.7%) and Nikkei 225 (-0.6%) were mixed in which the commodity-related sectors led the intraday recovery in Australia and as a higher Unemployment Rate stoked calls for an RBA rate cut, while Tokyo trade was pressured by disappointing earnings including Japan’s megabanks Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group. Hang Seng (U/C) and Shanghai Comp. (+0.6%) were initially subdued with underperformance seen in tech and telecoms following US President Trump’s national emergency declaration on foreign companies posing threats to US telecommunications, although strength in property names after firmer Chinese House Price data helped reverse the losses. 10yr JGBs were initially supported as they tracked recent upside in T-notes and amid weakness in Tokyo stocks, although gains were capped after the 5-year JGB auction results were relatively inline with the previous albeit with a weaker b/c.

Top Asian News

  • Philippines Cuts Large Banks’ Reserve Ratio by 2Ppt to 16%
  • Moody’s Changes Outlook on Japan Banking System to Negative
  • China Says It Will Take Necessary Measures to Defend Its Firms
  • MUFG Shifts Asia Rates Trading to London From Hong Kong

European equities have been volatile [Eurostoxx 50 +0.3%] following on from a mostly positive lead in Asia. Sectors are mixed with outperformance in material names (amidst rising base metal prices) whilst consumer discretionary lags as EU auto names pare back some of yesterday’s tariff-spurred gains. In terms of individual movers, Thyssenkrupp (+6.5%) shares rose to the top of the DAX after reports that Finland’s Kone (+3.8%) are exploring the viability of a bid for Thyssenkrupp’s EUR 14bln elevator division. Meanwhile, Thomas Cook (-18.4%) shares opened lower by over 20% after posting a Q1 pre-tax loss of EUR 1.465bln which came alongside a warning that “challenging” trading over the peak summer season would impact FY earnings, although the Co. did note that they have received multiple bids for all and parts of the group airline. Finally, Ubisoft (-12.4%) rests at the foot of the Stoxx 600 despite posting record sales figures, after a delay to its open-world game “Skull & Bones” into the next FY.

Top European News

  • Car Stocks Retreat as Trump Seen Seeking Industry Import Curbs
  • Burberry Falls as China Weakness Hangs Over Tisci’s New Looks
  • ECB’s Weidmann Says Rate Tiering Could Be Net Negative For Banks
  • Italian Banks Expectations Remain Demanding, Goldman Sachs Says

In FX, the Dollar is holding above Wednesday’s post-US data lows, but stands narrowly mixed vs G10 counterparts as the US-China trade dispute continues via recriminations over the cause of the derailment in talks that has sparked another round of reciprocal tariffs. However, the DXY is stuck in a narrow band either side of the 97.500 mark that has been pivotal for a while, and very close to the 30 DMA (94.428) between 97.565-438.

  • NZD/EUR/CAD/JPY/AUD/CHF - All marginally firmer vs the Greenback, with the Kiwi outperforming or clawing back more losses than other so be precise from sub-0.6550 levels to circa 0.6580. Meanwhile, the single currency is holding above 1.1200 after reclaiming big figure+ status yesterday on the EU auto tax reprieve, but unable to breach the 30 DMA (1.1222) convincingly amidst increasingly dovish ECB market expectations and another potential clash between Italy and the EU on budget policy intentions. The Loonie has also rebounded from recent lows and a post-Canadian CPI dip to test resistance ahead of 1.3400 with some positive momentum coming from reports that the Canada, Mexico and the US are close to clinching a deal on steel tariffs (Peso paring losses as well as Usd/Mxn eyes 19.0000). Usd/Jpy continues to straddle 109.50 as the Yen retains a safe-haven bid, but also contends with more decent option expiry interest (1.55 bn from 109.15 to 109.25 and 2.2 bn between 109.40-55). Elsewhere, the Aussie has recovered from its latest slump in wake of more weak data on balance (labour report) and a dip through 0.6900 stops with the aid of underlying bids/short covering, and Aud/Usd has now absorbed supply said to be sitting around 0.6910 and above to trade back up around 0.6933. Lastly, funding for a proposed acquisition has been touted as a factor behind recent Franc strength, but Usd/Chf has bounced towards 1.0100 from a few pips above 1.0050 and Eur/Chf has crossed over 1.1300 again.
  • GBP - Brexit and related UK political uncertainty is still haunting Sterling along with other global and geopolitical risk, with Cable retreating a tad further towards 1.2800 and Eur/Gbp inching close to 0.8750 as PM May meets the 1922 group in just under an hour.
  • EM - The Rand is showing a degree of resilience in the face of somewhat negative reviews from Moody’s on SA’s credit outlook with Usd/Zar hovering at the lower end of 14.2650-1525 trading parameters and perhaps being drawn or attracted to an unusually large expiry at the 14.0000 strike (1.365 bn).

In commodities, a positive session thus far for WTI (+0.7%) and Brent (+0.5%) futures as tensions in the Middle East drift back into focus. The former remains above USD 62.00/bbl and in close proximity to USD 62.50/bbl whilst its Brent counterpart floats comfortably above the USD 72.00/bbl mark. On the Iranian front, ship tracking data showed that a tanker carrying Iranian oil (in violation with US sanctions) has unloaded its cargo of almost 130k tonnes of oil near Zhousan, in China. Iran will remain a focus as the JMMC convene this weekend in Jeddah, with ministers expected to discuss whether the supply gap from Iranian sanctions will need to be filled, and hence whether the output curb deal will need to be extended until the end of the year.  In terms of technicals, analysts at PVM highlight resistance at 63.09 (21 DMA) in WTI and 72.60 in Brent (short-term DMA) which they believe will be tested today given the optimism emanating from Trump’s decision to delay EU auto tariffs, progress regarding the Canadian and Mexican aluminium and steel tariffs and concerns of supply disruptions from Middle Eastern tensions. Looking at metals, gold remains choppy below the 1300/oz level and flirts with its 100 DMA at 1296.82 ahead of its 50 DMA (1291.69). Elsewhere, copper prices are poised to notch a third day of gains amid a weakening buck and optimism surrounding Trump’s auto tariff delays with the red metal now back above 2.75/lb ahead of its 200 DMA at 2.7604.

US Event Calendar

  • 8:30am: Housing Starts, est. 1.21m, prior 1.14m; Housing Starts MoM, est. 6.15%, prior -0.3%
  • 8:30am: Building Permits, est. 1.29m, prior 1.27m; Building Permits MoM, est. 0.08%, prior -1.7%
  • 8:30am: Philadelphia Fed Business Outlook, est. 9, prior 8.5
  • 8:30am: Initial Jobless Claims, est. 220,000, prior 228,000; Continuing Claims, est. 1.67m, prior 1.68m
  • 9:45am: Bloomberg Consumer Comfort, prior 59.8

DB's Jim Reid concludes the overnight wrap

By the time you read this I’ll be flying back from the US West Coast and hopefully blissfully asleep. At the conference I was attending there was a panel on US politics with a couple of Washington insiders and a couple of things struck me from the conversation. Firstly, virtually every market person I’ve spoken to over the last few months wants a deal, pretty much any deal. However, in listening to the panel it’s quite clear that China has few friends on the trade front in Washington across the political spectrum. Also, the view was that behind closed doors virtually all US corporates were supportive of being more aggressive with China on Trade. They may not say so publicly but the impression given was that in private they believed the current trading relationship made life tougher for them. So, working in markets it’s easy to focus on the price action negatives and assume a rational compromise at some point. However, there is a bigger story than this. What makes this challenging though is that Mr Trump did everything to suggest he wanted a deal early this year and it looked like he was clearing the way for one regardless of the above support for more action. So second guessing the President’s next move is the hard part but don’t underestimate the support for a more aggressive stance politically and at a corporate level.

As discussed above though, markets have a very different view and given how fragile sentiment has become over the last 10 days, the last thing they needed was a string of soft data across China and the US. That was certainly the case until headlines hit in the mid-afternoon indicating that President Trump plans to delay the auto tariffs decision by up to six months.Even if that decision was broadly expected, there was always the chance that the President went ahead with them this week. More on the data later but the news about Trump’s auto tariffs delay ended up more than offsetting the weak China and US data with the NASDAQ (+1.13%) leading gains.The S&P 500 closed up a more modest +0.58% however was up +1.28% from the early lows while the DOW finished +0.45%. The STOXX 600 (+0.46%) also finished onside having spent the majority of the session in the red along with the DAX (+0.90%). Vol also abated with the VIX down -1.6pts to -16.4 and the V2X slipping -0.8pts to 16.7. It’s worth flagging that the European Autos sector rose +1.97% yesterday and +4.14% from the lows, while the S&P 500 Autos sector gained +1.00% and +2.70% off the lows.

Bond markets also witnessed a part reversal, however yields were still broadly lower across the board which goes to show that fixed income markets are still biased towards risk-off more generally.Indeed there was a multi-year low for Bunds which touched -0.134% intraday and closed at -0.100% (-2.8bps) for the lowest closing level since September 2016. That’s just 9bps off their all-time low from their summer 2016 post-Brexit levels. OATs rallied -2.3bps and Gilts -3.7bps while Treasuries were down another 3.7bps to 2.374% and the lowest since March despite yields rising after the auto tariff news.This morning they are hovering around similar levels. At the short end, 2y yields fell to 2.161% and to the lowest since February 2018. The 3m10y curve flattened back into negative territory at -2.9bps while there are now 31bps of cuts priced into the January 2020 Fed Funds futures contract. The one bond market that failed to join the party was BTPs which rose +1.8bps with the spread to Bunds hitting 292bps intra-day, which would have been the highest level of the year, before retracing slightly.The move for Bunds appeared to reflect a combination of the wider risk-off move and further reaction to Salvini’s early week comments about letting Italy’s deficit rise above EU limits, which he reiterated yesterday.

In other markets, US HY credit widened 6bps yesterday – and therefore bucking the equity move - while in currencies EM FX was +0.07% stronger. Unexpected comments from Mnuchin about US, Mexico, and Canada being closer to a deal to remove metal tariffs helped the Mexican Peso and Canadian Dollar rally +0.54% and +0.18% respectively. USTR Lighthizer met with the Democratic House leadership team to discuss passing the NAFTA-replacement deal, the USMCA, and Speaker Pelosi’s aide said the meeting was “productive” and that the Democrats want to “get to ‘yes.’” Meanwhile, WTI oil prices rose +2.12% from their lows (+0.39% on the day) after US data showed a +5.43mn barrel crude inventory build, which was not as big as feared.

After US markets closed, President Trump signed an executive order to declare a national emergency regarding “threats against information and communication” systems. While it did not mention China, Huawei or ZTE (which is down 5% overnight) by name, the move is likely a step on the path toward fully banning the Chinese tech firm from doing business in the US. Our economists in China wrote this morning that they believe this could be highly damaging, as it could trigger more voices in China’s policy circle against US business interests in China. See their note here .

Markets in Asia are a bit more mixed on the back of that news with declines for the Nikkei (-0.60%) and Kospi (-0.87%), and small gains for the Hang Seng (+0.24%) and Shanghai Comp (+0.20%) - the latter reversing earlier losses. The CNH is -0.10% weaker, trading at 6.911 – a level it has broadly hovered near for the last three days but failed to breach higher. Meanwhile US equity futures are down around -0.35%. A data point worth flagging this morning also is China’s holdings of Treasuries which hit the lowest level since 2017 in March following data released last night. It was also the first drop since November. The more significant data will be this month’s however which we will still have to wait a while for.

Back to that data in the US where first up was the April retail sales report where both the core (-0.2% mom vs. +0.3% expected) and control group (0.0% mom vs. +0.3% expected) prints both fell short.There were some modest upward revisions to the previous month but not enough to shrug off the overall disappointment. Adding to the pain was the April industrial production print released shortly after which unexpectedly fell -0.5% mom (vs. 0.0% expected), albeit somewhat offset by a three-tenths upward revision to March. It’s worth noting that manufacturing production also fell -0.5% mom (vs. 0.0% expected) and capacity utilization slipped from 78.5% to 77.9% - the lowest since February last year. The Atlanta Fed GDP tracker nudged down -0.5pp to 1.1% following the above data.

The better news came in the latest manufacturing sector survey data where the May empire manufacturing print rose +7.7pts to 17.8,far exceeding expectations for a drop to 8.0. In fact, it was the highest reading since November 2018. However, with the bulk of the responses coming prior to the rise in trade tensions it’s next month’s reading which will garner more attention.

Prior to this we had the preliminary Q1 GDP reading in Germany which matched expectations at +0.4% qoq. However, our economists in Germany now expect Q2 to be flat due to a negative payback for Q1 while the rise in trade tensions will also result in subdued growth for Q3. So the outlook appears less positive. For completeness, there was no change in the second revision for Q1 GDP for the Euro Area at +0.4% qoq while France’s April CPI was revised up one-tenth to +0.4% mom.

To the day ahead now, which this morning includes Q1 employment data in France, final April CPI revisions in Italy and the March trade balance for the Euro Area. In the US we’ll see April housing starts and building permits, the May Philly Fed PMI and the latest weekly initial jobless claims reading. Away from that the ECB’s Praet, Guindos and Coeure are all speaking at various stages today along with the Bundesbank’s Weidmann. The BoE’s Haskel also speaks this evening. Over at the Fed we’ll hear from Kashkari at 5.05pm BST when he is due to discuss monetary policy and the economy and then Brainard at 5.15pm BST who will be talking about a similar topic.

Published:5/16/2019 6:44:18 AM
[Markets] The Dow Rose 116 Points Because a Rate Cut Looks More Likely After Weak Retail Sales Speculation that weak April retail sales would nudge the Fed to cut sparked a rally. The Dow Jones Industrial Average gained 0.45% to close at 25,648.02. The S&P 500 rose 0.58% to end at 2850.96, and the Nasdaq Composite added 1.13% to close at 7822.15. Published:5/15/2019 4:10:13 PM
[Markets] Nasdaq, Dow Jones Frustrate Bears As 5 Top Stocks Trade Past Buy Points The Dow Jones Industrial Average is lagging a big rebound by key equity indexes and top stocks today. Zoom Video, Mastercard and others are rallying. Published:5/15/2019 2:39:40 PM
[Markets] Boeing Stock Is Rising Even as Congress Grills the FAA Over the 737 MAX The House subcommittee on aviation met on Wednesday to ask the Federal Aviation Administration questions about the two (BA)737 Max crashes that claimed the lives of 346 people. Boeing stock (ticker: BA) has bounced around in response to the hearing, but the general direction has been higher. Boeing stock is up 0.9% at $346.01 at 12:50 p.m. Wednesday, just edging out the 0.6% gain of the Dow Jones Industrial Average. Published:5/15/2019 12:40:53 PM
[Markets] The Dow Gains 97 Points Because the Market Is Less Gloomy About Trade SECTORFOCUS BLOG Back in Black. Markets were able to recover from early losses on Wednesday: The Dow Jones Industrial Average was 0.4% higher near midday, while the S&P 500 rose 0.6% and the Nasdaq Composite had gained 1%. Published:5/15/2019 12:08:10 PM
[Markets] The Dow Is Back in the Black Because Investors Are Less Gloomy About Trade Today SECTORFOCUS BLOG Back in Black. Markets were able to recover from early losses on Wednesday: The Dow Jones Industrial Average was 0.4% higher near midday, while the S&P 500 rose 0.6% and the Nasdaq Composite had gained 1%. Published:5/15/2019 11:41:42 AM
[Markets] Stocks Post Gains, But Dow Jones Battles Near 200-Day Line The Dow Jones is holding support at its 200-day moving average. The bulls want to see the blue-chip index hold above the longer-term support level. Published:5/15/2019 11:08:21 AM
[Markets] Global Trade Collapsing To Depression Levels

With the trade war between the US and China re-escalating once more, investors are again casting frightened glances at declining global trade volumes, which as Bloomberg writes today, "threaten to upend the global economy’s much-anticipated rebound and could even throw its decade-long expansion into doubt if the conflict spirals out of control."

"Just as tentative signs appeared that a recovery is taking hold, trade tensions have re-emerged as a credible and significant threat to the business cycle," said Morgan Stanley's chief economist, Chetan Ahya, highlighting a “serious impact on corporate confidence" from the tariff feud.

To be sure, even before the latest trade war round, global growth and trade were already suffering, confirmed most recently by last night's dismal China economic data, which showed industrial output, retail sales and investment all sliding in April by more than economists forecast.

A similar deterioration was observed in the US, where retail sales unexpectedly declined in April while factory production fell for the third time in four months. Meanwhile, over in Europe even though Germany’s economy emerged from stagnation to grow by 0.4% in the first quarter, "the outlook remains fragile amid a manufacturing slump that will be challenged anew by the trade war." As a result, investor confidence in Europe’s largest economy unexpectedly weakened this month for the first time since October.

Framing the threat, a study by Bloomberg Economics calculated that about 1% of global economic activity is at stake in goods and services traded between the US and China. Almost 4% of Chinese output is exported to the U.S. and any hit to its manufacturers would reverberate through regional supply chains with Taiwan and South Korea among those at risk.
U.S. shipments to China are more limited, though 5.1% of its agricultural production heads there as does 3.3% of its manufactured goods.

The macro fears are once again trickling down to the micro level, and last week chip giant Intel tumbled after it guided to a "more cautious view of the year," and Italian drinks maker Davide Campari-Milano SpA this month noted the “uncertain geopolitical and macro economic environment.”

“The world economy has been in a significant slowdown for a period,’’ said James Bevan, chief investment officer at CCLA Investment Management. “People just have to wake up and look at the trade data.’’

But the best way to visualize just how serious the threat to global flow of trade, and the world economy in general, below is a chart on the year-over-year changes in global trade as measured by the IMF's Direction of Trade Statistics, courtesy of BMO's Ian Lyngern. It shows the absolutely collapse in global exports as broken down into three categories:

  1. Exports to the world (weakest since 2009),
  2. Exports to advances economies (also lowest since 2009), and
  3. Exports to the European Union (challenging 2009 lows).

In short, even before the latest round of trade escalation, global trade had tumbled to levels last seen during the financial crisis depression. One can only wonder what happens to global trade after the latest escalation in US-China trade war...

Commenting on the chart above, Lyngen writs that "as estimates of the fallout from the renewed Trade War begin to reflect the growing apprehension in a variety of markets, we're struck by the extent of the drop in exports."

On Wednesday, markets were clearly not struck by the drop in exports, or any other negative news for that matter, with the Dow ripping, reversing its entire morning drop, and trading over 100 points in the green at last check.

Published:5/15/2019 10:39:13 AM
[Markets] Dow Futures Extend Declines on Weak Retail Sales as Trade War Bites Sentiment Global stocks add to gains, taking Asia markets from a three-and-a-half month low, amid signs of progress in the U.S.-China trade war that could lead to a resumption in talks. President Donald Trump suggests the "little squabble" with China can be resolved with a deal, while Treasury Secretary Steve Mnuchin is set to travel to Beijing soon to resume dialogue with Chinese officials. Wall Street futures suggest a weaker open for the Dow following weaker-than-expected April retail sales data. Published:5/15/2019 8:08:51 AM
[Markets] Wall Street Futures Grind Higher Amid Potential Thaw in U.S.-China Trade War Global stocks add to gains, taking Asia markets from a three-and-a-half month low, amid signs of progress in the U.S.-China trade war that could lead to a resumption in talks. President Donald Trump suggests the "little squabble" with China can be resolved with a deal, while Treasury Secretary Steve Mnuchin is set to travel to Beijing soon to resume dialogue with Chinese officials. Wall Street futures suggest a solid open for the Dow ahead of mortgage data at 7:00 am Eastern time and earnings from Cisco and Macy's. Published:5/15/2019 2:42:29 AM
[Markets] Stocks Close Higher Tuesday, Investors Still Watching China Trade The S&P 500 closed at 2,834.41 for a gain of 22.54 points or 0.80%. The VIX Volatility Index was lower at 18.06 for a loss of 2.49 points or -12.12%. Warning! GuruFocus has detected 1 Warning Sign with DOW. Published:5/14/2019 5:33:00 PM
[TC] Stocks gain back some ground as investors assess the trade war’s impact Stocks had their best trading day in a while on Tuesday as investors took a break from selling to assess the actual effects of the trade war with China. Both the Dow Jones Industrial Average and the S&P 500 gained back some of their losses with the DJIA climbing 207.06 points to close at 25,532.05 […] Published:5/14/2019 4:33:16 PM
[Markets] Dead. Cat. Bounce?

Stocks are up so everything must be awesome again, right?

 

Despite an early session bid, China stocks ended lower once again...

 

European markets were much more excited with Italy soaring along with France on the day erasing Monday's losses...

 

China has caught back down to US and Europe's YTD performance...

 

US Equity markets rallied back above the "constructive" rally point from Friday today as a lack of negative things from China and US as well no inflationary fears from import/export data sent markets higher...

 

Trannies were the best performers in cash markets with Dow and S&P laggards...

 

Another dead cat bounce?

 

"Most Shorted" stocks surged today, recovering around half of yesterday's losses...

 

All the major US indices moved back above key technical support once again.

FANG Stocks rebounded extremely modestly on the day...

 

Bonds and stocks have traded almost perfectly in sync through this recent chaos...

 

Treasury yields inched higher on the day...

 

The dollar extended its gains from yesterday...

 

Offshore Yuan went nowhere today, well below the Yuan Fix...

 

Ripple soared today as most of the major cryptos held on to gains...

 

Bitcoin flash-crashed around the Asia open overnight, but scrambled back above $8000

 

Oil prices rebounded today as mideast tension rose (ahead of tonight's inventory data), Copper and silver were flat and gold was weaker...

 

Gold slipped back below $1300...

 

 

Finally, it appears the liquidity party may be over for now...

 

Published:5/14/2019 3:08:31 PM
[Markets] Dow ends up over 200 points, partly rebounding from Monday's rout Dow ends up over 200 points, partly rebounding from Monday's rout Published:5/14/2019 3:08:31 PM
[Markets] Apple's stock rallies after BofA Merrill Lynch sees a 'particularly attractive' opportunity to buy Apple Inc.'s stock rallied 1.9% in afternoon trade, after Bank of America Merrill Lynch analyst Wamsi Mohan affirmed his bullish stance, saying the recent tumble caused by the escalation in the U.S.-China trade war has created "a particularly attractive buying opportunity." The stock fell 5.8% on Monday, and slid 12.2% in six sessions, to close Monday at a two-month low. Mohan said that while tariffs imposed by the U.S. on imports from China will impact Apple, the retaliatory tariffs imposed by China on exports to the U.S. should have "minimal" impact. Mohan said he remains bullish given the "solid" risk-versus-reward scenario at current levels, Apple's continued capital return program and the optionality of a large cash balance. The stock has lost 5.7% so far this month but was still up 10.8% this year, while the Dow Jones Industrial Average has shed 3.5% in May but gained 10.1% year to date. Published:5/14/2019 1:06:01 PM
[Markets] Dow ends down over 600 points in worst day since January Dow ends down over 600 points in worst day since January Published:5/13/2019 10:42:18 PM
[Markets] "Odds Point To A Worst-Case Scenario": Shocked Traders Respond To Latest Trade War Twist

Friday's euphoric reversal, which saw the Dow Jones first tumble some 400 points before staging a miraculous 500 points comeback on no news but a rebound in optimism that just because new US import tariffs were put in place that would make a trade deal/compromise between the US and China more likely, appears to have been... premature.

Following some soothing words from both the US and Chinese sides on Friday that while talks to avert a tariff hikes had failed, they were "constructive" and there was grounds for "cautious optimism" for the future, the standoff between the U.S. and China abruptly escalated over the weekend when China's vice premier Liu He said that China is planning how to retaliate and listed three core concerns that must be addressed, and on which it wouldn't make concessions, ahead of any deal including:

  • i) the complete removal of all trade-war related tariffs,
  • ii) set targets for Chinese purchases of goods in line with real demand and
  • iii) ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations.

Commenting on this list, the Editor in Chief of the Global Times, Hu Xijin, who has become a real-time translator for Chinese unspoken intentions on twitter, explained that "from perspective of China's politics, there is little room for compromises. They will insist.This political logic won't be changed no matter how much additional tariffs the US will impose."

Trump responded immediately on Twitter when he made it clear on Saturday that the US would not relent, stating that the Chinese may have felt they were "being beaten so badly" in the recent talks that it was better to drag their feet in hopes he would lose the 2020 election and get a better deal from the Democrats. Trump then said that "the only problem is that they know I am going to win (best economy & employment numbers in U.S. history, & much more), and the deal will become far worse for them if it has to be negotiated in my second term. Would be wise for them to act now, but love collecting BIG TARIFFS!"

Which in retrospect means that anyone who had hoped for a quick and easy resolution as per Friday's market action, may be disappointed when futures open for trading in a few hours.

As a result, amid the prospect of immediate retaliation from Beijing to the U.S. decision to slap higher tariffs on $200 billion of Chinese imports, traders are expecting a jump in volatility as investors dump risk assets in favor of U.S. Treasuries, gold, the dollar, yen and Swiss franc. Below, courtesy of Bloomberg, is a sample of trader reactions to the rapidly moving trade war narrative which is quickly shifting from optimism to pessimism:

Nader Naeimi, who oversees about $1 billion in a dynamic market fund at AMP Capital Investors Ltd. in Sydney, said by email:

“The biggest problem is the huge disconnect with what markets have been hoping for and what is transpiring now. Markets had priced the best-case scenario and odds are shifting towards the worst-case scenario”

“China’s response was certainly not what risk markets were hoping for, so I expect huge volatility” at the Asia open

Note: China is planning how to retaliate and has told Washington that it must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is “balanced” to ensure the “dignity” of both nations

“China demanding the U.S. drop the tariffs is setting the stage for a serious face-off”

“Economic tensions can now morph into military tensions between the two countries, and then with the U.S.-Iran flexing their muscles, oil prices are at risk of spiking up”

“For complacent equities, a perfect storm is brewing: tariffs, higher prices, a possible spike in oil prices in the face of fragile global growth. My asset allocation is gold, oil, inflation-linked bonds and defensive positioning”

Mansoor Mohi-uddin, Singapore-based senior macro strategist at NatWest Markets, told Bloomberg in an email:

"Forward-looking currency markets are reacting to the prospect of China’s trade surplus falling and Chinese corporates with $840 billion of onshore foreign-exchange loans pre-emptively buying dollars: Similar behavior last year caused the exchange rate to rise from 6.25 to 6.95”

The dollar’s strength against the yuan signals the greenback should remain strong versus the euro and other major currencies

A sharply higher greenback fueled by trade wars was a key threat U.S. investors raised when the NatWest team visited clients in New York, Seattle and California recently

“For the Federal Reserve -- still unwilling to consider easing monetary policy -- a surge in the dollar may become a risk to its current neutral outlook”

Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital in Abu Dhabi, said in a text message:

There’s concern that the new tariffs will be borne by U.S. consumers as prices will increase accordingly, lifting inflation above the Federal Reserve’s normalized rate of 2 percent

“That may change the current stance of interest rates in the U.S. from hold-to-cut to become hold-to-raise by year end or early 2020, which means more stock-market volatility and negative pressures”

“I really find the way Trump used his Tweets to manage the failure of the trade talks with China a failure in itself!”

“I believe it undermined his negotiation team and killed any chance of a possible compromise to be reached privately before making a public statement by those teams! It looked like he panicked and wanted to throw the blame on them rather take part of the responsibility!”

Hasnain Malik, the Dubai-based head of equity strategy at Tellimer, said in an email:

“Progress in U.S.-China trade talks is always going to be partial and temporary because the clash of interests at stake are not easily reconciled and the two negotiating parties are not under urgent pressure to settle”

The set-back in negotiations will hurt global growth expectations and pressure emerging-market assets

“For those economies with manufacturing integrated with China it is worse. But it also remains the case that rival manufacturing exporters to China, such as Bangladesh and Vietnam, should benefit, over time, from the redirection of purchasing orders and greater marginal capacity addition”

Raffaele Bertoni, head of debt-capital markets at Gulf Investment Corp. in Kuwait City, said in an email:

Investors who are exposed to emerging-market assets should protect their portfolio by switching from countries that are already suffering from significant inflation pressure and heavily dependent on foreign-currency debt -- including the Philippines, Indonesia, Malaysia, India, Turkey, Brazil and Argentina -- to countries where interest rates are already low and there’s more room for easing monetary policy to support growth, such as South Korea, Thailand and Mexico

U.S. Treasuries would be one of the few safe havens “still cheap in terms of real rates”

Sees upside for U.S. investment-grade corporate bonds while remaining more cautious on U.S. high-yield debt which is more correlated to the performance of equity markets

Expects the dollar, Japanese yen and Swiss franc to benefit from demand for haven assets.

Published:5/12/2019 10:49:45 AM
[Politics] Warren Phillips The death Friday of Warren Phillips, coming amid a historic crisis of journalism, takes from us one of the greatest exemplars of old school newspapering. He rose from copy editor of the Wall Street Journal to foreign correspondent, managing editor, and then chairman of its parent company, Dow Jones. He led the Journal to its position as America's most trusted newspaper. He was 92 when he slipped away. Published:5/12/2019 7:22:17 AM
[Markets] The Dow Rose 114 Points Because the Market Agrees There’s No Rush for a Trade Deal The Dow Jones Industrial Average rose 0.44% to end at 25,942.37. The S&P 500 added 0.37% to close at 2881.40, and the Nasdaq Composite edged up 0.08% to end at 7916.94. Published:5/10/2019 4:40:27 PM
[Markets] Dow Makes Furious Comeback To Lead Stock Market Higher The stock market took investors for a wild ride as the key indexes rallied into the black after falling hard, with the Dow Jones taking the lead. Published:5/10/2019 3:39:58 PM
[Markets] Trade Turmoil Sparks Worst Week Of 2019, Wipes Over $2 Trillion Off Global Stocks

A couple of tweets, and just like that $2.5 trillion of global equity market cap evaporates...

As stocks went from 'everything is awesome' to the worst week of the year in an instant...

With global money supply failing to support the illusion...

As stocks began to catch down to the far less exuberant global systemically important banks...

*  *  *

China's National Team refused to let stocks fall overnight (following the tariffs) and obviously lifted the market dramatically. However, it was still the worst week of the year...

 

An ugly week in Europe too with France and Italy worst...

 

The week in US equity markets has been dominated by algos chasing headlines about trade talks with dead cat bounces giving way to reality checks...

NOTE - today's "constructive" talks headline prompted the 4th biggest buy program of the month (PPT?).

Notice that the market turned around when the world's biggest money-losing IPO opened...

It seems it took the algos a long time to actually read He's and Mnuchin's comments:

  • Liu He: "No talks are scheduled from here"

  • Steve Mnuchin: "No future talks planned as of now"

But when they did, stocks rolled over...

 

Smells like PPT turned up after Mnuchin's comments as VIX flash-crashed (signaled) at 0830ET today then fell after Mnuchin's comments...

 

VIX has been inverted all 5 days this week...

 

Prompting a huge short-squeeze lift. just like on Monday (fail) and Thursday (fail)...

 

This is the seventh Friday in a row where a sudden panic bid lifted stocks...

 

The Dow ended below its 50DMA for the 3rd day in a row but the rest of the majors scrambled back above the key technical level...

DMA

 

And then of course, there's Uber...


 

Second worst week of the year for credit markets...

 

Treasury yields fell across the curve this week but the long-end notably underperformed...

 

The Dollar ended the week unchanged...

 

Yuan fell all week...biggest weekly drop in yuan against the dollar since June 2018

 

Yuan tumbled to 4-month lows...

 

Bitcoin soared on the week, along with Ethereum...

 

Bitcoin rallied above $6400 as trade tensions escalate...

 

Despite the dollar's flat week, silver slumped and crude managed gains...

 

And finally, it appears "constructive" is the new 'put'...

Published:5/10/2019 3:09:27 PM
[Markets] Dow ends up over 100 points after big turnaround; stocks suffer weekly losses Dow ends up over 100 points after big turnaround; stocks suffer weekly losses Published:5/10/2019 3:09:27 PM
[Markets] Trump's Big, Crazy China Trade War Vision Won't Save Dow Jones, U.S. Economy President Trump laid out his grand vision early Friday of why a full-scale China trade war will lift the U.S. economy. On cue, the Dow Jones immediately took another leg down. Published:5/10/2019 2:39:26 PM
[Markets] The Dow and S&P 500 are now up even though China trade talks ended with no deal The Dow and S&P 500 are now up even though China trade talks ended with no deal Published:5/10/2019 1:40:33 PM
[Markets] Dow Scrambles Into Green After Coordinated "Constructive" Jawboning

Mnuchin said trade talks were "constructive" igniting the momentum, Liu He said talks went "fairly well", and the editor of The Global Times said trade talks did not break down; and that was enough to lift The Dow 350 points back into the green...

On the back of a big short squeeze...

We have seen this before...

...well, it is Friday!

Published:5/10/2019 1:14:06 PM
[Markets] Dow claws back from 360-point skid as stock market attempts to end tariff-fueled slide on a high note The Dow Jones Industrial Average Friday afternoon popped into positive territory for the first time during a session that has exhibiting some signs of breaking down on tariff-related worries. The Dow , most recently, were up less than 0.1% at 25,837, but had hit an intraday low at 25,469.86, representing a more than 358-point stumble for the blue-chip index. All three of the major benchmarks were mounting powerful recoveries after U.S. markets appeared to react poorly to the U.S. allowing tariffs on some $200 billion in China goods to be raised to 25% from 10%. Meanwhile, Treasury Secretary Steven Mnuchin on Friday described the conclusion of two days of negotiations as "constructive." The S&P 500 index was off 0.1% at 2,867, but had hit a low of 2,825.59, while the Nasdaq Composite Index retreated 0.3% at 7,886, but had hit an intraday low at 7,759,14. Despite the mini comeback, equity indexes were on track for their worst weekly losses of 2019. Published:5/10/2019 1:14:06 PM
[Markets] These two Dow stocks could provide shelter in a volatile market The Dow Jones Industrial Average is on course to close Friday with its worst weekly losses of the year as trade uncertainty continues to spook investors. Matt Maley , equity strategist at Miller Tabak, has some advice for those concerned over these wild market swings. For those seeking shelter, Maley says Dow stock UnitedHealth UNH is one name that offers some protection in a volatile market. Published:5/10/2019 7:37:50 AM
[Markets] Dow set to decline at Friday open as increased tariffs on Chinese goods kick in Shares on Wall Street were poised for losses at Friday's stateside open, as U.S. tariffs on China goods were increased shortly after the stroke of midnight ET. Dow Jones Industrial Average futures slipped, implying an opening decline of nearly 90 points for the index at Friday's open, as of 1:24 a.m. ET. Futures also pointed to opening declines for the S&P 500 and Nasdaq. Published:5/10/2019 1:05:29 AM
[Markets] Dow set to drop more than 100 points at Friday open as increased tariffs on Chinese goods kick in Shares on Wall Street were poised for losses at Friday's stateside open, as U.S. tariffs on China goods were increased shortly after the stroke of midnight ET. Dow Jones Industrial Average futures slipped, implying an opening decline of nearly 140 points for the index at Friday's open, as of 1:06 a.m. ET. Futures also pointed to opening declines for the S&P 500 and Nasdaq. Published:5/10/2019 12:34:55 AM
[Markets] US futures point to Friday declines as increased tariffs on Chinese goods kick in Shares on Wall Street were poised for losses at Friday's stateside open, as U.S. tariffs on China goods were increased shortly after the stroke of midnight ET. Dow Jones Industrial Average futures slipped 124 points, implying an opening decline of 119.36 points for the index at Friday's open, as of 12:04 a.m. ET Friday. Futures also pointed to opening declines for the S&P 500 and Nasdaq on Friday. Published:5/9/2019 11:37:33 PM
[Markets] Hypersensitive Stocks Surge On Trade-Talks Tweet

With just a few short hours until Washington unleashes the next round of tariffs, all it took was a tweet from Fox Business to spike futures...

Edward Lawrence tweeted that: "Exclusive: President Trump meeting with Treasury Secretary Steven Mnuchin & US Trade Representative Robert Lighthizer right now. They are talking about the trade talk progress ahead of tariffs being upped on the Chinese."

Not exactly earth-shattering, but enough for Johnny-5 and his algo friends to lift Dow futures 200 poinst...

Additionally, Vice President Mike Pence said Thursday the Trump administration is working "literally hour by hour" to reach a trade agreement with China, as the deadline loomed on a U.S. threat to raise tariffs on Chinese imports.

Larry Kudlow has been oddly quiet - perhaps they are resting him just in case of a bloodbath tomorrow?

 

 

Published:5/9/2019 7:33:28 PM
[World] NewsWatch: Here are this week’s biggest stock-market losers as Trump’s trade war on China continues DowDuPont leads the Dow lower, while chip stocks falter.
Published:5/9/2019 4:04:05 PM
[Markets] The Dow Is Down Just 119 Points Because Trump Says China’s Xi Wrote Him a ‘Beautiful Letter’ The Dow Jones Industrial Average, which had been down more than 400 points, was down around 150 midafternoon. Published:5/9/2019 2:03:51 PM
[Markets] Here are this week’s biggest stock-market losers as Trump’s trade war on China continues DEEP DIVE U.S. stocks declined for a fourth straight trading session Thursday after President Trump said China’s government “broke the deal” on trade. The Dow Jones Industrial Average (DJIA)fell as much as 450 points (1. Published:5/9/2019 12:27:01 PM
[Markets] Apple, Boeing Hit Dow Jones Hard; These 2 Top Stocks Buck Market Drop The Dow Jones Industrial Average is on pace to fall more than 1% for a second time in three sessions amid trade war fears. Tradeweb and Roku gained. Published:5/9/2019 11:35:29 AM
[Markets] Dow down 400 points as Thursday declines accelerate; 29 of 30 components in red Dow down 400 points as Thursday declines accelerate; 29 of 30 components in red Published:5/9/2019 10:02:31 AM
[Markets] Peter Schiff: Did Trump Tank Stocks On Purpose To Force A Rate Cut?

Via SchiffGold.com,

There has been significant volatility in US stock markets so far this week. The Dow was down over 470 points Monday morning. Dip-buyers saved the day and the Dow ended up only down 66 points. But then the bottom fell out on Tuesday, with the Dow plunging 473 points.

Tweets by President Trump threatening more tariffs and raising questions about whether China and the US can work out a trade deal sparked this market volatility and the ensuing sell-off.

In his latest podcast, Peter Schiff raises an interesting question: was this by design?

Of course, it could be that Trump just realized that the amazing trade deal he’s been promising isn’t going to come to fruition and he’s trying to lower expectations. Or it could be a negotiating tactic. The president certainly has a history of using a carrot/stick negotiating strategy. And we know that he doesn’t have a problem with using tariffs as the stick. In fact, as Peter pointed out, Trump thinks tariffs are great because he believes the Chinese pay them, which isn’t true. The tariffs are added on here in the United States. It’s the American consumers who pay those tariffs.

Undoubtedly, tariffs can hurt China if the higher prices cause Americans to stop buying the Chinese goods subject to the tariffs. But ultimately, Americans are the losers when it comes to tariffs. They either have to pay a higher price or forgo the product altogether.

Regardless, the markets have been pushed upward on hopes that a trade deal was imminent. With every positive announcement, we saw stock markets rise. With the president suddenly casting doubts on the situation, we’re seeing volatility.

Peter said he thinks these tweets indicate that the odds of a deal are pretty slim.

So, the markets obviously have to begin pricing in the fact that there’s not going to be a deal, and if that’s the case, there is a lot of downside.”

Peter noted last week that it might have put a cap on the market when Powell came out a little more hawkish than investors expected and dampened hopes of an interest rate cut this year

What set the low, what was the catalyst for this rally, was the Fed getting more dovish. It went from ‘we’re going to keep hiking rates’ to ‘we’re finished hiking rates.’ It went from ‘quantitative tightening is on autopilot’ to ‘quantitative tightening is going to end over the summer.’ And so that shift – where the Fed went from being hawkish to dovish – that started the rally. Well, this more recent shift, where the Fed changed expectations again and disappointed the markets by saying, ‘Hey, we’re not as dovish as you think. We’re not going to cut rates,’ that, I think, capped the market. And now, Trump coming in and taking away the prospects of this great trade deal, well, that’s like a one-two punch, and I think this bear market rally, like I said, is over and we’re going lower.”

So, why did Trump send out these tweets, surely knowing it would ding the stock market? Peter has an interesting theory. Maybe Trump is OK with the stock market going down from here since it’s at record highs. And maybe he hopes that a plunge in the markets will push the Fed to cut rates, something he’s been pushing for months.

I think Trump knows the only chance he has of postponing the onset of this recession until beyond the 2020 election is to get the Fed to preemptively cut interest rates and launch QE4, which is something that Trump also says he wants.”

Peter also touched on the irony of the Fed suddenly acting all concerned about rising corporate debt.

The only reason that corporations have borrowed so much money was because the Fed made it so enticing. The Fed kept interest rates artificially low specifically so corporations would keep borrowing money. I mean, it makes no sense for the Federal Reserve to now be upset that corporations did exactly what the Fed wanted corporations to do. It’s like the Fed’s the bartender, it liquors everybody up, and then complains that there are too many people that are drunk.”

Peter said the Fed is eventually going to have to pull out all of the stops to reflate the bubble.

But even then, I don’ think it is going to work because the dollar is going to tank. I know it hasn’t done that yet. I think people are still oblivious. But just because it hasn’t happened doesn’t mean it’s not going to.”

*  *  *

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Published:5/9/2019 9:32:09 AM
[Markets] S&P Futures Tumble, Chinese Stocks Plunge As Tariffs Loom

Four words from Donald Trump during his Panama City Beach rally on Wednesday night is all it took for the rug to be pulled from under markets: "China broke the deal" Trump said with Chinese Vice Premier Liu He on route to Washington for two days of talks, and then said another three to cement the sell-off: "They'll be paying." 

And though Trump added that "it will all work out", Beijing warned it will retaliate should the U.S. hike tariffs as advertised at 12:01am on Thursday against Friday. With traders already extra jumpy in a week in which the trade war tide reversed unexpectedly and furiously, that's all it took to accelerate this week's slide in risk, and world shares tumbled for a fourth day running on Thursday, the result a sea of red amid global markets...

... with S&P500 futures dropping again on Thursday, sliding as much as 0.8% as the deadline approached for America and China to raise reciprocal tariffs.

If talks indeed fail to reach a deal, Washington is set to raise tariffs on $200 billion of Chinese goods to 25% from 10% at 12:01 a.m. ET on Friday. Kazuhiko Fuji, senior fellow at RIETI, a Japanese government-affiliated think-tank, said the trade talks looked fragile.

“I would suspect the U.S. will just hand China an ultimatum. No wonder the U.S. yield curve is almost inverting again,” he said.

"Markets remain on edge ahead of the Chinese vice premier’s visit to Washington today,” Rabobank analyst Bas van Geffen said. "Doubt that this tariff increase can be avoided is growing,” he added as Goldman Sachs also put the chance of a hike at 60 percent.

“In the event of a complete breakdown in talks and higher tariffs, we would expect this to see U.S. stocks trade 10–15 percent below their highs and a fall of around 15–20 percent in the Chinese market,” Mark Haefele, global chief investment officer at Global Wealth Management at UBS, said.

With tariffs imminent barring a last minute miracle, the FT reported that US trade official said the additional tariffs on Chinese goods would apply to goods exported from Friday and will not include goods already in transit, which reports noted provides negotiators a window between 2-4 weeks before the full impact of higher tariffs.

As the flight from risk continued, Treasuries and the yen climbed with gold as investors sought havens, while the yuan fell to its weakest since January. European stock markets sank almost immediately after a torrid day for Asia. Europe's Stoxx 600 hit session low shortly after the open, falling for the third time in four days, led lower by shares in cyclical sectors including automakers and miners, European tech stocks dropped as much as 1% dragged by a drop in semiconductor shares after Intel’s disappointing forecasts while banking stocks tumbled, with Banco BPM down 6.3% after disappointing quarterly results. The Stoxx 600 was down as much as 1.1%, its lowest level since March 29; the index has fallen 3.6% since hitting its peak in late April, on track to post its biggest weekly drop since December. There was broad based carnage in tech as well: wafer-maker Siltronic -3%, Infineon -2.6%, STMicro -2.6%, and AMS -1.6% all tumbled after Intel gave long-term forecasts for low, single-digit sales growth. Smaller European chip peer and Apple supplier Dialog Semiconductor gives up early gains to trade 0.3% lower after saying 2019 underlying revenue likely to decline this year.

Earlier in the session, Asian stocks fell for a fourth day, headed for their largest decline in six weeks led by technology and material firms; the rout was led by China, whose Shanghai Composite - which is often seen as the bellwether for how this trade war hits home - tumbled 1.5% while South Korea plunged 3%.

Most Asian markets were down, with Japan, South Korea and Hong Kong leading declines. The Topix gauge fell 1.4%, led by Toyota Motor Corp. and Honda Motor Co. The Shanghai Composite Index closed 1.5% lower, with Kweichow Moutai Co. and Ping An Insurance Group Co. among the biggest drags. The S&P BSE Sensex Index declined as much as 1%, as Reliance Industries Ltd. and HDFC Bank Ltd. contributed the most to losses.

Further hurting sentiment was the latest credit data out of China, where April money and credit growth decelerated from the rebound in March, with new CNY loans and total social financing below expectations. Overnight, the PBOC reported that new CNY loans were RMB 1020bn in April, below the RMB 1200bn expected, while Total social financing increased only RMB 1360bn in April, well below the RMB 1650bn consensus. According to the PBOC, TSF stock growth was 10.4% yoy in April, vs. 10.7% yoy in March. The implied month-on-month growth of adjusted TSF was 9.2% SA ann, lower than 11.5% in March.

In addition to trade headlines, traders will also be closely watching the pricing on ride-hailing firm Uber’s initial public offering, which is set to be the biggest of the year so far.

In the currency market, the Japanese yen surged to a three-month high of 109.64 yen as one-week yen volatility surged to its strongest level in four months, while China’s yuan fell half a percent to hit a four-month low of 6.838 and was headed for its worst four-day decline in a year as Australia’s currency falls on weak China credit growth data. A hawkish Norges Bank saw the krone climb against the euro even as faltering risk sentiment and depressed oil prices limited gains, after the central bank signaled a June rate hike. The pound was on track to wipe out last week’s advance against the euro as a Brexit deal resolution still proves elusive. Losses in sterling were limited as Prime Minister Theresa May earned a stay of execution from her Conservative Party.

In geopolitical news, following initial reports that North Korea had fired an unidentified projectile, further reports indicate this this was likely 2 short-range missiles. Prior to the further reports South Korea stated that it is unclear whether North Korea fired single or multiple projectiles.

In rates, Treasury 10-year notes jumped due to the escalation in risk-aversion, just hours after Wednesday’s auction saw the weakest demand for the benchmark bond in a decade. The yield spread between three-month U.S. government bonds and the 10-year notes shrank to 3 basis points, compared with about 15 basis points a few weeks ago. The spread first turned negative in late March, spooking investors, who read the development as portending a recession. The benchmark 10-year Treasury yield stood at 2.4529%, having touched its lowest level in five weeks of 2.426 percent on Wednesday before an especially poor 10Y auction sent the yield surging.

Commodity markets also felt the U.S.-China trade strains according to Reuters. Brent crude futures dropped 0.6 percent to $69.92 a barrel, while U.S. West Texas Intermediate crude also retreated 0.6 percent to $61.75 despite a surprise fall in U.S. crude stockpiles. London copper hit its lowest in nearly three months, going as low as $6,111 a tonne.

Expected data include PPIs, trade balance, jobless claims, and inventories. Canadian Natural Resources, Hydro One, Dropbox, and Yelp are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures down 0.8% to 2,864.25
  • STOXX Europe 600 down 0.8% to 379.05
  • MXAP down 1.4% to 156.55
  • MXAPJ down 1.8% to 515.76
  • Nikkei down 0.9% to 21,402.13
  • Topix down 1.4% to 1,550.71
  • Hang Seng Index down 2.4% to 28,311.07
  • Shanghai Composite down 1.5% to 2,850.95
  • Sensex down 0.8% to 37,474.17
  • Australia S&P/ASX 200 up 0.4% to 6,295.33
  • Kospi down 3% to 2,102.01
  • German 10Y yield fell 1.5 bps to -0.059%
  • Euro down 0.07% to $1.1184
  • Italian 10Y yield fell 0.4 bps to 2.243%
  • Spanish 10Y yield fell 0.4 bps to 0.956%
  • Brent futures down 0.3% to $70.15/bbl
  • Gold spot up 0.3% to $1,285.02
  • U.S. Dollar Index little changed at 97.58

Top Overnight News

  • U.S. President Donald Trump declared China’s leaders “broke the deal” he was negotiating with them on trade, before adding that “it will work out.” Chinese state media warned that “fighting while talking” may become the new normal in trade relations with the U.S
  • China’s credit growth slowed more than expected in April after record expansion in the first quarter
  • North Korea fired at least one unidentified projectile Thursday, South Korean military officials said, in the country’s second test launch of weapons in less than a week
  • The Bank of Japan will quickly consider additional easing steps if risks such as protectionist moves by the world’s two largest economies wipe out upward price momentum in Japan, its Governor Haruhiko Kuroda said
  • U.K. Prime Minister won a reprieve from her Tory party after a key panel of lawmakers kept the rules on leadership challenges unchanged. May agreed to meet with the executive of the so-called 1922 Committee of Tory Members of Parliament next week to discuss her future
  • Theresa May earned a stay of execution from her Conservative Party after a key panel of lawmakers kept the rules on leadership challenges unchanged, as talks with the opposition Labour Party to find a compromise on Brexit gained new life
  • The U.S. Treasury on Wednesday saw the weakest demand for its benchmark 10-year note in a decade, illustrating the diminishing appetite among some investors to accept current yields
  • Trump issued an executive order on Wednesday prohibiting the purchase of Iranian iron, steel, aluminum and copper, ratcheting up tensions with the Islamic Republic less than a day after it declared it may begin enriching uranium again in two months
  • House price growth in the U.K. remained weak in April as the slump in southeast England and London depressed the market, the latest survey from the Royal Institution of Chartered Surveyors showed

Asian equity markets were mostly negative as US-China trade uncertainty kept global risk sentiment cautious ahead of trade talks in Washington and as the region also digested a heavy slate of corporate earnings, as well as mixed Chinese data. Nonetheless, ASX 200 (+0.4%) was the exception due to corporate updates. Nikkei 225 (-0.9%) was weighed by currency effects and with individual stocks driven by a plethora of earnings releases, while Hang Seng (-2.4%) and Shanghai Comp. (-1.5%) were the worst hit on trade concerns after the US issued a notice confirming that tariffs will be increased on Friday and with China’s Mofcom mulling counter measures. There was also some sabre rattling from US President Trump who alleged that China broke the deal in trade talks and warned to not backdown until China stops cheating US workers, otherwise the US will not do business with them. Furthermore, overnight data releases were mixed in which Chinese CPI printed inline and PPI topped forecasts, although lending data disappointed with both New Yuan Loans and Aggregate Financing below expectations. Finally, 10yr JGBs initially saw mild upside on the risk averse tone and with the BoJ present in the market focused in the belly. However, the gains were later pared amid mixed comments from BoJ Governor Kuroda who reiterated to continue with powerful monetary easing under YCC given that inflation is still below target, but noted that JGB purchases are slowing and suggested that even if BoJ bond purchases slow to JPY 30tln annually, it would not cause huge trouble.

Top Asian News

  • Bahrain Is Set to Receive $2.3 Billion From Allies in 2019
  • Singapore’s First 2019 Mainboard IPO Falls in Trading Debut

European bourses have succumbed to the risk aversion [Eurostoxx 50 -1.0%] seen in Asia and Wall Street, with the downbeat tone exacerbated by reports of further missiles tests in North Korea. Sectors are largely lower with the exception of defensive sectors such as Utilities (Unch) and Consumer Staples (+0.2%). A few themes are in play today; 1) a guidance cut by Intel yesterday has prompted a sell-off in European chip names with Infineon (-2.8%) and STMicroelectronics (-2.8%) shares plumbing the depths, albeit Dialog Semiconductor (+0.2%) is bucking the trend on the back of optimistic earnings. 2) Mining names bear the brunt of sentiment-subdued base metal prices coupled with ArcelorMittal’s (-3.9%) 33% drop in profits, thus Rio Tinto (-0.9%), Antofagasta (-1.3%) and Glencore (-1.8%) all weigh on the sector. 3) Against the backdrop of weaker auto earnings, Continental (-3.2%) also reported dismal numbers which dragged its peers Michelin (-0.9%) and Pirelli (-1.2%) lower in sympathy. Finally, Renault (-2.0%) shares declined amid press reports that Nissan could lower its 2022 guidance. Back to earnings, some analysis from JPM notes that thus far, 55% of the Stoxx 600 companies topped EPS estimates (vs. 76% in the S&P 500) whilst 58% of firms are beating on topline with sales growth at 1% Y/Y (vs. +5% Y/Y in the S&P 500), “This is consistent with our view that sales growth in Europe would underwhelm relative to the US, given the weaker macro momentum in the region” JPM says.

Top European News

  • Continental AG Sees China Auto Rebound Boosting Second Half
  • Norges Bank Says It Will ‘Most Likely’ Raise Rates in June
  • Airbus 320 Makes Emergency Landing in Sweden After Cabin Smoke
  • SocGen Introduces Crypto to $2 Trillion Market for Covered Bonds

In FX, demand for the Yen remains fervent and the Franc is also back in favour as tensions rise ahead of the US/China face-off in Washington, while geopolitical factors are also weighing on sentiment given the US-EU-Iran sanctions dispute and NK firing an unidentified projectile. Hence, Usd/Jpy has retreated a bit further from 110.00+ to fill/trip a few stops between 109.75-70 and test the top end of decent option expiry interest spanning 109.60-50, while Usd/Chf and Eur/Chf have pulled back from 1.0200+ and 1.1400 respectively.

  • USD - Notwithstanding the greater appeal for safer-havens noted above, the Dollar retains a firm underlying bid vs the other G10s and especially EMs that are suffering in their own right. Indeed, the DXY continues to find support below 97.500 and its 30 DMA (97.398) with the index currently hovering in a 97.702-517 range.
  • AUD - The major underperformer and most prone to the threat of a complete breakdown in US-China trade dialogue that would trigger an exchange of more aggressive tit-for-tat tariffs. Aud/Usd has recoiled from recent recovery highs towards this week’s multi-month low around 0.6963 and Aud/NZD has unwound more post-RBNZ spike gains to sub-1.0600 as Nzd/Usd holds more comfortably above 0.6550 and depths plunged in wake of Wednesday’s NZ rate cut. On that note, Governor Orr has reiterated that the policy outlook is now more neutral and it is too soon to assess if more easing is required ahead of testimony on the latest meeting and action to a parliamentary select committee.
  • NOK - Staying with the Central Bank theme, but in stark contrast to the RBNZ, Norway’s Norges Bank flagged a hike at next month’s meeting and the Nok shot up across the board in response. However, gains were rapidly eroded and reversed at one stage amidst the aforementioned risk-averse tone before the Norwegian Crown regained bullish momentum on the fact that rates are set to rise against the general global grain of steady to easier policy. Eur/Nok is back under 9.8000, albeit just within 9.7784-8393 trading parameters and eyeing hefty expiry interest (1.1 bn) at the strike.
  • EUR/GBP/CAD - All narrowly mixed vs the Greenback, but with a bearish bias below 1.1200, 1.3000 and only just over 1.3500 respectively. Eur/Usd has multi-bn expiries stretching from 1.1150 to 1.1200 and beyond to keep price movement contained along with the 30 DMA (1.1223) and interim chart support at 1.1155, while Cable has gleaned some traction around a Fib (1.2980) and ahead of the 200 DMA (1.2960), but needs to recapture the 100 DMA (1.3013) to revisit best levels of 1.3025. Back to the Loonie, Canadian trade data looms alongside house prices.
  • EM - More widespread losses vs the Usd, but once again the Try is underperforming and has been down to through 6.2450 with the Lira lamenting another decline in Turkish foreign reserves.

In commodities, Brent (-0.5%) and WTI (-0.4%) prices are choppy, with prices initially subdued amid the general risk sentiment as markets await US-China updates and the most recent geopolitical developments being reports that North Korea has fired an unidentified projectile at 16:30 local time, although it is still unknown whether it was a single or multiple projectiles. Despite the recent price action being sentiment-driven, the macro picture still stands, with Iranian/Venezuelan sanctions, Libyan tensions and OPEC-led cuts still on the table. Thus, Barclays revised their Q3 2019 Brent and WTI forecasts higher by USD 4/bbl amid expectations of tightening market conditions. In terms of US supply, ING highlights that refinery run rate remain at a season-low at 88.9% last week amid a heavier maintenance season alongside several unplanned outages. Meanwhile, gold (+0.3%) has been accumulating some risk premium in light of the aforementioned developments in the Korean peninsula whilst conversely, copper is pressured by the humdrum risk tone emanating from the seemingly escalating US-Sino tensions and geopolitical concerns. Finally, China State Planner stated that strict pollution related controls will be imposed on steel-making capacity in key pollution area whilst also raising domestic iron ore production. It’s worth noting that earlier in March, a level 1 smog alert was issued which requires steel mills to curb production by 40-70%. Although, it is worth assuming that iron ore production will be hiked to offset volatility in the base metal. China's State Planner state they will impose strict controls on steel-making capacity in key pollution areas.

Looking at the day ahead, we will get the April PPI report where the market consensus is pegged at +0.2% mom for the core. Expect there to be focus on the health care and portfolio management services components of the report as a read-through for the core PCE deflator. Away from that we’ll also get the latest claims reading and March trade balance print, followed later by the final March wholesale inventories revisions. Away from that we’re due to hear from the ECB’s Hakkarainen while over at the Fed, Powell is scheduled to speak in the early afternoon, albeit only opening remarks with no Q&A to follow. The Fed’s Bostic and Evans also speak today.

US Event Calendar

  • 8:30am: PPI Final Demand MoM, est. 0.3%, prior 0.6%; YoY, est. 2.3%, prior 2.2%
    • PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%, YoY, est. 2.5%, prior 2.4%
  • 8:30am: Trade Balance, est. $50.1b deficit, prior $49.4b deficit
  • 8:30am: Initial Jobless Claims, est. 220,000, prior 230,000; Continuing Claims, est. 1.67m, prior 1.67m
  • 9:45am: Bloomberg May United States Economic Survey; Bloomberg Consumer Comfort, prior 60.4
  • 10am: Wholesale Trade Sales MoM, est. 0.55%, prior 0.3%;  Wholesale Inventories MoM, est. 0.0%, prior 0.0%

DB's Jim Reid concludes the overnight wrap

As US/China trade and Brexit talks looked increasingly more vulnerable yesterday at least here in the UK we had the first glance of a new royal baby to distract us. I was disappointed he was named Archie rather than Divock after Liverpool’s Tuesday night heroics which have still yet to fully sink in. As it stands I have a one-way flight to Madrid booked and no final tickets. I also haven’t run the idea of a weekend away watching football by my wife yet. I thought I’d work on this in stages. Flight out first (only tick so far), ticket second, flight back third, accommodation next (but I could camp) and then ask permission. No point asking permission and firing a bullet if you can’t logistically do it. If Liverpool’s performance was astonishing one would have to say Spurs also coming back from 3-0 down in the tie at HT against Ajax last night and winning on away goals deep in injury time was also remarkable. My long-time work colleague Nick Burns is a Spurs season ticket holder and entitled to final tickets and as I reserved him an flight to the final yesterday just in case I will assume he’s reserved me a ticket this morning. This morning could be the defining moment in his 2019 appraisal.

Outside of the knowledge of the craziness of sport, the last 24-48 hours has taught us that markets have no greater insight as to whether this week’s trade developments are just hardball from Trump or the start of a very real threat to the global growth narrative. If it’s the latter then you can’t help but feel that markets look extremely complacent at this point. However if it’s just hardball negotiation en route to a deal then we’ll likely resume the rally. A big bid offer admittedly, but in the very short term the risks probably look greater than the rewards as it feels unlikely that either side can back down in the near term. Maybe over weeks but not over the next few days.

At the time of writing, China’s top trade negotiator Liu He is flying over to Washington DC for talks with Lighthizer and Mnuchin. Time is not on China’s side though with tariffs due to kick in in a little under 24 hours after the Office of the US Trade Representative yesterday signed off that tariffs on $200bn of China goods are to be raised on Friday morning at 12:01am ET.

In line with the back-and-forth newsflow, markets slipped between gains and losses before ending the US session slightly lower. Just four minutes before the Office of Trade statement in late morning US time, President Trump tweeted that China were “coming to the US to make a deal” which appeared to at least hold some hope of optimism in markets. A bigger boost came after White House spokeswoman Sarah Sanders said that the White House had received an “indication” that China is ready to make a deal. Within half an hour, however, a commerce department statement from China said that “The US intends to raise the tariff of 200 billion US dollars of Chinese exports to the United States from 10% to 25% on May 10. The escalation of trade friction is not in the interests of the people of the two countries and the people of the world. The Chinese side deeply regrets that if the US tariff measures are implemented, China will have to take necessary countermeasures."

Overnight, while addressing a rally in Panama City Beach, Florida, President Trump has said that China’s leaders “broke the deal” he was negotiating with them on trade and added there’s “nothing wrong with taking in $100 billion a year” in tariffs on Chinese imports, in the absence of a trade deal. However, he also said, “they come in tomorrow and whatever happens, don’t worry about it. It will work out. It always does.” Elsewhere, the WSJ has reported that China’s Vice Premier Liu He is not carrying the title of President Xi’s “Special Envoy” while visiting the US for trade negotiations and this means that he cannot make any big concessions. China’s Global Times is also reporting this morning that China wont flinch in the face of a tough-talking US and is likening the trade talks to a "Banquet at Hongmen", a Chinese reference to a historical event that took place in 206 BC at Hong Gate and implies a treacherous situation. So emotions and rhetoric are being raised in both sides. It should be worth watching China’s regular ministry of commerce briefing at 03:00 pm Beijing time (08:00 am London) to get further insight into the situation.

All nice and straightforward then. The end result to the conflicting headlines yesterday was a bit of volatility for the S&P 500 just before Europe went home, opening -0.37% lower before rallying to +0.47%, but ultimately closing -0.15% after a sharp late drop. That leaves May’s returns at a still pretty mild -2.24% though considering all that has gone on. The VIX touched an intraday high of 21.74 yesterday though - a level it hasn’t closed at since January 3 - before ending at 19.92, trading in a range of 3.5pts. That's the third consecutive day with a range of over 3pts, the first such stretch since January 4. The NASDAQ fell -0.26% and the DOW traded flat (+0.01%), while in Europe the STOXX 600 finished +0.15% after spending the bulk of the session in the red.

Meanwhile, bond markets couldn’t quite make their minds up yesterday with 10y Treasury yields rising +2.7bps, +5.9bps off the morning low but 2bps lower again in Asia. The 3m10y curve steepened +1.9bps yesterday, taking it back to +5.8bps after flirting with another inversion over the last few sessions. The 2y10y is still hovering around 18.3bps and the reality is that this has been in a broad 10-20bp range ever since December. Bunds have been more of a beneficiary of the risk-off moves, hitting an intraday low of -0.065% yesterday before closing at -0.044% as risk rallied back into the European close. For reference, the recent low mark for Bunds was -0.095% on an intraday basis back at the end of March. BTPs have been caught up in the broader risk off move – with the recent budget headlines also not helping – though they retraced their +7.7bps intraday move yesterday to end the session flat. Elsewhere EM FX traded flat overall, with the Turkish lira again underperforming (-0.56%) as the government announced plans to re-hold the Istanbul elections. Balancing this was a +0.26% rally by the South African rand, as the country held national elections yesterday, with the results due this morning.

This morning in China we saw the release of April aggregate financing data which came in at CNY 1,360bn (vs. 1,650bn expected and 2,859.3bn last month) with new loans standing at CNY 1,020bn (vs. 1,200bn expected and 1,690bn last month). Weakness in China’s credit data along with the possibility of further escalations in the trade war is continuing to weigh on Asian markets with the Nikkei (-1.01%), Hang Seng (-1.95%), CSI (-1.90%), Shanghai Comp (-1.35%), Shenzhen Comp (-1.03%) and Kospi (-1.67%) all down over -1% alongside most Asian markets. China’s onshore yuan is down -0.39% to 6.8090, the weakest since January. Other EM Fx is also trading weak this morning with the exception of Turkish Lira which is up +0.37% while the Korean won is leading losses (-0.56%). G10 Fx is also weak with the exception of the Japanese yen which is up +0.14%. Elsewhere, futures on the S&P 500 are down -0.53% and crude oil prices (WTI and Brent both down -0.74%) are also weak. In terms of other data releases China’s April CPI came in line with consensus at +2.5% yoy while PPI stood at +0.9% yoy (vs. +0.6% yoy expected).

In other news, cross-party talks between the Conservatives and Labour continued yesterday but finding common ground remains elusive. In the meantime, the BBC has reported this morning that Labour Party’s Jeremy Corbyn is set to launch his European elections campaign later and will say that the party backs "the option of a public vote" if a "sensible" Brexit deal cannot be agreed and there is not a general election. Elsewhere Prime Minister May looks set to survive for at least another week as the 1922 committee failed to agree on any changes to Conservative party rules at this week's meeting. The 1922 head Graham Brady said he expects May to hold a vote on the Withdrawal Agreement Bill next week, which could possibly still leave time to exit the European Union before the European Parliament elections but that is looking very very unlikely.

Back to the US and Fed Governor Brainard made some headlines yesterday by expressing interest in a form of yield curve control as a future policy option. She said "we might turn to targeting slightly longer-term interest rates -- initially one-year interest rates, for example, and if more stimulus is needed, perhaps moving out the curve to two-year rates.” This would potentially allow the Fed to better signal how long it plans to keep rates low. Such tools could be needed in a future recession if short-term interest rates again approach zero.

Oil prices rose +1.101% before this morning’s fall as tensions between the US and Iran continued to intensify and the outlook for Iranian oil exports continues to darken. First, Iran announced that it is also withdrawing from the nuclear deal, following the US's move exactly one year ago. While the Iranian government did not declare an intention to renege on all the deal's elements, they did announce their plans to resume stockpiling low enriched uranium and heavy water, and signalled that they would resume construction of a closed reactor if Europe fails to compensate for the US's unilateral sanctions. That comes after news that Europe's mechanism to avoid US sanctions, which reportedly would have allowed Iran to export more oil, will actually only apply to food and humanitarian aid. Finally, the US administration followed up by adding new sanctions to Iran's iron, steel, aluminium, and copper industries.

Before we wrap up, the data yesterday included a better than expected March industrial production print in Germany (+0.5% mom vs. -0.5% expected) albeit somewhat offset by downward revisions to February. In the UK the Halifax house price index rose +1.1% mom in April and more than expected. US mortgage applications rose +2.7% last week, the first rise since March.

Finally to the day ahead, where there are no data releases due in Europe this morning however in the US this afternoon we will get the April PPI report where the market consensus is pegged at +0.2% mom for the core. Expect there to be focus on the health care and portfolio management services components of the report as a read-through for the core PCE deflator. Away from that we’ll also get the latest claims reading and March trade balance print, followed later by the final March wholesale inventories revisions. Away from that we’re due to hear from the ECB’s Hakkarainen while over at the Fed, Powell is scheduled to speak in the early afternoon, albeit only opening remarks with no Q&A to follow. The Fed’s Bostic and Evans also speak today.

 

Published:5/9/2019 7:03:49 AM
[Markets] Donald Trump Says China ‘Broke the Deal’ – and the Stock Market Tumbles 6:45 a.m. The Dow Jones Industrial Average is set for a big Thursday morning drop after President Donald Trump, at a Florida rally, gave further indication that higher tariffs on China were on the way. Dow futures have fallen 199 points, or 0.8%, while S&P 500 futures have declined 0.7%, and Nasdaq Composite futures have dropped 0.9%. “Movement in the stock markets continues to be primarily headline driven as investors look towards the start of the latest round of trade negotiations in Washington today,” writes the London Capital Group’s Jasper Lawler. Published:5/9/2019 6:30:36 AM
[Markets] Stocks end mostly lower as trade uncertainty keeps investors unsettled Stocks ended flat to slightly lower on Wednesday, after swinging between gains and losses throughout the session, as investors contended with mixed signals around a potential U.S.-China trade deal. The S&P 500 was down 0.2% to end around 2,880. The Dow Jones Industrial Average gained around 4 points, or less than 0.1%, to end near 25,969. The Nasdaq Composite fell 0.3% to finish around 7,943. President Donald Trump said the Chinese delegation was coming to Washington to secure a trade deal. Beijing has said it would send its top trade negotiator Vice Premier Liu He to the U.S. on Thursday. At the same time, a notice in the Federal Register confirmed that the U.S. would slap additional duties on $200 billion of Chinese imports on early Friday, raising the tariff rate to 25% from a current 10%. Shares of Lyft Inc. fell 9.8% after the first-quarter earnings of the ride-hailing company fell short of analysts' expectations. Published:5/8/2019 3:26:41 PM
[Markets] Stocks are rebounding Wednesday with Dow up 100 points on Disney strength Stocks are rebounding Wednesday with Dow up 100 points on Disney strength Published:5/8/2019 2:26:18 PM
[Markets] Dow Jones Leads Market Indexes As 3 Key Stocks Rally The Dow Jones industrials took the lead as stocks saw modest gains heading into the last hour of trade amid hopes for a U.S.-China trade deal. Published:5/8/2019 2:26:18 PM
[Markets] Disney's stock rallies to pace Dow gainers ahead of earnings report Shares of Walt Disney Co. rallied 1.6% in afternoon trade Wednesday, enough to pace the Dow Jones Industrial Average's gainers, ahead of the media and entertainment company's fiscal second-quarter results due out after the close. The stock has been on a roll lately, soaring 23.4% in April for the best monthly gain since January 2000, fueled by the record-breaking performance of "Avengers: Endgame" at the box office and the unveiling of a new streaming service. In comparison, the Dow gained 2.6% in April. The stock has pulled back slightly since closing at a record $139.92 on April 26. Published:5/8/2019 1:55:59 PM
[Markets] Prepare for a ‘sell the news’ scenario once a U.S.-China trade deal is signed The big run-up in U.S. stocks since their Christmas Eve lows was propelled by the strong economy and a pause in interest-rate increases by the Federal Reserve. As optimism grew that a deal was near, stocks reached new all-time highs — until the Tweeter in Chief sent markets reeling with threats he would impose higher tariffs on $200 billion of Chinese goods by this Friday. The Shanghai and Shenzhen indices fell more than 5%, the Dow Jones Industrial Average (DJIA) shed more than 500 points, and the S&P 500 Index (SPX) gave up 2.1% in the two trading days since the president’s Twitter hammer fell. Published:5/8/2019 9:55:23 AM
[Markets] Market Snapshot: Dow threatens longest losing skid in 2 months amid U.S.-China trade tensions U.S. stock benchmarks on Wednesday are sliding for the third-straight session, albeit with less gusto than Tuesday, as worries about a U.S.-China trade agreement this week dogged marks, resulting in the worst day for the Dow in about four months.
Published:5/8/2019 9:01:17 AM
[Markets] Lyft, Electronics Arts, Disney, Bitcoin, Trade War - 5 Things You Must Know U.S. stock futures were mixed on Wednesday following a nearly 500-point decline for the Dow Jones Industrial Average in Tuesday's session as investors held onto hopes that this week's talks in Washington will salvage months of negotiations on trade between the U.S. and China. Shares in Asia tumbled as investors grew increasingly concerned about what kind of impact a collapse in U.S.-China trade talks would have on an already-fragile world economy. Contracts tied to the Dow Jones Industrial Average fell 5 points, futures for the S&P 500 rose 0.45 points, and Nasdaq futures were up 2.50 points. Published:5/8/2019 4:44:04 AM
[Markets] US-China trade fears unnerve investors, pulling shares lower BANGKOK (AP) — Shares skidded in Asia on Wednesday after the Dow Jones Industrial Average tumbled more than 470 points overnight amid mounting trade tensions between the U.S. and China. Published:5/8/2019 1:12:43 AM
[Markets] US-China trade fears unnerve investors, pulling shares lower Shares skidded in Asia on Wednesday after the Dow Jones Industrial Average tumbled more than 470 points overnight amid mounting trade tensions between the U.S. and China. The Shanghai Composite edged 0.1% lower after China reported its exports fell 2.7% in April. A broad sell-off on Wall Street pulled the Dow 1.8%, or 473.39 points, lower on Tuesday to 25,965.09 as the U.S. and China moved closer to an escalation of their already costly trade war. Published:5/8/2019 12:56:22 AM
[Markets] US Market Indexes Continue Losses on China Tariff Uncertainty Dow Jones down 1.79% on Tuesday Published:5/7/2019 5:38:59 PM
[Markets] Luongo: 'Economic-Warfare-Man' Strikes Again

Authored by Tom Luongo,

It’s getting tiresome watching Donald Trump’s bipolar presidency. It seems he can’t let a day go by without making some massive announcement to raise tariffs, threaten sanctions or overthrow a government.

Every 24 hours is another exercise in chasing the Trump Reality Show around. Every lull in the perpetual news cycle has to be seized upon to create more chaos so he can validate his insanity.

Trump has so many plates spinning there’s no way he’s actually thinking anything through. Take the latest fiasco, Chinese trade talks.

One day “Talks are going well,” the next “We’re raising tariffs to 25%.”

That’s where we are today. Because Trump thinks he’s winning the trade war and China won’t give him what he wants so he’ll disrupt global trade until he does.

It doesn’t matter how many times he’s told. Tariffs don’t work. The costs are not paid by the exporter. They are paid by the consumer. Tariffs don’t shift manufacturing of the goods imported onshore, they are supplied by other countries or substituted for lesser goods.

The consumer pays higher prices for end-user goods. The domestic members of the supply chain pay higher input prices while sclerotic domestic producers are subsidized to stay non-competitive.

Warfare is Welfare

The problems with threatening these tariffs are myriad but the main ones are:

  1. Trump is an economic ignoramus. Who only likes to look at one side of the trade ledger.

  2. His advisors are all paranoid neoconservatives who can only see the world in terms of power.

Because these ‘advisors’ are who they are they all push Trump to his worst decisions by feeding him exactly what he wants to hear. It doesn’t matter if it’s intelligence about the potential for a Venezuelan coup or the efficacy of sanctioning everyone who buys a drop of Iranian oil.

Trump likes punishing people he thinks have wronged him.

The National Security Council played a key role in driving the argument to end the waiver program — especially Richard Goldberg, a new member of the Trump administration and a longtime advocate for confronting Iran, according to the two sources. He was “instrumental,” one of the sources said.

National Security Adviser John Bolton added Goldberg to the NSC in January.

Previously, Goldberg was an adviser at the Foundation for Defense of Democracies (FDD) think-tank headed by Mark Dubowitz, a leading advocate for tougher handling of Iran since the United States’ first round of sanctions against the country under former President Barack Obama.

In 2012, Goldberg was an aide to then-Senator Mark Kirk, a Republican, and delivered a blow to Tehran by writing legislation that closed Iran’s last legal loophole in selling oil under the Obama sanctions. That legislation targeted the Belgium-based SWIFT financial messaging system over which Iran was conducting billions of dollars in oil trade.

Bolton was in charge of the failed Venezuela operation and is the architect of both the Iran sanctions plan as well as scuttling peace talks with North Korea.

Do you really think he’s not involved in telling Trump to up the pressure on China by giving them an ultimatum to deal or see tariffs raised to 25%?

This, the same day that Bolton announces moving an aircraft carrier group to the Persian Gulf as a message to Iran.

Never forget that all of this can be avoided by Trump having one shred of courage to stop this welfare for the merchants of death.

Dollars Locked and Loaded

That the impetus to weaponize the U.S. dollar through trade and hybrid warfare comes from this corner of Trump’s administration is not news. Neither is Trump’s impulsiveness, cravenness and inability to think systemically.

What is news, however, is that Trump thinks he has the leverage here because the S&P 500 is flirting with a new all-time high. As I said above, Trump is an economic ignoramus.

He refuses to see the opposite side of the trade ledger. We export trillions in debt, which fuels our trade deficit with China and receive goods in return. Those funds created out of thin air aren’t used for domestic investment, they simply goose GDP — Gross National Spending — as that money flows through the economy.

Tariffs won’t solve this.

Trump lowered corporate tax rates to 20%, a good thing certainly, and is trying to cut through regulatory red tape, also a good thing, but it isn’t enough if he doesn’t cut government spending at the same time.

What’s never admitted by mainstream economists is that GDP can fall and economic value created by the economy can rise. Boosting GDP with fake spending fueled by new debt at artificially low rates isn’t wealth creation.

In fact, it is, ultimately, capital destructive. It is malinvestment that shows up everywhere as ghost cities, empty malls, crumbling infrastructure and cultural malaise which leads to political degradation.

This is why Trump is a coward. He doesn’t have the courage to confront this. He just blames everyone else for not paying their fair share. He’s focused the anger and frustration of Americans impoverished by these policies on everyone else.

There is no issue that gets people more angry with me among Trump supporters ripping him on tariffs. It’s insane how deeply this idea is embedded.

It’s economic warfare in which the bombs go up and come straight back down.

A courageous President, however, would level with the American people and say:

“We’ve spent beyond our means. We in Washington with our insane policies have destroyed your communities.

“Government can’t solve these problems. Only you can. We’ve cut taxes and and now we’re cutting spending and I will veto any budget that doesn’t do so.”

“The best way to improve the American economy is to get real and put the money back into your hands. Government doesn’t produce wealth, at best it shuffles it around. You produce wealth.

“It will be tough. But I have faith in you the American People.”

Stephen Miller will never write that speech.

That’s the fight he won’t have. Instead he does what every other crackpot politician has ever done, guns AND butter. And then sells that as a trade war with China.

No one is ever to blame for their economic messes. Blame the other guy. Blame the corporations. Blame everyone except the people who actually did it and compound the problem by taking it out on the rest of the world.

Trump’s Market Problem

He thinks the stock market is the weather vane of his presidency and that when it’s rising he can make outrageous demands and when it’s falling he has to tack against it.

It’s why everything is so bipolar and we’re being pushed every day in a different direction. A quick look at the Dow Jones Industrials on a weekly basis since Trump embarked on his trade and tariff war should give you an idea of how much volatility has increased.

In case the picture itself is unclear, the numbers are. Since hitting a peak in January 2017 volatility as measured by the difference in closing prices week to week and the range of each week has more than doubled.

For move of the second half of 2018 we saw got used to three sigma or grater movements in the Dow. This is the real effect of political and policy uncertainty. And if Trump’s goal is a rising stock market someone should show him this chart. 2017 is what you want, Don, not 2018.

Because, for all intents and purposes, it hasn’t gone anywhere in over a year.

Not that I think Trump is the only reason for this volatility, but his pressure on dollar liquidity and his consistent scaring capital markets with shutting down trade isn’t helping anything.

The Fed is helping this along, no doubt.

He helped break the eurodollar system last year with his overnight tariffs on aluminum and his pullout from the JCPOA.

The U.S. share market is rising precisely because he has embarked on a mad policy of weaponizing the dollar. He thinks there is no possible way anyone can get out of using the dollar and therefore this won’t hurt him or the U.S. in the long run.

In the short run he’s right. Dollar liquidity is causing massive capital flight into U.S. assets. But it isn’t coming here necessarily as long-term investment.

Tariffs Have Consequences

The problem is he forgets that he’s the one subject to an election while China’s leadership is not. Everything China has done politically under Xi Jinping has been to safeguard the Chinese state in the event of a crisis.

Back here we have one major party, half of the President’s party, his own staff and the permanent bureaucracy actively plotting a coup against him.

Oh, and there’s an election in eighteen months. But his advisers keep telling him China is a paper tiger, squeeze them and they will capitulate. But it hasn’t happened yet and it won’t.

China’s not going to implode over these tariffs. It will give Xi and his central bank the opportunity to devalue the yuan in response to the slower flow of dollars. It has to protect the lion’s share of its trade with Southeast Asia and Europe whose currencies are already in trouble.

And it will bail out the most strategically-sensitive banks and businesses over-exposed to them. It’s what they did last year in response to the 10% tariff and it is what will happen this time.

So, if Trump doesn’t want a stronger dollar he can’t look to the Fed to give it to him. The structure of the offshore dollar markets is not under their control. As always, markets are bigger than central planners.

If global trade is the M0 of the world then restricting it at a time of maximal dollar-based debt capacity is the stupidest thing you can do if your goal is a lower dollar and trade balance with China.

We don’t need a lower dollar. We need a dollar that buys more value at home. And that can’t happen with the Fed and Treasury pumping money in while choking us with the debt behind it.

But don’t worry folks Economic Warfare Man has a plan for that too.

*  *  *

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Published:5/7/2019 4:38:20 PM
[Markets] US STOCKS-Wall Street slides as U.S.-China trade fears rise U.S. stocks slid on Tuesday as escalating trade tensions between the United States and China triggered global growth fears and drove investors away from riskier assets. The Dow Jones Industrial Average posted its second-biggest daily percentage drop of the year, while the S&P 500 and Nasdaq registered their third-biggest percentage drops, even as the major indexes pared losses to end off their session lows. Published:5/7/2019 3:38:16 PM
[Markets] Dow suffers worst drop since January on U.S.-China trade worries Dow suffers worst drop since January on U.S.-China trade worries Published:5/7/2019 3:08:31 PM
[Markets] Traders Bet Worst-To-Come As Trade Turmoil Sparks Huge Deleveraging

Well that re-escalated quickly...

A small bounce in China did nothing to lipstick that pig...

 

European stocks were ugly as various data and forecasts disappointed...

 

And Bund yields dropped back below zero...

 

And then there was 'Murica! Futures dumped right after the bell on Lighthizer confirmation of increased tariffs, then spiked during the EU session on headlines that China VP Liu would make it to DC, but that didn't last long as yet another dead-cat-bounce died... The machines went panic-bid into the close

In cash markets, Trannies lead the collapse on the week but Nasdaq was ugly today...The Dow was down 648 points at the lows of the day...

Today was The Dow, S&P and Nasdaq's biggest daily point loss since 2018

While the S&P held above its 50DMA, Dow broke and closed below its 50DMA - the first close below it since Jan 15th...

 

As Semis were slaughtered...worst day since the start of 2019...

As Nomura's Charlie McElligott shows in this stunning intraday chart, the magnitude of the excess Futures notional of S&P, Nasdaq and Russell above the combined Cash notional (and adjusting ‘roll’ days, defined as the first future traded notional-second fut traded notion) is supportive of the view that today’s trade is absolutely driven by futures deleveraging...

...And perhaps indicative that this is indeed both the 1) Asset Manager monetization of “Longs;” 2) our estimate that CTA Trend models may be reducing their “Long” (as described in more detail below) and of course 3) dealer Gamma hedging activity.

Additionally, McElligott warned, we are now in “negative Gamma” territory in SPX / SPY and QQQ options landscape -

All as the VIX curve inverts and forces “short vega” covering from systematics...

With VVIX really beginning to dance and price some serious “gap” / tail-risk @ 111:

 

Given the record short positioning...

VIX is notably inverted...

It is not a surprise that VIX is dramatically underperforming credit (although spreads have started to crack wider)...

 

Treasury yields tumbled intraday...

 

With 10Y Yields back at their lowest since April 1st...

 

And the yield curve flattened... with 3m10Y spread back near inverted...

 

The market's expectations for rate-moves this year shifted dovishly today as stocks fell - dropping to a 30bps rate cut...

 

The dollar index managed modest gains on the day, once again in demand overnight...

 

Cryptos were extremely noisy today with a broad-based sell program hitting this morning...

As Bitcoin twice tried for $600, and was rejected...

 

PMs were higher, crude and copper lower on the day...

 

Finally, a reminder from BMO's Brad Wishak highlighted, the world's favorite (and also largest) index to completely ignore is flashing another negative divergence here...the exact same divergence that kicked off the the fall equity slide lower.

Back in SEP the SPX pushed to new all time highs while the NYSE did not, flagging the initial divergence. Just last week, the SPX again made fresh all time highs with the NYSE again NOT confirming.

Is it different this time?

Not according to options traders as Bloomberg reports that a growing cohort of investors is betting the worst is yet to come.

Demand for protection against more losses over the next month is higher than at any time during the fourth-quarter rout that almost ended the bull market, going by relative levels of implied volatility on S&P 500 options. The derived price for one-month puts that pay off if the S&P 500 falls 10 percent below its current level has soared compared to the cost for calls that would pay out if the benchmark gauge rose 5 percent in that time.

“This is an event being priced in the very near term that didn’t exist just a few days ago," said Pravit Chintawongvanich, Wells Fargo’s equity derivative strategist, who emphasized that the reaction in very near-dated options was disproportionately large relative to longer-dated options.

“Vol is well bid, and it makes sense given we suddenly got a 2 percent move out of nowhere.”

We leave you with a new hope...

Published:5/7/2019 3:08:30 PM
[Markets] Investors needing steady income should hope for higher interest rates Stockholders should think twice before celebrating lower interest rates. While stock portfolios become more valuable, the income from those portfolios declines. This unfortunate fact of life puts into new light President Donald Trump’s statement that the Dow Jones Industrial Average (DJIA) would be between 5,000 and 10,000 points higher if the Federal Reserve “had done its job properly.” Even if his words were accurate, it’s not clear that investors’ future standard of living would be much different than it is now. Published:5/7/2019 1:39:50 PM
[Markets] The Dow is now down 500 points, but stock selling is far from a panic level The Dow is now down 500 points, but stock selling is far from a panic level Published:5/7/2019 12:37:09 PM
[Markets] Nasdaaq Takes Out Monday's Lows As Dead-Cat-Bounce Dies

Update (1100ET): Things are getting worse in stockland... Nasdaq futures have plunged since the initial opening bounce, back below yesterday's lows...

Trannies are the worst post-Tariff-tweets, down 2.5%.

*  *  *

Treasury yields are tumbling as US equity markets re-plunge after some overnight gains on Liu headlines.

Dow futures are down over 300 points...

Dow futures are back below the 50DMA...

But Nasdaq futures are the laggard, near yesterday's lows...

And Treasury yields are back below pre-FOMC levels...

Published:5/7/2019 10:10:33 AM
[Markets] Dow down 320-plus points as Tuesday losses accelerate Dow down 320-plus points as Tuesday losses accelerate Published:5/7/2019 9:37:01 AM
[Markets] Dow off 240 points early Tuesday as U.S.-China trade tensions persist Dow off 240 points early Tuesday as U.S.-China trade tensions persist Published:5/7/2019 9:13:45 AM
[Markets] Disney's stock the only Dow component gaining ground premarket, after analyst boosts price target Walt Disney Co.'s stock rose 0.4% in premarket trade Tuesday, and was the only one of 30 Dow Jones Industrial Average components gaining ground, after an upbeat analyst call. The gain comes in the face of a broader market selloff, with Dow futures tumbling 222 points, amid concerns that the U.S.-China trade dispute is escalating. Analyst David Miller at Imperial Capital raised his stock price target on Disney to $147 from $139, while reiterating his outperform rating, as the media giant's blockbuster film "Avengers: Endgame" continues to break box-office records and ahead of Disney's fiscal second-quarter report scheduled for May 8. Published:5/7/2019 8:41:25 AM
[Markets] Market Turmoil Continues After Liu Confirms Washington Visit; Beijing Tells Investors To 'Stay Calm'

Continuing the pattern of China countering belligerent American trade rhetoric with attempts to calm its domestic market, turmoil across global markets continued Tuesday even after Beijing confirmed that Vice Premier Liu He would travel to Washington for two days this week to lead trade talks, in what appeared to be an attempt to calm markets.

Liu

Just as investors were starting to think that they had dodged a bullet Monday evening after markets had pared most of their declines from overnight, Robert Lighthizer and Steven Mnuchin sent global stocks and the yuan into a tailspin after they affirmed that Washington would impose additional tariffs on Beijing Friday, claiming that China had reneged on its commitments, and - furthermore - that the market's reaction wouldn't be a factor in the talks. 

At the time, we noted what appeared to be a new American strategy to maximize the damage from the US's jawboning, while mitigating the blowback.

And like clockwork, as Chinese equities and the yuan tumbled on Tuesday after recording their largest daily declines in three years the day before, China's Commerce Ministry announced that Vice Premier Liu He would travel to Washington for two days for the next round of talks, despite the Trump Administration's threats. On Monday, the Commerce Ministry said Beijing would still send a delegation, but it was unclear whether Liu would join.

But even after the Liu news broke, US stock futures, which had briefly trimmed their losses overnight, dumped once again.

Dow

Marking a stark departure from Beijing's more aggressive trade rhetoric, in an editorial in the Global Times, an English-language Communist Party mouthpiece, Beijing adopted a surprisingly cautious tone, advising investors to 'remain calm' in the face of the trade-war turbulence, and insisting that the Chinese people should support Beijing's strategy - whatever that happens to be - and that Washington was simply anxious for an early deal, so even if talks did fail, the outcome would be 'controllable'.

Offering another example of its conciliatory rhetoric, Beijing warned that 'mutual respect, equality and mutual benefit' should be the premise of the talks.

Another editorial, published in the People's Daily, urged both sides to set aside their differences find a resolution in a 'timely manner', and warned that in order for an agreement to be reached, both sides may need to make some compromises.

Published:5/7/2019 5:35:45 AM
[Markets] Mnuchin won't turn over Trump's tax returns to House Democrats Mnuchin won't turn over Trump's tax returns to House Democrats Published:5/6/2019 5:04:34 PM
[Markets] The Dow Fell 66 Points Because Markets Have a Hard Time Digesting Tariff Tweets President Donald Trump’s threat to ramp up tariffs on China sent markets into the red, although they recovered from lows by the close. The Dow Jones Industrial Average dropped 0.25% to close at 26,438.48. The S&P 500 lost 0.45% to end at 2932.48, and the Nasdaq Composite tumbled 0.50% to close at 8123.29. Published:5/6/2019 4:35:48 PM
[Markets] Dow finishes well off day's low after clawing back from 472-point plunge Dow finishes well off day's low after clawing back from 472-point plunge Published:5/6/2019 3:33:21 PM
[Markets] Stocks sink on Trump's threat to China—Buffett, Cramer and other experts share what they're watching Trade war troubles have taken hold in the U.S. stock market. The Dow Jones Industrial Average shed more than 200 points on Monday after President Donald Trump made a series of threats regarding U.S.-China trade talks over the weekend. In several tweets on Sunday, Trump said tariffs on $200 billion worth of Chinese goods would go up to 25% by the end of this week, countering the seemingly positive headlines made by some of his trade advisors in recent months. Published:5/6/2019 2:32:06 PM
[Markets] UnitedHealth's stock surges to pace Dow gainers; CEO spent more than $900,000 to buy company stock Shares of UnitedHealth Group Inc. surged 3.1% in afternoon trade Monday, enough to pace the Dow Jones Industrial Average's gainers, as the health care sector was one of the just 2 of the S&P 500's 11 sectors that are gaining ground. The Dow was down 128 points, with 23 of 30 components losing ground, while the SPDR Health Care Select Sector ETF edged up 0.2% with 25 of 62 components gaining ground. Earlier Monday, UnitedHealth disclosed that Chief Executive David Wichmann spent $904,366.88 to buy 20,000 of the company's stock at an average price of $231.7865 as early as Friday. The stock was now trading around $239.12. Published:5/6/2019 2:03:01 PM
[Markets] Here's what advisors are telling clients worried about Trump's China trade-war tweets It appeared to be a painful start to the week for the stock market, with the Dow Jones Industrial Average down more than 470 points at the open on Monday. "There's always something that's troubling the stock market," McClanahan said. It appeared to be a painful start to the week for the stock market, with the Dow Jones Industrial Average tumbling more than 470 points at the open on Monday. Published:5/6/2019 1:02:30 PM
[Markets] Dow industrials experience bounce after dipping below 50-day moving average Dow industrials experience bounce after dipping below 50-day moving average Published:5/6/2019 10:00:45 AM
[Markets] Dow industrials down nearly 500 points at opening bell as trade-war fear spikes Dow industrials down nearly 500 points at opening bell as trade-war fear spikes Published:5/6/2019 9:00:23 AM
[Markets] Chevron is only Dow stock gaining after rival Occidental revises Anadarko bid Chevron is only Dow stock gaining after rival Occidental revises Anadarko bid Published:5/6/2019 7:36:30 AM
[Markets] Dow Jones Futures Dive As China Trade War Fears Reignite On Trump Tariff Threat Stock futures: President Trump threatened higher China tariffs due to slow China trade talks. That could be bad for the stock market, and Dow Jones giants Apple, Boeing, Caterpillar. Published:5/6/2019 7:01:45 AM
[Markets] Trump Doubles Down: 'We're Not Going To Lose To Beijing Anymore' 

Just when US equity futures were finally starting to move higher after Dow futures had lingered around the -500 level for most of the morning, President Trump doubled-down on his antagonistic stance toward Beijing, tweeting that the US was done losing "500 billion dollars" a year in trade to China.

The message was clear: Trump isn't backing down from his threats to hike tariffs and impose new ones, even after sending global markets into paroxysms with a series of tweets on Sunday.

Trump latest tweet follows reports that Beijing was still planning to send a trade delegation to the US this week, but that Vice Premier Liu He, the official who has led the Beijing side during the now ten rounds of talks that have been held over the past year, might either delay a trip to Washington by a few days, or not go at all. 

It supports the view that, given the market's robust performance since the start of the year, Trump feels he has the latitude to ratchet up  the pressure on Beijing, given the strength of the labor market and Q1 GDP.

Put another way:

Published:5/6/2019 6:31:56 AM
[Markets] Apple could face an E.U. investigation over complaint from Spotify: FT Investigators in the European Union are reportedly preparing to launch a formal investigation into Apple Inc. and potential anticompetitive practices, according to a report from the Financial Times. The investigation would follow a complaint from rival Spotify Technology SA , which has argued that the 30% cut Apple takes from developers after consumers complete an in-app purchase makes it challenging for companies to compete against Apple. In particular, Spotify has argued that it may have to raise prices for its premium streaming plan to compensate for having to pay Apple a sizable chunk of its subscription fees. Apple and Spotify both declined to comment in the FT's report. Apple shares have gained 34% so far this year, as the Dow Jones Industrial Average has risen 14%. Published:5/6/2019 6:31:56 AM
[Markets] Beijing Says Trade Delegation's Trip To Washington Still Happening Despite Trump Threats

With Chinese stocks down a staggering 6% on Monday, Chinese state media scrambled to project an air of calm. Though his comments did little to quiet stormy markets, Chinese foreign ministry spokesman Geng Shuang told reporters Monday that a trade delegation is still "preparing to travel to the U.S. for trade talks" or what was - according to the US, at least - supposed to be the 'final round' of negotiations. However, he declined to say whether Vice Premier Liu He would join the delegation, Reuters reported. 

The Global Times, an English language mouthpiece for the Chinese government, affirmed that the delegation's decision to stick with its travel plans following Trump's threat to hike tariffs this week over frustrations with the grinding pace of talks (which, until last week, had, according to both sides, had been inching closer to a deal) should be seen as a "gesture of goodwill").

However, the South China Morning Post reported that Liu might delay his trip and leave Beijing on Thursday, three days later than previously scheduled, or possibly cancel the trip altogether.

In any case, Geng said during the press conference that China's positions were "clear" and that they hoped to work toward a deal that would "benefit both sides".

"There have been many times that the US side has threatened to increase tariffs," Geng said when asked about Trump’s tweets on Sunday which threatened to impose punitive tariffs on US$200 billion of imports from China tariffs beginning on Friday. "China’s positions are clear and the US side is well aware of them."

"[We have hoped] to make progress in our trade talks and [we] hope the US side can work together with us and move in the same direction so we can achieve a deal that can benefit both sides. Everyone in China and abroad is very concerned about the next round of talks, and we are also learning about the relevant changes. The Chinese delegation is preparing to go to the US for the negotiations."

One analyst told SCMP that the Chinese are familiar with Trump's tactics, and seemed to imply that China wouldn't cancel the talks because that would allow Trump to blame them for the collapse.

"If China cancels the trip, Trump would blame China for the failure of the trade negotiations," he said.

One possible response from China could be to send a smaller delegation to US, he said.

"After the intensive talks, China is familiar with the style of Trump and his administration. Trump’s flip-flop announcement is not a big surprise for China, but China should be prepared for the worse-than-worst scenario," Lu Said.

But in the US, Dow futures were off more than 500 points, the USD/JPY was off 0.4% to its lowest level since late March, as China's onshore yuan hurtled toward new lows of 7 to the dollar and oil tumbled 1.5% as the faltering trade talks revived fears about global growth.

Trump's warning that he planned to move ahead with a planned tariff hike that had been suspended after Trump and President Xi fist agreed to pursue talks during a dinner in Buenos Aires, and then again at the end of February, followed a flurry of reports last week that the Chinese were demanding steep concessions from the US, which had caused talks to stall. The head of the US Chamber of Commerce had also warned that China was pushing back against US demands to end subsidies to state-backed firms "in a broad range of sectors."

Reports in Chinese media pushed back on the insistence by the US side that a deal would hopefully be reached by the end of this week, when the 11th round of talks would have concluded. The Chinese side described this as a "trick" and a "pressure campaign" to try and bully Beijing.

"It’s the same tactic as the US threatening to raise tariffs. It is merely smoke and mirrors to exert extreme pressure [on China]," the post said. "You don’t have to take it seriously."

Treasury Secretary Steven Mnuchin said shortly before he and Robert Lighthizer headed to Beijing last week for a 10th round of talks that the US side expected to "either recommend to the president we have a deal or make a recommendation that we don’t."

Trump initially imposed duties of 25% on an initial $50 billion of Chinese goods in July and August last year and then slapped another 10% on an additional $200 billion in products in September.

Meanwhile, as the return of open trade hostilities between the US and China hammers markets around the world, the Europeans have voiced their frustration with Trump's threats.

  • HEAD OF GERMAN CHAMBERS OF COMMERCE TELLS AUGSBURGER ALLGEMEINE NEWSPAPER ANNOUNCEMENT OF NEW TARIFFS BY U.S. ON CHINESE GOODS "NOT GOOD AT ALL FOR GERMAN ECONOMY"

With the market's four-month streak of steady gains suddenly shattered, all eyes will be on what Trump tweets next.

Published:5/6/2019 5:01:08 AM
[Markets] Dow Jones Futures, China Markets Dive On Trump Tariff Threat Stock futures: President Trump threatened higher China tariffs due to slow China trade talks. That could be bad for the stock market, and Dow Jones giants Apple, Boeing, Caterpillar. Published:5/6/2019 2:30:18 AM
[Markets] Asian market plunge after Trump threatens more China tariffs Shares tumbled in Asia early Monday after President Donald Trump threatened in a tweet to impose more tariffs on China, spooking investors who had been expecting good news on trade. The Shanghai Composite index sank 4.9%, briefly dipping 5% lower, and the Hang Seng in Hong Kong plunged 3.5%. The future contract for the Dow Jones Industrial Average fell 1.9% to 25,996.00, while that for the S&P 500 also shed 1.9%, to 2,892.00. Published:5/5/2019 10:28:28 PM
[Markets] S&P Futures Plummet As China Said To Cancel Washington Trade Trip, All Eyes On S&P 2,890

It's only appropriate that the S&P may be about to suffer its biggest drop of the year one day after hitting a new all time high.

For those who are only now catching up, the reason why futures are tumbling is that just after 12pm ET, Trump tweeted that trade talks - which according to the White House, media leaks and Larry Kudlow would be basically concluded by next week - are instead effectively dead, as the current 10% tariff will spike to 25% on Friday, while an additional $325BN in goods will be subject to new trade tariffs.

Some saw in Trump's tweet a retaliation for Friday's North Korea ballistic missile launch, the first since 2017, and one which would not have happened without the explicit blessing of Beijing.

Others were more nuanced, and Nomura's Charlie McElligott writing late on Sunday that "either this is an epic act “rope-a-dope” posturing and poker-playing from POTUS to collect a (self-perceived) “better” deal “win” thereafter…as the 500-handle rally in Spooz has given Trump enough confidence to absorb a market drawdown and again “lean-into” what some in the administration believe is Chinese “slow-playing”—all in an attempt from to extract additional last-minute deal concessions, after last week’s reported negotiation setbacks—OR a raging ‘miscalculation’ with “vigilante” markets."

For now it is looking like it's the latter, with futures tumbling and the Emini down a whopping 55 points on Sunday night, shaping up as the third biggest intraday drop of the year so far.

But Nasdaq is worst for now (down over 2%) as Dow is down 500 points.

Meanwhile, the (non-USD) FX markes is getting absolutely crushed, with China proxies such as the Aussie and Kiwi tumbling, because, as McElligott adds, the key risk is that the offshore Yuan (CNH) may tumble - which it is currently, plunging over 1.3%, or the biggest move since Jan 2016, "as market forces anticipate that China may allow the Yuan to weaken considerably IF they choose to retaliate (a big “IF”), following their prior perceived ‘goodwill’ controlling of the exchange rate within a tight band the past three months for trade negotiation purposes."

Treasury futures are dramatically bid (implying a 7.5bps drop in 10Y yields).

Meanwhile, in an attempt to prevent a Sunday rout, Goldman published a note after 6pm Eastern, in which the bank's chief political economist, Alec Phillips, comments on Trump’s announcement that the tariff rate on $200bn of imports from China will rise from 10% to 25%, noting that it "lowers the odds of a successful conclusion to US-China trade talks and raises the odds of further tariff escalation. However, we think it is more likely that the increase will be narrowly avoided and believe the odds of tariffs increasing on Friday are 40%."

Well, it may be time for Goldman to rename itself Gartman Sachs, because the digital ink wasn't even dry yet on that note when the WSJ reported that China is considering canceling trade talks with the U.S. After Trump's sudden, unexplained threats, adding that:

  • Trump’s Tweets Threatening New Tariffs Surprised Chinese Officials
  • Decision Weighs on Whether Vice Premier Liu He Goes to Washington as Planned
  • Canceling Talks Conform to China’s Strategy Not to Negotiate Under Threat

And while the WSJ was somewhat tentative in its reporting, reporter Edwards Lawrence was far more convinced that it's pretty much game over: "Chinese Vice Premier Liu He has cancelled his trip to Washington this week for trade talks following a tweet by President Donald Trump threatening more tariffs because the talks have moved too slowly. "

So it looks like it is indeed likely that US-China trade talks may be about to implode (especially with Goldman's "kiss"). Meanwhile, going back to McElligott's note, this "unexpected" negative development couldn't come at a worse time for investors, as after avoiding rushing into the meltup for over 4 months, "it was leveraged funds who were finally “forced in” last week (through start of week), covering $9B of SPX futures short positioning, while we also saw Macro Funds take up their “Beta to SPX” WoW, going from 11th %ile to now 51st %ile into the start of the week.  Tough timing." Tough indeed, and here are some other "tough" observations:

  • There is a very large Asset Mgr ‘net long’ in US Eq Futs, as they currently hold a total $123B net long notional position across US Equities Futures (SPX, NDX, Russell)—with $62.4B / half of the overall position bought YTD alone
  • As half of this position then is deeply ‘in the money,’ it would make sense that an extreme ‘risk-negative’ reaction to this news by the market tonight / tomorrow could elicit AM profit-taking to monetize some of this performance YTD

Finally, with the Emini back under 2,900 all eyes are now back on 2,890 - that's both where dealer gamma turns negative again, selling begets more selling...

Source: Nomura

... and is also where the CTAs start dumping in earnest, as per these latest updated market triggers, according to McElligott:

  • S&P 500, currently 100.0% long, as of tomorrow would be selling under 2878.76 to get to +57%, more selling under 2635.85 to get to -100% , flip to short under 2636.14 max short under 2635.85 --deleveraging triggers moves up to 2894.26 in a week and 2900 in 2 weeks, in 3 weeks 2932
  • Russell 2000, currently 100.0% long, as of tomorrow would be selling under 1565.7 to get to +57%, more selling under 1557.82 to get to -100% , flip to short under 1557.98 max short under 1557.82--deleveraging levels move up to 1600 in a week, 1617.52 in 2 weeks, in 3m weeks 1616
  • NASDAQ 100, currently 100.0% long, as of tomorrow would be selling under 7578.15 to get to +57%,  more selling under 6657.92 to get to -100% , flip to short under 6658.7, max short under 6657.92--deleveraging levels move up to 7641 in a week, 7687.84 in 2 weeks, in 3m weeks 7842.53

For the TL/DR crowd: Steven Mnuchin better have the PPT on speed dial.

Published:5/5/2019 8:00:36 PM
[Markets] Dow Futures Plunge 500 Points As Markets Adjust To Trump Trade Threats

Update: Futures markets have just opened and Dow Futures are down 500 points...

All of Friday's melt-up to record high gains, gone...

WTI Crude is down over 2% at the open...

What is more problematic, as Nomura's Charlie McElligott warns in an emergency note this evening:

SPX / SPY consolidated options “Gamma” is set to flip ‘negative’ around 2890 as an “acceleration point” where moves could get sloppy with dealer hedging.

Asset managers could turn “sellers” of their very profitable futures length acquired YTD:

There is a very large Asset Mgr ‘net long’ in US Eq Futs, as they currently hold a total $123B net long notional position across US Equities Futures (SPX, NDX, Russell)—with $62.4B / half of the overall position bought YTD alone.

As half of this position then is deeply ‘in the money,’ it would make sense that an extreme ‘risk-negative’ reaction to this news by the market tonight / tomorrow could elicit AM profit-taking to monetize some of this performance YTD

Final point - it was leveraged funds who were finally “forced in” last week (through start of week), covering $9B of SPX futures short positioning...

while we also saw Macro Funds take up their “Beta to SPX” WoW, going from 11th %ile to now 51st %ile into the start of the week. 

Tough timing.

Black Monday?

How long before Trump walks back his threats?

*  *  *

As we detailed earlier, indications across the (admittedly thin) FX markets is that 'pain' is on its way for risk assets after Trump's China Trade deal threats.

Yuan has plunged over 500 pips to 3-month lows...

For context...this is the biggest yuan crash since August...

And USDJPY is down notably (typically signaling derisking of carry-trade funded risk assets)...

We'll see if the algos buy the dip when US futures market open. Also note that China is still on holiday today.

Published:5/5/2019 5:27:18 PM
[Markets] Dow Jones Futures Dive On Trump Tariff Threat Vs. China Dow Jones futures: President Trump threatened higher China tariffs due to slow China trade talks. That could be bad for the stock market, and Dow Jones giants Apple, Boeing, Caterpillar. Published:5/5/2019 5:27:18 PM
[Markets] How Democrats Plan To Destroy The Market

As US stocks have powered to fresh all-time highs, the health-care sector has emerged as a pariah for investors, as burgeoning support for 'Medicare for All' among the Democratic contenders for 2020 - part of an overall shift to the far-left for the party as a whole - has caused panic to set it.

All it took was a few formerly moderate candidates like Kamala Harris to follow Sanders' lead and embrace Medicare for All, and holders of managed-care stocks were stuck with a $300 billion loss.

But while the price action in health-care has left thousands of investors frustrated, it's just one harbinger of what could happen to the market depending on the outcome of the Democratic Primary, according to a Bloomberg piece published Sunday.

Trump

The increasing hostility to Wall Street and corporate America from candidates like Bernie Sanders and Elizabeth Warren, as well as what has become a bipartisan push to curb share buybacks (which would threaten corporations' position as a crucial marginal buyer powering the decade-long bull market), threatens to spoil the stock-market party inspired by the Trump Administration, which has established itself as the single most market-friendly administration in recent memory. Ultimately, whether any of this legislation passes is irrelevant: A surging tide of support for these 'progressive' policies would likely be more than enough to send equities deep into the red. 

There has even been some talk of banning buybacks altogether, something that Goldman warned last month could tank the entire market.

And it could all happen sooner than many investors believe possible.

"Most people think that they don’t have to worry about it today," Ryan Primmer, head of investment solutions at UBS Asset Management, said in an interview. "But we can just look at what’s happened with health care as an indication that you don’t know when it’s going to come."

The market's growing unease was evidence in Stephen Schwarzman's comments Monday at the Milken Institute conference in Los Angeles this past week where he warned that the Democratic candidates and their policies threatened to slow the economic expansion, particularly by pushing for a rollback of tax reform.

Few presidents have aligned themselves with markets as closely as Trump, who cheers records in the Dow Jones Industrial Average and browbeat Federal Reserve Chairman Jay Powell for raising rates. His sweeping overhaul of corporate taxes capped a 35 percent rally in the S&P 500. Not everything has helped, but the image of a Republican-controlled government united in the cause of stocks was one many investors had begun to savor.

Another foreboding indication of just how damaging the Democrats' approach can be even without legislation behind it is Alexandria Ocasio-Cortez's success in driving Amazon out of New York City. One portfolio manager described her approach as 'the exact opposite of what the Trump Administration is doing'.

Enter the opposition, its flag borne by the likes of Congresswoman Alexandria Ocasio-Cortez, whose condemnation of Amazon.com helped keep it from building a New York headquarters. Stocks may remain near record highs and few candidates frame themselves as the outright enemy of equities. But the episodes are evidence that plenty of Democratic contenders don’t view preserving profit margins as a top priority.

"That really is the polar opposite of what the Trump administration has done," said Mark Stoeckle, CEO and senior portfolio manager of Adams Funds, which has about $2.5 billion under management.

If anything, some Democrats view the underperformance of health-care stocks over the past few months as a sign that their approach is working - because it signals that, for the first time, the market is taking the threat of a Bernie Sanders presidency seriously.

Not that the candidates are shedding any tears. A campaign aide for Senator Bernie Sanders - who is running for the Democratic nomination - touted the concerns among investors as a victory that signals growing support for his ideas like Medicare for All.

The aide said it shows that investors who didn’t consider Sanders a real threat before now believe he can win.

To be sure, health-care isn't the only industry that the Democrats' have in their sights. Elizabeth Warren and Bernie have railed against Wall Street, promised to break up the big banks, raise taxes and strengthen regulations.

Warren and Sanders have called for sharply raising taxes on wealthy people and corporations - often calling them out by name - to finance an expansion of the safety net. "Do you happen to know - anybody here happen to know how much Amazon paid in taxes last year?"

Sanders said at a CNN town hall last week. "Zero. All right? Owned by the wealthiest guy in America. That is an absurd tax system, a regressive tax system."

Warren recently warned that major technology firms are hurting entrepreneurs. "The area around these giants are referred to by venture capitalists, investors, as the dead zone because it means you try to start up a business, you just run the risk that Amazon steps in front of you or Google steps in front of you or they buy you out before you have a chance to get started," she said last week at the same series of CNN town halls.

Warren has also accused big tech firms of being monopolies that should be broken up (echoing some of the same rhetoric President Trump has used against Amazon). Already, under Trump, the FTC has set up a task force to apply more anti-monopoly scrutiny to big tech.

Other election themes bear watching, say bulls. They include stiffer regulation and the breakup of large companies, something Warren is advocating. Her proposal could see the dissolution of tech megacaps like Amazon.com Inc., Alphabet Inc.’s Google and Facebook Inc., which she’s called monopolies that harm innovation and small business.

"Today’s big tech companies have too much power -- too much power over our economy, our society, and our democracy," Warren wrote in a recent blog post. "They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else."

Warren’s motion hasn’t done much to the tech sector. Shares of Facebook barely budged following her announcement -- ditto for Amazon and Alphabet. But critics say the proposal has the potential to be disruptive in a market that these firms all but dominate.

"You might see Facebook and Google and Amazon try to be broken up. That’s always a risk," Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, said by phone. "There’s always been this political jargon and fighting and hell raising, so to speak, over the years."

Bottom line: When President Trump warned ahead of the midterms that if Americans want to see the market and economy tank, they should vote Democrat, he was - once again - right. What's worse: At this point, progressive Democrats wouldn't even need to win to crash the market. They would only need to poll high enough to give investors a real scare.

Published:5/5/2019 3:57:45 PM
[Markets] It Never Hurts To Ring The Cash Register

Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Update & Review

Fortunately, the market rallied on Friday as traders scrambled to hold important support levels following confirmation from Richard Clarida that the Fed has no intention of moving interest rates anytime soon. Via Bloomberg:

  • CLARIDA: INFLATION PRESSURES MUTED, EXPECTED INFLATION STABLE

  • CLARIDA: WE’LL WEIGH `WHAT, IF ANY, FURTHER ADJUSTMENTS’ NEEDED

  • CLARIDA: FED FUNDS RATE NOW IN RANGE OF NEUTRAL ESTIMATES

  • CLARIDA SAYS FED CAN AFFORD TO BE DATA DEPENDENT

  • FED’S CLARIDA SAYS U.S. ECONOMY IS IN A `VERY GOOD PLACE’

Despite headlines to the contrary, the employment report on Friday was NOT good and we will likely see a good bit of payback next month. David Rosenberg summed it up well:

Nonetheless, the market did rally keeping us in the same place as last week.

“While that break to the upside was indeed bullish, the market remains very confined to a rising consolidation pattern and failed to close above the intraday all-time highs from last September. With the markets trading on VERY light volume on Friday, combined short-term ‘sell signals’ forming, and pushing more extreme overbought conditions, it is too early to completely remove all risk management controls in portfolios.”

The chart below is updated from last week.

While the market did hold inside of its consolidation pattern, we are still lower than the previous peak suggesting we wait until next week for clarity. However, a bit of caution to overly aggressive equity exposure is certainly warranted.I say this for a couple of reasons.

  1. The market has had a stellar run since the beginning of the year and while earnings season is giving a “bid” to stocks currently, both current and forecast earnings continue to weaken.

  2. We are at the end of the seasonally strong period for stocks and given the outsized run since the beginning of the year a decent mid-year correction is not only normal, but should be anticipated.

With respect to earnings, and as we have stated many times previously, estimates continue to be revised lower, and have now exceed our original revision target (red dashed line) set out in early 2018.

Note: The Q4-2019 hockey-stick earnings jump WILL BE revised down markedly over the next few months. 

Why do I say that? 

Because 2020 estimates are already being revised down rather sharply as well. 

This is important as markets push all-time highs at a time when forward earnings estimates for the next 18-months are all lower than previously estimated. Despite the rise in expected earnings in 2020, the peaks of those expectations (which are predictably about 33% too high currently) are all lower than the 2018 earnings peaks.

In other words, further increases in the markets over the next two years will be a function of multiple expansion rather than increased “value.” 

Such an environment tells us a few things about the market.

  1. In the short-term prices will be driven by momentum and optimism. (1-3 months)

  2. Over the intermediate-term prices will become more subject to higher volatility due to potential disappointments as “bad news” is treated as “bad news” (4-9 months)

  3. Longer-term the market is simply a weighing machine and current expectations of 8% annual growth rates in asset prices will be realigned with weaker earnings prospects (10-24 months)

As noted above, the market’s stellar run is set for a breather over the next couple of months. Specifically, as we approach the end of the seasonally strong period, the odds of a “reset” rise markedly. As noted on Thursday by StockTraders Almanac the seasonal “sell” signal has also been triggered. To wit:

“Yesterday after the market closed, we sent out our Tactical Seasonal Switching Strategy Sell Alert for DJIA and S&P 500…we are shifting the ETF Portfolio to a market-neutral position by adding some exposure to short and longer duration bonds.”

Never Hurts To Ring The Cash Register

This brings me to what we did with our equity portfolios last Tuesday and subsequently reported to our RIA PRO subscribers on Wednesday morning. (Try NOW and get 30-days FREE)

A common theme through today’s report is ‘Profit Taking.’ Over the last couple of weeks, we have continued to discuss taking profits and rebalancing risks. Yesterday we sold 10% of our many of holdings prior to earnings to capture some profits. We also added to some of our Healthcare holdings which have been under undue pressure and represent value in a market that has little value currently.”

This was also a point Jim Cramer reiterated on CNBC on Thursday:

“Any time you have a remarkable run, it never hurts to take something off the table. Nobody ever got hurt ringing the register,” – Jim Cramer, CNBC

As the old Wall Street saying goes:

“Bulls make money. Bears make money. Hogs get slaughtered.”

Yes, markets are hovering near all-time highs and everything certainly seems to be firing on all cylinders. However, such is ALWAYS the case before a correction begins. Such is the nature of markets. 

Currently, the markets have had a stellar run since the beginning of the year, and as we wrote previously if you sold everything today, and went to cash, it is unlikely you will miss much between now and the end of the year. (We aren’t recommending you do that, it is just to illustrate a point)

The reason is because of a chart we posted earlier this week in “A Warning About Chasing This Bull Market.” 

“At almost 7% above the long-term weekly moving average, the market is currently pushing the upper end of historical deviations.”

The important point to take away from this data is that “mean reverting” events are commonplace within the context of annual market movements. 

Currently, investors have become extremely complacent with the rally from the beginning of the year and are quick extrapolating current gains through the end of 2019.

As shown in the chart below this is a dangerous bet. In every given year there are drawdowns which have historically wiped out some, most, or all of the previous gains. While the market has ended the year, more often than not, the declines have often shaken out many an investor along the way.

Let’s take a look at what happened the last time the market started out the year up 13% in 2012.

So far, it looks a whole lot like this year.

From a portfolio management standpoint, the reality is that markets are very extended currently and a decline over the next couple of months is highly likely. While it is quite likely the year will end on a positive, particularly after last year’s loss, taking some profits now, rebalancing risks, and using the coming correction to add exposure as needed will yield a better result than chasing markets now.”

Given that every given year has some sort of corrective action in it, betting this year will be different is a low probability event.

So, what could cause such a correction? 

Doug Kass laid out a decent laundry list of non-trivial risks that not only currently exists but in many cases are expanding.

  • Slowing Domestic Economic Growth: I see going forward nominal GDP in the U.S. at nearly recessionary growth levels. There was less than meets the eye in the first-quarter headline Real GDP growth rate of 3.2%. The accumulation of inventories, large doses of government spending and a sharp improvement in exports will likely subtract from the second-quarter growth rate. Moreover, consumer spending is clearly slowing (first-quarter consumer durable spending was down 5%), along with housing and non-residential construction now. Commodities are down in each of the last five days and are now at a seven-week low. Finally, credit card charge-off rates are rising sequentially, as are delinquency rates.

  • Slowing Non-U.S. Economic Growth: Economic confidence in the European Union has hit a 10-month low. Hong Kong exports to China are falling post haste (down 10% in March). Finally, last night’s disappointing Chinese data questions the foundation of growth in that region.

  • The Earnings Recession: A strengthening currency, sub-4% nominal U.S. GDP growth and rising wage and salary costs pose threats to corporate profitability this year. While estimates have improved from year-end, first-quarter profits still look to be down by more than 2%. According to Rosie (David Rosenberg), fully 84% of those companies issuing guidance have been negative. Second-quarter profits look negative, again. As I have chronicled, profit margins peaked several quarters ago (3Q 2018). Going forward, it seems to me that commodities and interest expenses are likely troughing and that wage growth may accelerate from here, pressing margins. Finally, don’t fall for the fact that 77% of the reporting companies have beat “estimates.” This is what I refer to as the “Twit Olympics” where estimates are taken down and guided to levels that almost certainly will be beat.

  • The Last Two Times the Fed Ended Its Rate Hike Cycle, a Recession and Bear Market Followed

  • The Strengthening U.S. Dollar: More than 40% of the S&P component’s sales are non U.S.-based. A strong U.S. currency will be a profits headwind over the remainder of 2019.

  • Message of the Bond Market: Stated simply, the 10-year U.S. note is sending the message of slowing global economic growth.

  • Untenable Debt Levels: I have already spent quite a lot of time making the case that debt is a governor to growth. The greatest subset threat is sovereign debt, which for now is being ignored.

  • Credit Is Already Weakening: With GDP up by more than 3% in real terms in the first quarter, one should be asking, “Why are bank credit and leveraged loans weakening?” The proliferation of “covenant lite” financing and the existence of increasingly excessive leverage are worrisome. Bankwide loans are weakening (are inventories bloated?); it’s the most sluggish trend seen since 2016. The ratio of debt upgrades to downgrades this year is also at the worst level in three years. As well, the leveraged loan market is seeing outflows and distressed debt is beginning to see an acceleration in write-offs. Finally, the search for yield, coupled with low interest rates, causes mischief and the misallocation of resources — for example, the silly issuance of 100-year Argentina bonds that now sell for about 66 cents on the dollar (they were issued at par).

  • Valuation: Many claim that the “Powell Pivot” and its likely ramifications of lower rates for longer provides a cover for equities. But stocks, currently valued at 17x forward earnings, are now more than two price-to-earnings (P/E) multiple points above the average level of the last decade — a period of time in which rates were mostly at or near generational lows.

  • Positioning Is to the Bullish Extreme: As noted last week by my pal Peter Boockvar, chief investment officer at Bleakley Advisory Group, the net speculative position in short VIX futures is at an all-time high. And all-time is a long time.

  • Rising Bullish Sentiment (and The Bull Market in Complacency): The CNN Fear & Greed Index is extended toward Greed now. Barron’s Big Money Poll lists only about one-sixth of the respondents as bearish.

  • Non-Conformation of Transports: The Dow Theory is shining an amber light in 2019’s sea of market green. I am surprised so few technicians have mentioned this warning flag.

It’s a lot. 

However, where that laundry list of worries is long, none of them are going to be the “one” which gets the market. It is the combination of these issues which provide the “fuel” to amplify the impact of an unexpected, exogenous event which ignites selling in the markets. 

Since it is ALWAYS an unexpected event which causes sharp declines in asset prices, this is why advisors typically tell their clients “since you can’t predict it, all you can do is just ride it out.” 

This is not only lazy, but ultimately leads to the unnecessary destruction of capital and the investors time horizon.

Published:5/5/2019 9:53:52 AM
[Markets] Buffett says not 'inconceivable' that Berkshire teams up with 3G Capital in a deal after Kraft-Heinz woes Berkshire Hathaway Inc.'s Warren Buffett repeated numerous times on Saturday that he overpaid in a 2015 deal with 3G Capital that formed Kraft Heinz. However, he said that Berkshire remains partners with the Brazilian-American multibillion-dollar investment firm. Buffett said "and it is not at all inconceivable that we could be partners in some other transaction in the future." Kraft has undergone a yearslong cost-cutting drive which has undermined the value of some of its best-known brands such as Oscar Mayer and Kraft cheese, as eating habits shifted. Buffett previously said he overpaid for Kraft in the deal but had no plans to sell. "We paid a very high price in terms of the Kraft part," he said during the shareholder meeting. Shares of Kraft-Heinz are down 24.3% so far this year, compared with the S&P 500 index's 17.5% year-to-date return and a 13.6% gain for the Dow Jones Industrial Average . Berkshire shares, meanwhile, are up more than 7% over the same period. Ahead of the official start of the Berkshire shareholder meeting, Buffett said a dispute between Kraft Heinz and its auditor prevented Berkshire from reflecting the food company's performance in its first-quarter earnings report. Published:5/4/2019 12:21:35 PM
[Markets] 'It is the one thing that always worries me about my job' says Buffett Bad actors doing harm to shareholders are key concerns for one of the world's richest and well-known investors. Speaking at an annual shareholder meeting in Omaha, Neb., Berkshire Hathaway Inc.'s Warren Buffett on Saturday said that the possibility of malfeasance at one of his companies, or within Berkshire, has been one of his biggest dreads. "It is the one thing that always worries me about my job," Buffett said. The investor's comments come in response to questions about Berkshire's stake in Wells Fargo Inc. , which has seen its reputation badly tarnished amid a fake-account scandal that ultimately led to the departure of ex-CEO Tim Sloan. Buffett has been supportive of Sloan and said that he was treated like a a "human piñata." That said, he urged speed in responding to problems that crop up: "When you find out something is leading to bad results or bad behavior, if you are in the top job, you've got to take action fast," he said. Buffett was famously criticized for a wrongheaded investment bank Salomon in the early 1990s. Thus far this year, Berkshire shares have climbed more than 7%, compared with a gain of 17.5% for the S&P 500 index , a return of 13.6% for the Dow Jones Industrial Average and a 23% rise for the Nasdaq Composite Index . Meanwhile, Wells Fargo shares are up 5.6% year-to-date, lagging behind the large-capitalization exchange-traded Invesco KBW Bank ETF , up 20.3% over the same period. Published:5/4/2019 10:47:47 AM
[Markets] Berkshire's Munger says he predicts the company will be 'a little more liberal in repurchasing shares' Berkshire Hathaway Inc. may be a little freer in buying back its own shares in the future, said Vice Chairman Charlie Munger. Concisely speaking at the company's annual shareholder meeting in Omaha, Neb., on Saturday morning, the plain-spoken right-hand man to Warren Buffett implied that the company might up its share repurchases. "I predict we'll be a little more liberal in repurchasing shares," Munger said. Berkshire bought back $1.7 billion of its own shares in the first quarter, leading to an early question about the company's buyback strategy. Buffett offered a lengthier explanation about the thinking behind share repurchases, explaining that Berkshire aims to buyback when shares are 'selling below a conservative estimate of its intrinsic value," and added that it is important that "those people who have not sold shares are better off than before we repurchase them," as a part of the philosophy. Munger's more concise response to the question of buybacks perhaps is tied to the Berkshire's growing cash pile which increased to $114 billion at the end of the first quarter from $112 billion at the end of 2018. Thus far this year Berkshire shares have climbed more than 7%, compared with a gain of 17.5% for the S&P 500 index , a return of 13.6% for the Dow Jones Industrial Average and a 23% rise for the Nasdaq Composite Index . Berkshire changed its buyback policy last year, and some shareholders have said they would like the company to spend significantly more cash repurchasing its stock. Published:5/4/2019 10:23:23 AM
[Markets] Buffett's Berkshire held about $114 billion in cash in the first quarter, up from the end of 2018 Warren Buffett's Berkshire Hathaway Inc. is stacked with cash, as the most recent financial update from the investment conglomerate reveals. Berkshire's first-quarter results were released ahead of the company's well-attended shareholder meeting in Omaha, Neb. and beyond showing a roughly $21.66 billion profit, it also showed that Berkshire is holding onto a lot of cash. Indeed, Berkshire held about $114 billion in cash at the end of 2019's first three months, up from almost $112 billion at the end of 2018. The cash pile is one reason why Buffett & Co., has been elephant hunting, looking for large investments to put the company's money to work. Thus far this year Berkshire shares have climbed more than 7%, compared with a gain of 17.5% for the S&P 500 index , a return of 13.6% for the Dow Jones Industrial Average and a 23% rise for the Nasdaq Composite Index . Published:5/4/2019 9:22:34 AM
[Markets] Try Claiming America Is "Booming" After Reading These 19 Facts About Our Current Economic Performance

Authored by Michael Snyder via The Economic Collapse blog,

After taking an honest look at the facts, I don’t know how anyone can possibly claim that the U.S. economy is “booming”.  I really don’t. 

We hear this sort of rhetoric from the mainstream media all the time, but it doesn’t make any sense.  As I discussed yesterday, nobody should be using the term “booming” to describe the state of the U.S. economy until we have a full year when GDP growth is 3 percent or better, and at this point we haven’t had that since the middle of the Bush administration.  And as you will see below, the latest numbers are clearly telling us that the U.S. economy is not even moving in the right direction.  Economic conditions are getting worse, and they weren’t that great to begin with.  According to the calculations that John Williams has made over at shadowstats.com, the U.S. economy is already in a recession, but of course the Federal Reserve will continue to tell us that everything is just fine for as long as they possibly can.  Unfortunately for them, they can’t hide the depressingly bad numbers that are coming in from all over the economy, and those numbers are all telling us the same thing.

The following are 19 facts about our current economic performance that should deeply disturb all of us…

#1 In April, U.S. auto sales were down 6.1 percent.  That was the worst decline in 8 years.

#2 The number of mortgage applications has fallen for four weeks in a row.

#3 We just witnessed the largest crash in luxury home sales in about 9 years.

#4 Existing home sales have now fallen for 13 months in a row.

#5 In March, total residential construction spending was down 8.4 percent from a year ago.

#6 U.S. manufacturing output was down 1.1 percent during the first quarter of this year.

#7 Farm incomes are falling at the fastest pace since 2016.

#8 Wisconsin dairy farmers are going bankrupt “in record numbers”.

#9 Apple iPhone sales are falling at a “record pace”.

#10 Facebook’s profits have declined for the first time since 2015.

#11 We just learned that CVS will be closing 46 stores.

#12 Office Depot has announced that they will be closing 50 locations.

#13 Overall, U.S. retailers have announced more than 6,000 store closings so far in 2019, and that means we have already surpassed the total for all of last year.

#14 A shocking new study has discovered that 137 million Americans have experienced “medical financial hardship in the past year”.

#15 Credit card charge-offs at U.S. banks have risen to the highest level in nearly 7 years.

#16 Credit card delinquencies have risen to the highest level in almost 8 years.

#17 More than half a million Americans are homeless right now.

#18 Homelessness in New York City is the worst that it has ever been.

#19 Nearly 102 million Americans do not have a job right now.  That number is worse than it was at any point during the last recession.

But at least the stock market has been doing well, right?

Actually, the Dow Jones Industrial Average has been down for two days in a row, and investors are getting kind of antsy.

Hopes of a trade deal with China had been propping up stocks in recent weeks, but it looks like negotiations may have hit “an impasse”

The latest round of US-China trade talks may have hit an impasse, raising doubts about the chances of an early trade deal between the world’s two leading economies, Chinese official media reported on Thursday.

Unlike the previous negotiations, the 10th round of high-level economic and trade talks, which concluded here on Wednesday, had fewer details about specific discussions and results, state-run Global Times reported.

I warned my readers repeatedly that this would happen.  The Chinese are going to negotiate, but they are going to drag their feet for as long as possible in hopes that the U.S. will free Meng Wanzhou.

Of course that isn’t going to happen, and so at some point the Chinese will have to decide if they are willing to move forward with a trade deal anyway.

But if the Chinese drag their feet for too long, Trump administration officials may lose patience and take their ball and go home.

In any event, the truth is that the U.S. economy is really slowing down, and no trade deal is going to magically change that.

And a lot of other pundits are also pointing out that a substantial economic slowdown has now begun.  For example, the following comes from Brandon Smith’s latest article

The bottom line is, the next crash has already begun. It started at the end of 2018, and is only becoming more pervasive with each passing month. This is not “doom and gloom” or “doom porn”, this is simply the facts on the ground. While stock markets are still holding (for now), the rest of the system is breaking down right on schedule. The question now is, when will the mainstream media and the Fed finally acknowledge this is happening? I suspect, as in 2008, they will openly admit to the danger only when it is far too late for people to prepare for it.

Hopefully things will remain relatively stable for as long as possible, because nobody should want to see a repeat of 2008 (or worse).

Unfortunately, we can’t stop the clock.  We are already more than a third of the way through 2019, and we will be into 2020 before we know it.

It has been an unusual year so far, but I have a feeling that it is about to get much, much more interesting.

Published:5/3/2019 3:43:26 PM
[Markets] Dow Suffers Longest Weekly Losing Streak Of Year As Fed Loses Control Of Short-End

The Fed's tweak to the funding markets failed to take back control...

As The Fed's IOER cut left EFF still 6bps rich...

And so, a 'murder' of Fed Speakers were unleashed today and they managed to inch the market's rate expectations in a dovish direction, but on the week, thanks to Powell's "transitory"

The key message was obvious:

Chinese markets remain on holiday (and will be through Tuesday) but Chinese stocks remain the leader in 2019...

 

European stocks were very mixed with Germany's DAX leading and UK and Spain lagging...

 

An epic short-squeeze ramped US equities back into (or near) the green for the week...

 

With Small Caps and Trannies leading... Nasdaq and S&P were levitated almost perfectly into the green for the week...

Nasdaq up 6 week sin a row and 16 of the 18 weeks in 2019.

Nasdaq soared today on the back of Berkshire buying some Amazon shares... (FANG stocks managed to get back to breakeven on the week only though after the GOOGL drop)

 

For The Dow, this is the same panic-bid we saw last Friday... Dow down for 2nd week in a row - first time since Dec 2018

 

VIX has now risen for 3 straight weeks (albeit marginally) - the longest streak since Oct 2018

 

Treasuries were bid today, shifting the long-end yields back to unchanged on the week, while the short-end remain notably higher in yield...

 

The yield curve flattened dramatically on the week (after a brief spike initially on the Fed statement)...This was the biggest weekly flattening in 5 months

 

Roller-coaster week for the dollar surging back to unchanged on the week after The Fed, then tumbling today after payrolls...

 

Yuan ended the week unchanged (after a big bounce back today) even with China closed...

 

The peso surged today ahead of Cinco de Mayo...

 

Big week for Cryptos with Bitcoin and Bitcoin Cash leading...

 

As Bitcoin tests $5800...

 

Strong bounce back day for commodities today was unable to get them green on the week but gold outperformed as copper lagged...

 

Gold bounced off its 200DMA once again...

 

WTI fell for the 2nd week in a row - the biggest 2-week drop since 2018...hugging the 200DMA...

 

Finally, as BofA notes, ISM's collapse (which everyone seemed to ignore this week) is a major warning signal for US EPS growth...

Which is already lagging the market's enthusiasm for free money...

Global money supply better start picking up again soon...

Published:5/3/2019 3:14:57 PM
[Markets] Nasdaq closes at record high; Dow jumps over 190 points Nasdaq closes at record high; Dow jumps over 190 points Published:5/3/2019 3:14:57 PM
[Markets] Nasdaq carves out record after solid employment report Stock-market benchmarks ended solidly higher on Friday to end a multisession slide after a stronger-than-expected jobs report underscored the U.S. economy's health. The S&P 500 was up around 1% to finish near 2,945. The Dow Jones Industrial Average advanced 195 points, or 0.7%, to end around 26,503. The Nasdaq Composite climbed 1.6% to finish around 8,164. The Nasdaq clinched a fresh record, recovering from a three-session skid, aided by gains in internet-related company Amazon.com Inc. . Bolstering buying appetite was a reading of employment that showed that the U.S. economy added 263,000 jobs in April, well above analysts' estimates of 217,000. The unemployment rate fell to a near 50-year low of 3.6%, even as wages rose by a modest 0.2%. Amazon shares rose 3.2% after Warren Buffett said that Berkshire Hathaway had recently bought shares of the e-commerce giant. Published:5/3/2019 3:14:57 PM
[Markets] All 11 sectors of the S&P 500 are trading in positive territory after upbeat jobs report The S&P 500's 11 main sectors were trading in the green on Friday, following a report on jobs for April that came in better than expected, with an unemployment rate that fell to a nearly 50-year low. The labor-market data helped to prompt a broad-market rally after a multiday skid for the indexes, with S&P 500 's energy sector rising better than 1.1%, with defensive sectors like real estate also showing gains of about 0.1%. The S&P 500 overall was trading 0.7% higher at 2,938 and the Dow Jones Industrial Average advanced 0.5% at 26,428. Both the S&P 500 and the Dow had fallen in the past two sessions in the wake of a Federal Reserve that was read by investors as signaling no eagerness to reduce rates in the near term. Meanwhile, the Nasdaq Composite Index was up 1.1% at 8,128. The April jobs report underscored a healthy labor market that produced a stronger-than-expected 263,000 new jobs in April, helping to drive down the unemployment rate to 3.6%, the lowest level since 1969, topping economists' estimates polled by MarketWatch for monthly job gains of 217,000. Published:5/3/2019 10:11:39 AM
[Markets] US Market Indexes Continue Losses on Thursday Dow Jones falls 0.46% Published:5/2/2019 5:37:30 PM
[Markets] The Great Stock Buyback Debate

Authored by Lance Roberts via RealInvestmentAdvice.com,

I recently wrote about stock buybacks in our weekly newsletter. However, a recent report from Axios noted that for 2019, IT companies are again on pace to spend the most on stock buybacks this year, as the total looks set to pass 2018’s $1.085 trillion record total.

“By the numbers: Companies so far have spent $272 billion on buybacks, data compiled by Mike Schoonover, COO of Catalyst Funds, for Axios shows.

Between the lines: The amount of spending on buybacks announced by companies in the IT sector has fallen significantly this year as other industries, particularly energy and industrials, have picked up the slack. Companies in those sectors have about doubled their percentage of announced buybacks.

The top 5 sectors for buybacks this year accounted for 76% of the total. Last year, the top 5 sectors accounted for 82%, led by IT, financials, health care, consumer discretionary and industrials, respectively.

Interestingly, buyback spending has not coincided with market performance for most sectors.

As I have shown previously, the runoff in shares outstanding since the financial crisis lows have been nothing short of stunning.

It has been the magnitude of buybacks which have now brought it to the attention of politicians. It is a “political football” perfectly suited for the 2019 primaries as the “wealth gap” in America has become a visible chasm. Debates around share repurchases invoke themes for everyone: shades of corporate greed, historic income inequality, images of populism, and the idea that they’ve propped up the most-hated bull market of all time.

As noted by Business Insider:

“Politicians like Sens. Elizabeth Warren, Bernie Sanders, Chuck Schumer, and Marco Rubio have derided buybacks’ explosive rise due in large part to the Trump administration’s tax cuts, demanding Congress more fairly regulate what public companies can do with their cash. 

“Corporate self-indulgence has become an enormous problem for workers and for the long-term strength of the economy,” Sens. Sanders and Schumer wrote in a New York Times op-ed in February, which was met the following month with an opposing piece in the paper.

The pressure on buybacks, which hit a record $806.4 billion in 2018 according to an estimate from S&P Dow Jones Indices, isn’t expected to let up.”

Where’s The Beef

The buyback boom can be traced back to Bill Clinton’s 1993 attempt to reign in CEO pay. Clinton thought, incorrectly, that by restricting corporations to expensing only the first $1 million in CEO compensation for corporate tax purposes, corporate boards would limit the amount of money they doled out to CEO’s.

To Bill’s chagrin, corporations quickly shifted compensation schemes for their executives to stock-based compensation. Subsequently, CEO pay rose even higher, and as I showed previously, the gap between profits and wages has become vastly distorted. Rising profitability, fewer employees, and increased productivity per employee has all contributed to the surging “wealth gap” between the rich and the poor.

In 1982, according to the Economic Policy Institute, the average CEO earned 50 times the average production worker. Today, the CEO Pay Ratio’s increased to 144 times the average worker with most of the gains a result of stock options and awards.

You can understand why it is a political “hot topic” for 2020.

The arguments in support of corporate share buybacks are relatively “thin” in terms of substance.

  • Limited potential to reinvest for growth. (Least favorable use of cash.)

  • Management feels the stock is undervalued. (Rarely a consideration)

  • Buybacks can make earnings and growth look stronger. (Main reason given by firms)

  • Buybacks are easier to cut during tough times. (Easy to deploy and controlled by the board)

  • Buybacks can be more tax-friendly for investors. (Rarely a consideration)

  • Buybacks can help offset stock-based compensation. (Primary use in many cases)

Of the reasons given, the ones which support executive compensation are the most valid.

The debate over share repurchases came to the fore following the tax cuts in December of 2017. The bill was targeted at corporations and lowered the tax rate from 35% to 21%. The tax cut plan was “sold” the the American public as a “trickle down” plan and by giving money back to corporations; they would in turn hire more workers, increase wages, and invest in America.

It didn’t happen. As Caroline Baum penned:

“Kevin Hassett, chairman of the White House Council of Economic Advisers said ‘the gross domestic product report confirms our view that the momentum from last year was not a sugar high but a serious response to long-run policies that have made the U.S. a more attractive place for business.’ 

There’s just one problem with Hassett’s assessment.

The unexpected strength in the GDP report came from inventories, trade, and state and local government spending, not from business investment, which is where one would expect to see the response to the kind of long-run, supply-side policies Hassett implied.”

Where did the money primarily go? Just one place; share repurchases.

The problem with the surge in share repurchases is that such actions divert ever-increasing amounts of cash from productive investments which ultimately impairs longer-term profit and growth.

“But, corporate profits have been surging.”

Not so much.

The reality is that stock buybacks create an illusion of profitability. Such activities do not spur economic growth or generate real wealth for shareholders, but it does provide the basis for with which to keep Wall Street satisfied and stock option compensated executives happy.

Let’s clear up a myth used to support the benefit of stock buybacks:

“Share repurchases aren’t bad. It is simply the company returning money to shareholders.”

Not really.

Share buybacks only return money to those individuals who sell their stock. This is an open market transaction. For example, Apple (AAPL) just announced they plan to buy $75 billion of their stock back. Via NY Times,

“Apple’s record buybacks should be welcome news to shareholders, as the stock price is likely to climb. But the buybacks could also expose the company to more criticism that the tax cuts it received have mostly benefited investors and executives.”

Let’s clear something up. Buybacks do not RETURN money to shareholders. A dividend does. 

The only people who receive any capital from the buyback are those who opt to sell their shares. They have their capital back, but they no longer have the shares. Also, while it is believed that buybacks ALWAYS increase share price, that is not necessarily the case. Apple bought a vast amount of shares back in 2018, the stock lost 15% of its value.

So, who are the ones mostly selling their shares?

“Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.” – Financial Times

A recent report on a study by the Securities & Exchange Commission found the same:

  • SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.

Finally, as Jesse Fried wrote for the WSJ:

“The real problem is that buybacks, unlike dividends, can be used to systematically transfer value from shareholders to executives. Researchers have shown that executives opportunistically use repurchases to shrink the share count and thereby trigger earnings-per-share-based bonuses.

Executives also use buybacks to create temporary additional demand for shares, nudging up the short-term stock price as executives unload equity.”

What is clear is that the misuse and abuse of share buybacks to manipulate earnings and reward insiders has become problematic.

Ending The Addiction

Now that you understand the background, and who share buybacks actually benefit, you can understand the reason why this debate has become a much more visible topic heading into the 2020 election cycle.

Most people have forgotten that share repurchases were banned in 1933 following the “Crash of 1929,” until the ban was repealed during the Reagan Administration in 1982.

Why were they banned? Via Vox:

“Buybacks were illegal throughout most of the 20th century because they were considered a form of stock market manipulation. But in 1982, the Securities and Exchange Commission passed rule 10b-18, which created a legal process for buybacks and opened the floodgates for companies to start repurchasing their stock en masse.”

But more importantly, they are obfuscating the normal functioning of the market relative to price discovery. As John Authers recently pointed out:

“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”

In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market. 

The other problem with the share repurchases is that is has increasingly been done with the use of leverage. The explosion of corporate debt in recent years will become problematic during the next recession particularly as the proliferation of sub-investment grade issuers are locked out of the bond market for refinancing activities. As noted by the Bank of International Settlements.

“If, on the heels of economic weakness, enough issuers were abruptly downgraded from BBB to junk status, mutual funds and, more broadly, other market participants with investment grade mandates could be forced to offload large amounts of bonds quickly. While attractive to investors that seek a targeted risk exposure, rating-based investment mandates can lead to fire sales.”

With 62% of investment grade debt maturing over the next five years, there are a lot of companies that are going to wish they didn’t buy back so much stock.

One of the best pieces of analysis on the whole issue is from William Lazonick via The Harvard Business Review in which he summarized:

“The corporate resource allocation process is America’s source of economic security or insecurity, as the case may be. If Americans want an economy in which corporate profits result in a shared prosperity, the buyback and executive compensation binges will have to end. As with any addiction, there will be withdrawal pains.” 

There aren’t any easy fixes and banning them altogether is probably a “horse that is long gone.”

However, an honest assessment of the abuses, some rule changes in both reporting requirements and timing of sales, as well as potentially some limits on the amounts of annual repurchases could provide a start.

Just like any addiction, it is always better to ween the subject off of the addiction than just going “cold turkey.”

But, like 1929, it will likely be the next major market crash which solves the problem.

Published:5/2/2019 12:07:37 PM
[Markets] Dow briefly falls to roughly 3-week low in aftermath of Fed policy update The Dow Jones Industrial Average was trading solidly lower late-morning Thursday, with the blue-chip benchmark threatening to finish at its lowest level since April, if the current slide holds. Most recently, the Dow was off 170 points, or 0.6%, at 26,258, with a finish at that level marking its lowest since April 12 when the benchmark finished at 26,143. Meanwhile, the S&P 500 index was trading 0.5% lower at 2,910, and the Nasdaq Composite Index was down 0.3% at 8,022. On Wednesday, Federal Reserve Chairman Jerome Powell at a news conference emphasized a healthier global domestic growth picture, and indicating that neither a rate cut nor a rate hike were in the offing, undercutting the hope held by some investors that a near-term rate reduction was likely. Published:5/2/2019 10:36:59 AM
[Markets] Under The Veneer Of The "Unbreakable" US Consumer

Authored by Chris Woods via Grizzle.com,

Continuing last week’s subject of the momentum in the U.S. economy, the key issue remains consumption, which accounts for 68% of GDP.

The fundamental problem for the U.S. consumption dynamic remains the extreme unequal distribution of income in America which means, to a far greater extent than is the case in western Europe or indeed Japan, that America’s middle class has been hollowed out. U.S. real median household income in 2017, the latest data available, was still 0.1% below the previous high reached in 2007 and 1.0% below the all-time high reached in 1999 (see following chart).

As an example of rising stresses, it was interesting to read recently that the Federal Housing Administration (FHA) tightened in March, underwriting standards because of rising delinquencies. Thus the FHA, which insures mortgages for first-time home buyers, told lenders that it would begin flagging more loans as high risk. The FHA reportedly said that those mortgages, many of which are extended to borrowers with low credit scores and high debt payments relative to their income, will now go through a more rigorous manual underwriting process (see The Wall Street Journal article: “FHA clamps down on risky government-backed mortgages” [paywall], March 25, 2019).

U.S. REAL MEDIAN HOUSEHOLD INCOME

Note: Adjusted the levels prior to 2013 based on the 2013 gap between the old data and the new data based on the redesign income questions. Source: U.S. Census Bureau

Similarly, there are growing stresses on auto loan repayments. Thus, the flow into serious delinquency (the share of auto loan balances that newly became 90+ day delinquent) rose to 2.4% in 4Q18, up from a recent low of 1.5% in 4Q12, according to the latest New York Fed’s household debt survey. More interestingly, auto loan borrowers with credit scores less than 620 saw their transitions into serious delinquency rise from 5.5% in 4Q12 to 8.2% in 4Q18 (see following chart).

TRANSITION OF AUTO LOANS INTO SERIOUS DELINQUENCY (90+ DAYS) BY ORIGINATION CREDIT SCORE

Source: Federal Reserve Bank of New York

Meanwhile, the trend in retail sales and U.S. consumer spending on services remains relatively lacklustre. U.S. retail sales rose by 3.6% YoY in nominal terms in March, down from 6.6% YoY in July 2018 (see following chart). While real household consumption expenditure for services rose by 2.4% YoY in 1Q19, down from 4.1% YoY in 2Q15 (see following chart).

As for consumer loan demand, the Fed’s latest quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices shows a net 17.4% and 18.2% of banks reporting weaker demands for credit card loans and auto loans, respectively, in January, up from 4.3% and 1.8% in October (see following chart).

U.S. NOMINAL RETAIL SALES GROWTH

Source: U.S. Census Bureau

U.S. REAL HOUSEHOLD CONSUMPTION EXPENDITURE FOR SERVICES

Fed senior loan officer survey – Net Pct of domestic banks reporting stronger demand for consumer loans

FED SENIOR LOAN OFFICER SURVEY: NET % OF DOMESTIC BANKS REPORTING STRONGER DEMAND FOR CONSUMER LOANS

Source: Federal Reserve – Senior Loan Officer Opinion Survey on Bank Lending Practices

True, the bull story on the American consumer story, which has been acknowledged here previously, is that millennials are now a bigger cohort of the U.S. population than the baby boomers and they have much less debt. “Millennials”, defined as people aged between 19 and 37 (or born from 1982 to 2000), now total 85 million, compared with 74 million baby boomers, defined as those born between 1946 and 1964, according to the Census Bureau’s population estimates (see following chart).

While this is broadly true, save perhaps for student debt, which now totals an enormous US$1.5 trillion, the problem is that the boomers are entering “retirement” with a much greater debt burden than previous generations.

U.S. POPULATION BY AGE AND GENERATION

Source: U.S. Census Bureau

THE BURDEN OF DEBT FOR AGING AMERICANS

Americans who are 60 or older owed about US$615 billion in credit cards, auto loans, personal loans and student debt as of 2017, up 84% since 2010, the biggest increase of any age group, according to the TransUnion data compiled for The Wall Street Journal (see The Wall Street Journal article: “Over 60, and crushed by student loan debt” [paywall], Feb. 2, 2019).

Student loan borrowers in their 60s, for example, owed an average US$33,800 in 2017, up 44% from 2010. So, student debt is spread across age groups. Thus, the New York Fed data shows that 6.5% of the student loans were owed by Americans aged 60 or above at the end of 2018, up from 1.8% in 2004 (see following chart). Indeed such data is why many baby boomers cannot afford to retire, assuming they want to.

SHARE OF STUDENT LOANS BY AGE GROUP

Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax

CAN STRONG WAGE GROWTH BALANCE OUT DEBT?

The conclusion from all of the above is that the resilience of U.S. consumption should not be taken for granted despite the seeming improving trend in wage growth. U.S. average hourly earnings growth for private employees rose from 2.3%YoY in October 2017 to 3.4%YoY in February 2019 and was 3.2%YoY in March (see following chart).

Meanwhile, the capex trend remains far from robust while share buybacks have continued to surge. Indeed surging share buybacks have been the chief beneficiary of Donald Trump’s tax reform. In terms of capital spending, real non-residential private fixed investment, excluding mining investment, rose by 4.6%YoY in 1Q19, down from 6.6%YoY in 4Q18 (see following chart).

S&P500 share buybacks rose by 63% YoY to US$223 billion in 4Q18, the fourth consecutive record high. For the whole year, S&P500 share buybacks increased by 55% to a record US$806 billion in 2018, 37% above the previous record of US$589 billion reached in 2007 (see following chart).

U.S. AVERAGE HOURLY EARNINGS GROWTH FOR PRIVATE EMPLOYEES

Source: US Bureau of Labour Statistics

U.S. REAL PRIVATE NON-RESIDENTIAL FIXED INVESTMENT EXCLUDING MINING INVESTMENT

Source: CLSA, Bureau of Economic Analysis

S&P500 SHARE BUYBACKS

Source: S&P Dow Jones Indices

CONTINUING DECLINE IN SMALL BUSINESS OPTIMISM

The other point to be aware of is the renewed decline in America’s NFIB Small Business Optimism Index after the spike to an all-time high which occurred last year followed Trump’s tax reform, higher than under Ronald Reagan in 1980s.

The index peaked at 108.8 in August 2018 and has since declined to a two-year low of 101.2 in January and was 101.8 in March. It is interesting to note that within the aggregate index, the components measuring capital spending plans and hiring plans are trending down again. Thus, the capex plans and hiring plans components declined from 33% and 26% in August 2018 to 27% and 18% in March. This needs to be watched closely in coming months.

U.S. NFIB SMALL BUSINESS OPTIMISM INDEX

Source: CEIC Data, National Federation of Independent Business (NFIB)

All of the above suggests there is a lot of potential for U.S. data to weaken in the coming quarters regardless of what happens on the U.S.-China trade dispute. If this is yet another reason for the Donald not only to agree to a deal, but also to drop the existing tariffs, it is also the case that the American president will be quick to blame the Fed if the U.S. data does indeed start to disappoint. That will, in turn, create political pressure on the Powell Fed to do what it is going to do anyway sooner or later, which is to cut interest rates.

What about the risk that the Donald’s continuing pressure on the Fed, with his comments in early April that the Fed should “drop rates”, will stop Powell from acting for fear that he no longer looks “independent”? I would not be concerned. The Fed has never in reality been “independent” of the executive, even allowing for the vaunted separation of powers under the American constitution. The reality is that G7 central banks are no more “independent” than central banks in the emerging world but their policies are a lot less orthodox than their emerging market counterparts!

Published:5/2/2019 10:08:03 AM
[Markets] An Early Gain Faded for the Dow. The S&P Is What to Watch. The Dow Jones Industrial Average briefly looked set to bounce back one day after suffering its worst loss since April 9, but the gain vanished even before the start of regular trading. Published:5/2/2019 8:35:00 AM
[Markets] DowDuPont profit slumps 28 percent, hit by lower chemical demand Formed in 2017 by the $130 billion merger of chemical giants Dow Chemical and DuPont, DowDuPont is now in the process of splitting into three separate business units - Dow, DuPont and Corteva Agriscience. It posted a 24 percent drop in core earnings from operations, in line with estimates, hurt by lower chemical prices. DowDuPont reaffirmed its full-year core earnings target of $2.8 billion for agricultural seeds and chemicals business Corteva. Published:5/2/2019 7:04:49 AM
[Markets] Stocks Drift Lower As Rate Cut Bets Slide On Hawkish Fed

With key Asian markets (China and Japan) closed for the second day in a row, Europe’s share markets struggled early on even as US equity futures levitated form session lows...

... after the Fed crushed hopes that it is preparing its first interest rate cut in years, as Powell said inflationary pressures were "transitory", sending 2019 rate cut odds sliding.

As a result, stocks were mixed on Thursday as, in Bloomberg's words "investors switched their focus from monetary policy back to company earnings and the outlook for global trade". The dollar was little changed, while treasury yields continued their ascent.

Starting off the overnight session, Asian trading was thinned by holidays in Japan and China but Hong Kong and Korea’s stocks gained after CNBC reported the U.S. and China could announce a long-awaited trade deal by May 10, as Chinese Vice Premier Liu He heads to Washington. Though now expected by markets if confirmed, it would remove significant uncertainty that has weighed on markets and global data for a year now.

“I would still expect some relief rally once the deal gets done. The question is how big that move might be,” State Street GM’s Metcalfe added.

Following the subdued Asian action, Europe’s basic resource stocks led the downward shift in equities with a 1.4 percent drop to their lowest since late March.  Continental Europe was also trying to get back up to speed having been shut for holidays on Wednesday. Oil and metals markets added to the pressure on stocks on Thursday with traders sending copper to a 2-month low while news of record US production sent the price of oil sliding after a 33% rise this year.

Elsewhere Turkey’s lira remained under pressure near the 6 per dollar mark after data there had showed manufacturing activity contracting for the 13th month in a row. Euro zone factory activity also contracted for a third straight month. “Demand shortages were again evident in the Turkish manufacturing sector in April, while currency weakness led to inflationary pressures building again,” said Andrew Harker, associate director of IHS Markit.

But the biggest driver of risk on Thursday was the reaction to the Fed, where for all the intense political pressure to ease policy and the mixed growth/inflation data, the central bank held the line on Wednesday and refused to signal anything other than it was still on pause as Reuters put it.

Although the Fed made the predicted 5 basis point cut to the interest it pays on banks’ excess reserves – a technical move to ease money market tightness as it runs down its balance sheet - chair Powell was unwavering on the rate outlook and said the recent relapse in inflation rates was likely temporary.

“The market has gotten perhaps ahead of itself in quite confidently pricing in (U.S) interest rate cuts,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets. “Powell was quite dismissive of the latest downturn in inflation... which I think has caused the market to reassess that a little bit.”

Emerging markets steadied from Wednesday’s knee-jerk sell-off as the US spike slowed down, and investors weighed the Fed’s comments for clues on the global-growth outlook. The EM benchmark index rose for a second day, while an index developing-nation currencies was little changed, as the focus turned to the next big catalyst for risk sentiment - the U.S. jobs report due Friday.

In rates, most government bonds in Europe initially tracked the slide in Treasuries, though they reversed declines to edge higher after data showed the euro area’s manufacturing slump extended into a third month. Dollar bonds of shorter tenors from Ukraine to Turkey advanced, with money managers saying the asset class has received a new lease of life from the Fed’s pause on rate moves.

The Bloomberg Dollar Index was little changed after rising 0.1 percent on Wednesday; the dollar index drifted around 97.600 against its set of major currency peers after going as high as 97.728 and hovering around $1.1211 to the euro and $1.305 to Britain’s pound after the Bank of England kept its rates on hold. An increase in Treasury yields helped to narrow the premium on emerging-market sovereign bonds. Manufacturing data from Asia suggested the worst may be over for the region. “Emerging-market credit is holding up reasonably well,” BlueBay strategist Tim Ash told Bloomberg. “It is emerging as the asset of choice in the EM space as people feel nervous about investing in local currencies and local markets given enduring dollar strength and the U.S.-EM growth differential."

In commodities, the drop in oil prices came after US crude production output set a new record, though the losses were capped by the intensifying crisis in Venezuela and the stopping of Iranian oil sanction waivers by Washington. US crude was last off 27 cents at $63.32 a barrel while Brent slipped 33 cents to $71.86. Copper was at a two month low after a heavy tumble on Wednesday, while spot gold was marginally weaker at $1,271.55 an ounce.

Looking at today's calendar, durable goods orders, factory orders and initial jobless claims are due. Scheduled earnings include DowDuPont, Gilead Sciences and Cigna.

Market Snapshot

  • S&P 500 futures up 0.2% to 2,927.25
  • STOXX Europe 600 down 0.3% to 389.82
  • MXAP down 0.02% to 162.64
  • MXAPJ up 0.1% to 540.16
  • Nikkei down 0.2% to 22,258.73
  • Topix down 0.2% to 1,617.93
  • Hang Seng Index up 0.8% to 29,944.18
  • Shanghai Composite up 0.5% to 3,078.34
  • Sensex up 0.2% to 39,093.26
  • Australia S&P/ASX 200 down 0.6% to 6,338.41
  • Kospi up 0.4% to 2,212.75
  • German 10Y yield rose 1.9 bps to 0.032%
  • Euro up 0.2% to $1.1215
  • Brent Futures down 0.8% to $71.59/bbl
  • Italian 10Y yield fell 2.9 bps to 2.184%
  • Spanish 10Y yield rose 0.8 bps to 1.009%
  • Brent Futures down 0.8% to $71.59/bbl
  • Gold spot down 0.5% to $1,270.65
  • U.S. Dollar Index down 0.1% to 97.55

Top Overnight Headlines from Bloomberg

  • It’s possible for U.S. and China to announce a trade deal by May 10 as Chinese Vice Premier Liu heads to Washington for further talks next week, CNBC reported, citing people familiar with matter
  • Theresa May and her arch political rival Jeremy Corbyn are both signaling they may be edging closer to a Brexit deal after a month of talks between their teams that seemed to be going nowhere
  • U.K. Prime Minister May fired her defense secretary for revealing secret discussions about Huawei Technologies’s role in Britain, as she attempted to assert control over a government that has become dominated by the battle to succeed her
  • BOC Governor Stephen Poloz said he still believes policy interest rates would likely need to rise if the slew of factors slowing the expansion vanish
  • European Union warned about greater transatlantic political tensions after President Trump decided to let U.S. citizens file lawsuits over property confiscated in Cuba during the 1959 revolution
  • Federal Reserve Chairman Jerome Powell pushed back against pressure for interest-rate cuts from traders and President Donald Trump, saying inflation will rebound and the economy will stay healthy without fresh help from the central bank
  • The Federal Reserve’s message of patience this week further relieves pressure on “resilient” economies across Asia, said a regional body
  • The euro area’s manufacturing slump showed tentative improvement in April as Italy’s contraction slowed markedly and French industry stopped shrinking

Asian equity markets were mixed as the region partially shrugged off the negative lead from US where all major indices were pressured, and the S&P 500 snapped a 3-day streak of record closes after Fed Chair Powell downplayed prospects for looser policy at the post-FOMC presser. ASX 200 (-0.6%) traded negative with the index led lower by financials after AMP Capital reported net cash outflows widened in Q1 and with ‘Big 4’ bank NAB also weighed after it lowered its interim dividend by 16%. Elsewhere, both KOSPI (+0.4%) and Hang Seng (+0.8%) recovered from early losses on return from Labour Day holidays amid US-China trade optimism as reports suggested a trade deal could be possible by the end of next week, while China also recently announced several measures to open up its financial sector to foreign companies in a concession to the US. As a reminder, Japan and mainland China remained closed for holidays.

Top Asian News

  • Huawei is Said to Hold Fixed-Income Investor Meetings in Asia
  • Naval Ships Deployed as India Braces for Worst Storm Since 2014
  • AIA Hits High After China Plan to Open Up Financial Industry

Major European indices have traded indecisively this morning [Euro Stoxx 50 -0.3%], as the region struggles to find direction post-FOMC where US indices were subdued but Asia did manage to somewhat shrug off the negativity. It is also worth bearing in mind that markets are playing catchup due to yesterday Labour Day holiday for much of Europe which may account for some of the volatility. Sectors are subdued this morning, although there was some mild outperformance in Healthcare and utility names at the open. This morning’s notable earnings release came from Shell (+2.3%) who beat on their Q1 adj. profit and have begun the next tranche of their share buyback programme, with the heavyweight lifting energy names higher in-spite of lower oil prices. Separately, Volkswagen (+4.5%) are towards the top of the Stoxx 600 after beating on Q1 revenue and confirming their FY outlook for car sales. Also of note are Bayer (+3.3%) whose share prices are supported this morning by the US Environmental Protections agency stating that glyphosate is not a carcinogen. Elsewhere Lloyds (-1.0%) are in the red post-earnings as the Co’s Q1 statutory pre-tax profit missed on Co. complied estimates, Lloyds have also made an additional PPI provision of GBP 100mln.

Top European News

  • Volkswagen Gains After Profit Rises, Confirms Annual Targets
  • Watches of Switzerland Considers IPO as Apollo Reduces Stake
  • Deutsche Bank Said to Have Virtually No New Plan for What’s Next

In FX, although the Greenback has a lost a degree of its post-Powell recovery momentum, the index remains above 97.500 and on a more stable footing as the Fed chair refrained from flagging any shift towards a rate cut or even a hint that soft inflation could tip the policy balance from neutral to dovish. In fact, after the 5 bp IOER reduction he stressed that the move was technical rather than fundamental and repeatedly downplayed slowing price developments as transitory. Hence, the DXY has rebounded from sub-97.200 lows and just above a Fib support level (97.121), albeit with the Buck now mixed vs G10 peers.

  • EUR - The single currency has drawn a bit more encouragement from the run of Eurozone manufacturing PMIs, as all bar Germany posted better than expected headlines, including Italy that rebounded relatively firmly following a return to GDP growth in Q1. Eur/Usd is back above 1.1200 as a result having probed a few pips below the 200 HMA at 1.1194, but the headline pair may be hampered by heavy option expiry interest stretching from 1.1200-10 through 1.1225-40 and up to 1.1250 (1.5 bn, 2 bn and 1.1 bn respectively). Moreover, chart resistance could cap the upside given the 30 DMA at 1.1236 and a Fib at 1.1242.
  • NZD/AUD - The Kiwi and Aussie are marginally outperforming vs major counterparts amidst reports that a US-China trade accord may be in the offing as soon as next week and at the end of the next talks to take place in Washington, with Beijing said to be offering concessions in return for a recent olive branch from the US. Nzd/Usd is hovering between 0.6620-39 and Aud/Usd within a 0.7012-29 range as the Aud/Nzd cross sits just under 1.0600 and attention down under turns towards next week’s RBNZ and RBA policy meetings (notwithstanding NFP tomorrow of course). Both rate calls are seen tight with swap pricing not far from evens for easing, but as NAB contends that it may be to early for the RBA options are indicating higher break-evens as a result (circa 80 pips).
  • GBP/CAD/CHF/JPY - All on a more even keel vs the Greenback, with Cable straddling 1.3050 and braced for BoE super Thursday after only deriving modest support from a return to growth in the UK construction sector. However, the Pound is consolidating gains relative to the Euro over 0.8600 amidst some talk that 1 MPC voter could break ranks and switch into hike mode – full preview on the headline feed and via the Research Suite. Conversely, the Loonie is struggling to hold above 1.3450 against the backdrop of ongoing weakness in oil prices, while the Franc is back down near 1.0200 and sub-1.1400 against the Euro in wake of weak Swiss retail sales and a contractionary manufacturing PMI. The Yen has also retreated from Wednesday’s pre-FOMC peaks through 111.50 and the 30 DMA (111.42) into decent option expiries (1.2 bn between 111.50-55).
  • NOK/SEK - Disappointing Scandi manufacturing PMIs vs consensus and previous readings have soured sentiment to a degree, but Eur/Nok has also been driven higher by the aforementioned crude retracement, to 9.7400+ at one stage vs Eur/Sek topping out just shy of 10.7050.

In commodities, Brent (-1.0%) and WTI (-0.9%) prices are lower, with oil prices subdued as this week's large crude stockpile builds overshadows Iranian waiver woes and Venezuela concerns, although some of downside in the complex could be attributed to a firmer post-FOMC Dollar.  In terms of recent newsflow Russia’s April oil production stood at 11.23mln BPD vs. 11.3mln in March, with these levels being relatively in-fitting with recent IFX reports. Additionally, the Russian Energy Ministry have stated that they are to keep May's production in-line with the prior agreements; which was agreed at a reduction of 228k BPD (from the October baselines of 11.4mln BPD) in the OPEC pact. Gold (-0.5%) was also afflicted by the surge in the Dollar, with the yellow metal unable to recover from this downside, in spite of the Buck easing off highs, and is currently trading firmly at the bottom of its USD 7/oz range. While copper prices are still around 2-month lows as the red metal is missing the support of its largest buyer China which is on Labour Day holiday for the remainder of the week.

US Event Calendar

  • 7:30am: Challenger Job Cuts YoY, prior 0.4%
  • 8:30am: Initial Jobless Claims, est. 215,000, prior 230,000; Continuing Claims, est. 1.66m, prior 1.66m
  • 8:30am: Nonfarm Productivity, est. 2.2%, prior 1.9%; Unit Labor Costs, est. 1.5%, prior 2.0%
  • 9:45am: Bloomberg Consumer Comfort, prior 60.8
  • 10am: Factory Orders, est. 1.5%, prior -0.5%; Factory Orders Ex Trans, prior 0.3%
  • 10am: Durable Goods Orders, prior 2.7%; Durables Ex Transportation, prior 0.4%
  • 10am: Cap Goods Orders Nondef Ex Air, prior 1.3%; Cap Goods Ship Nondef Ex Air, prior -0.2%

DB's Jim Reid concludes the overnight wrap

Needless to say, the focus yesterday in markets was on the Fed meeting, and though the eventual outcome was broadly in line with expectations, we did finally see a return of some volatility after the statement’s release and subsequent press conference. The only change in policy was a 5bps cut to the IOER, though that was just a technical adjustment and not a monetary policy signal. The S&P 500 initially rallied on dovish expectations, but then retraced to end the day -0.75% lower for the biggest decline since March as Powell spoke hawkishly about the inflation and growth outlook at his press conference.

Indeed, markets made a bit of a u-turn between the statement and press conference. First, Treasury yields fell as much as -4.9bps to touch 2.453% and the S&P 500 advanced as much as +0.29% to a new intraday all-time high. The reason for the rally was the initially dovish Fed statement, which contained few changes but did change the assessment on inflation from “near 2%” to “have declined and are running below 2%.” That was interpreted as a signal that the committee is more concerned about weak inflation data, which could be a catalyst to justify a rate cut in the near or medium term. However, in his press conference, Powell emphasized that recent inflation weakness is expected to be “transient or idiosyncratic” and that he doesn’t see a strong case for a move in either direction.Even when prompted about how he would respond to a downside surprise, he explicitly stopped short of endorsing a rate cut. He also spoke positively about the growth outlook in China and Europe, and said that financial conditions are accommodative. All in all, he sounded more optimistic about the economy than expected. Our US economists last night reiterated their view that they expect the Fed to remain patient and keep rates steady for the foreseeable future. See their note here .

Powell’s comments caused markets to promptly reprice, with bond yields completely reversing their moves. 10y yields ended the session flat at 2.501%, though they had already fallen earlier in the session after the weak ISM report – more on that below – so they ended net higher after all the Fed drama was done. 2y yields rose +3.8bps and the 2s10s curve, which had steepened over one basis point after the Fed’s statement, retraced to end -4.0bps flatter at 19.3bps. Along with the S&P 500’s retreat, the NASDAQ and DOW ended -0.56% and -0.61%, with losses fairly widespread. In fact, 83% of S&P 500 companies ended lower, the highest ratio in over five weeks and third worst day of the year. The dollar rallied +0.21%, which was +0.53% off its intraday lows, with losses spread evenly between the euro (-0.17%) and a basket of EM currencies (-0.17%). WTI oil prices mirrored the dollar’s move, falling -0.49%, though the big driver was data that showed another large build in US inventories.

This morning Asia has followed in a slightly more mixed fashion, however the various holidays in Japan and China have sapped some liquidity out of the market. Of those open, the Hang Seng (+0.63%) and Kospi (+0.41%) are both up, however the ASX (-0.67%) has retreated. US futures are also slightly positive. The gains in Hong Kong and Korea seem to have got a boost from news out of CNBC that a US-China trade deal is “possible” by next Friday. Politico is also reporting that the two sides are close to an agreement and that the plan being put forward is for the US to remove a 10% tariff on a portion of the $200bn of Chinese imports hit by tariffs, before lifting the rest not long after. However, the article also suggests that a 25% tariff on $50bn of Chinese goods would stay in place longer and possibly until after the 2020 election.

That story comes as US-China trade talks wrapped up in Beijing yesterday. Treasury Secretary Mnuchin confirmed in a tweet that the meetings had been “productive” and that talks between both sides will continue in Washington DC next week. So, we’re nearing the business end of talks at last it seems.

The other highlight for markets yesterday was the US data and most notably that much softer than expected ISM manufacturing report. The 52.8 reading for April came in well below expectations for 55.0 and represented a drop of 2.5pts from March. It was also the lowest reading since October 2016 and it means that the current level is now 8pts below the August 2018 peak. The breakdown was also soft with the employment component dropping over 5pts to 52.4, new orders also down over 5pts to 51.7 and most notably the prices paid component falling over 4pts to 50.0. The associated statement highlighted Mexico/US border crossing delays on numerous occasions as slowing supplier deliveries.

Prior to this and in contrast to the ISM data, we got a much stronger than expected April ADP employment change print (275k vs. 180k expected) which also included upward revisions to the March data. In fact, it was the strongest monthly reading since July 2018 and continues the theme of the labour market still being incredibly strong. A reminder that we’ve got the April employment report tomorrow. The only other notable US data yesterday was the April vehicle sales figures, which fell to 16.4mn, the lowest level since August 2017. That’s still higher than every month from mid-2007 through early 2014, so not a cause for alarm yet.

In Europe, it was only the UK that was open of the main markets, with the FTSE 100 closing -0.44% and Gilt yields falling -3.4bps. Sterling also ended +0.14%, despite the dollar’s broad strength, after the April manufacturing PMI was confirmed at 53.1 – matching the consensus - and therefore down 2pts from March. In addition, mortgage approvals in March were confirmed as declining to 62.3k and the least since 2017. Consumer credit was also the weakest since 2013 at just £0.5bn and therefore continues a declining trend for consumer lending in the UK. All-in-all this just means more confusing data to untangle for the BoE – which as a reminder meet today at lunchtime.

Staying with the UK, the Brexit newsflow is starting to slowly creep back onto our screens. The last couple of days have seen both the Conservatives and Labour talk up recent progress and especially compromise on a customs union, with PM May seen to be pushing for a deal being reached next week and ahead of the EU elections in just three weeks now. It’s worth flagging that the UK local elections are today, where an expected bad result for May will only increase pressure to a reach a deal sooner rather than later.

In other news, the ECB’s Guindos said yesterday that the ECB is “open-minded” to discussions around changing the inflation target, but haven’t yet discussed anything. This is similar to recent comments fellow policy maker Rehn made. This morning we’ve got the final April manufacturing PMIs in Europe where the consensus is for no change in the 47.8 flash reading for the Euro Area. A reminder that this included sub-50 readings for Germany (44.5) and France (49.6) while Italy is forecast to print at 47.8 which is only a marginal improvement on the very soft March reading. Spain is forecast to improve to 51.2. Those readings will be drip fed from 8am BST.

To the day ahead now, where this morning the focus is on those aforementioned final April PMIs in Europe. The focus after that turns to the BoE meeting where no policy change announcement is expected, however our UK economists expect the tone to be marginally hawkish given stronger than expected growth a tight labour market coupled with weaker rate expectations. This afternoon in the US we’ve got another busy slate of data releases with claims, preliminary Q1 nonfarm productivity and unit labour costs, and final March durable, capital and factory orders data all due. We’ve also got comments due from the ECB’s Hansson this morning and then Praet this evening, while from today US waivers on purchases of Iranian oil officially expire. The earnings highlights today include Shell, Volkswagen, DowDupont, BNP and Lloyds.

Published:5/2/2019 7:04:49 AM
[Markets] Since 1980, when stocks surge through April, this is how they do for the rest of the year Since 1980, an S&P 500 return of 10% or greater in the January through April period has been followed by solid full-year returns in the S&P, Dow Jones Industrial Average and Nasdaq Composite. The Federal Reserve's dovish policy in 2019 has been seen as the primary driver of the stock surge. Comments from Fed chairman Jerome Powell on Wednesday that low inflation is "transitory" and an interest rate cut is not warranted sent the Dow down by more than 150 points. Published:5/2/2019 6:39:57 AM
[Markets] 3M to buy Acelity in a $6.7 billion deal, including debt 3M Co. announced Thursday at deal to buy privately held wound care company Acelity Inc. in deal valued at $6.7 billion, including debt, from a consortium of funds advised by Apax Partners, together with affiliates of Canada Pension Plan Investment Board and the Public Sector Pension Investment Board. 3M's stock fell 0.7% in premarket trade. 3M expects to fund the deal, which is expected to close in the second half of 2019, with a combination of cash and new debt. The company estimates the deal to be reduce net earnings by 35 cents a share in the first 12 months, but add 25 cents a share to adjusted earnings. As a result of the deal, 3M lowered its expectations for share repurchases in 2019 to $1.0 billion to $1.5 billion from previous expectations of $2.0 billion to $4.0 billion. "This acquisition bolsters our Medical Solutions business and supports our growth strategy to offer comprehensive advanced and surgical wound care solutions to improve outcomes and enhance the patient and provider experience," said 3M Chief Executive Mike Roman. 3M's stock has slipped 2.4% year to date through Wednesday, while the Dow Jones Industrial Average has climbed 13.3%. Published:5/2/2019 6:05:29 AM
[Markets] Dow and DowDuPont Report Earnings Today. Here’s What to Expect. Dow and DowDuPont are now separate companies, but the separation wasn’t official until the beginning of April. That means this is the last quarter the two can report numbers together, sort of.. Published:5/2/2019 4:34:24 AM
[Markets] No, Stocks Don't Rally on Friday, in January, or at Month's End Or around holidays, when investors might be jubilant headed into a long weekend? Equity returns around different days of the week or when the calendar flips are no better than any other times, according to research in the North American Journal of Economics and Finance, which analyzed calendar anomalies for the Dow Jones Industrial Average between 1900 and 2018. The “‘golden age’ of calendar anomalies was in the middle of the 20th century,” wrote the group of researchers led by Alex Plastun, an economics professor at Sumy State University in Ukraine. Published:5/2/2019 12:36:49 AM
[Markets] Dow, S&P 500 have turned lower in afternoon trade following Fed rate decision Dow, S&P 500 have turned lower in afternoon trade following Fed rate decision Published:5/1/2019 2:03:48 PM
[Markets] Blast From The Past

Authored by Sven Henrich via NorthmanTrader.com,

“Those who cannot remember the past are condemned to repeat it.” – George Santayana

Are market participants poised to learn this lesson the hard way? Perhaps they should listen to a blast from the past, the lessons of Richard Wyckoff.

Who was Richard Wyckoff?

“Richard was an active trader and analyst in the early 1900s, his career coincided with other Wall Street greats including Jesse Livermore, Charles Dow and JP Morgan. Many have called this the “golden age of technical analysis.”

“Richard Wyckoff began his Wall Street career in 1888 as a runner, scurrying back and forth between firms carrying documents. As with Jesse Livermore in the bucket shops, Wyckoff learned to trade by watching the action firsthand. His first trade occurred in 1897, when he bought one share of St. Louis & San Francisco common stock. After successfully trading his own account several years, he opened a brokerage house and started publishing research in 1909. The Magazine of Wall Street was one of the first, and most successful, newsletters of the time.  As his stature grew, Wyckoff published two books on his methodology: Studies in Tape Reading (1910) and How I Trade and Invest in Stocks and Bonds (1924).”

Why may market participants of today want to listen to Richard Wyckoff?  Because he developed this market cycle pattern:

A period of accumulation/consolidation a massive mark-up run, then a bunch of back and forth called distribution, and then note the final new high at the end there, followed by a reversal markdown process that reverses it all.

Does this structure look at all familiar to you? If not, it really should:

Let me overlay lines outlining the larger moves of the past few years onto the chart and you get this:

Remove price and you get this structure:

Now compare this to Wyckoff’s market cycle structure:

Are there some differences? Sure there are, smaller deviations have to be allowed for, the key is the larger structure and it fits the larger $SPX structure quite closely.

The structure suggests that the 2014-2016 time frame was the accumulation phase, the run between 2016 into early 2018 was the mark-up phase and the period since January 2018 has been the distribution phase.

What phase are we in now? Here’s a bit more detail on the final topping phase:

If the pattern is applicable it suggests with current new highs we’re in phase C, the UTAD (upthrust after distribution) test.

The definition:

“Upthrust after Distribution.  This last gasp rally from support occurs occasionally, and will drive the stock price above resistance and the prior price peaks in the distribution trading range. Price rallies with conviction and often has big leaping bars and volume. Once at new highs, price can stay above the resistance area for days to weeks. The conviction of this rally and breakout will attract a following of buyers. After a series of tests, price begins to sink back below the prior peaks and in short order is heading back to the Support area. After a UTAD, price becomes persistently weak to and through support and into a confirmed downtrend”.

Key takeaways:

Phase C is much shorter compared to the previous phases and any new highs will not sustain suggesting that prices above the September 2018 highs are ultimately a selling opportunity.

This process of new highs could be short lived, a matter of days or it could drag out for weeks perhaps even months, but any price advances from here would be limited.

For reference I offer 2015. Prices peaked early in May, frustrated for 3 months and then dropped fast:

But the Wyckoff pattern is suggestive of something more sustained than a quick August 2015 move to come. Rather is suggests not only new lows versus December it suggests an ultimate move back to the accumulation price range meaning back to the 2015 highs or around 2100-2150 $SPX.

What’s the upside risk to stocks here and still fit the pattern? Ironically the price risk range I outlined with the broadening top pattern in Combustion:

Wyckoff’s pattern however does not require for the upper trend line in the chart above to be reached. It can reverse at any time, but strongly suggests some back and forth probing and testing at new highs first before a confirmed breakdown.

The main message of the pattern goes to the question of sustainability of new highs which I recently discussed in my most recent video analysis:

How will we know if the pattern applies to our markets today?

When we see evidence that the break above the September 2018 highs on $SPX does not sustain and price falls back below the 2940 area and then fails to regain it. Then the pattern suggests that the 2019 gains will not only be given back, but that new lows are to come. A price destination that the broadening top pattern is also suggesting.

Until then: Party hardy at your own risk. But remember: “Those who cannot remember the past are condemned to repeat it.” – George Santayana

*  *  *

For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

Published:5/1/2019 12:59:26 PM
[Markets] Apple's stock set to single-handedly lift the Dow by 70 points at open Apple's stock set to single-handedly lift the Dow by 70 points at open Published:5/1/2019 8:07:13 AM
[Markets] Futures Jump On Apple Surge; Fed Looms In Holiday-Muted Session

The tremors unleashed by Google's earnings debacle and China's disappointing PMIs just over 24 hours ago are now long forgotten as trader focus shifts to Apple's strong guidance (if not 17% drop in iPhone sales and 22% plunge in China revenues), helping push the global rally into a fifth month and US equity futures to a fresh record high, even as potential disappointment looms should the FOMC come out more hawkish than expected. At least there will be fewer traders to be disappointed: most of Asia and Europe was shut for the May day holiday. Meanwhile, out of equities, bonds continue to disagree with the algos' optimism as treasury yields slumped below 2.50% again, while the dollar dipped ahead of the Federal Reserve’s policy decision.

The MSCI world equity index was up 0.1% in early trading after rising to its highest since early October, although May Day holidays across Asia and Europe meant trading was thinner than usual with China, Hong Kong, India, Japan, Singapore, South Korea and Taiwan all shut, and only the UK and Denmark open in Europe.

In a sign of the growing appetite for riskier assets, Australian shares ended just shy of an 11-year peak and London’s blue chip FTSE 100 was up 0.2 percent after solid earnings from supermarket chain Sainsbury’s.

Apple's strong guidance which came against a disappointing background of the second consecutive revenue decline...

... helped rally US index futures and Apple's global suppliers and pointed to a rebound for American technology shares, which had slumped in the wake of Google’s revenue miss. Stocks in the U.K. turned lower after data showed manufacturing growth slowed in April, though the pound held gains. Australian equities climbed, while the New Zealand dollar fell after unexpectedly weak labor data.  In the UK, Pearson fell after US textbook peers McGraw-Hill Education and Cengage Learning were said to plan a merger. The pound rose to fresh gained to fresh 2 week highs against the dollar.

For those traders who did make it to work today, there is plenty to keep them busy: Beijing and Washington began their latest talks aimed at ending a bitter trade war and Fed chairman Jerome Powell was due to speak later following the central bank’s two-day policy meeting.

Indeed, all eyes turn to the Marriner Eccles building at 2pm today, and Powell's subsequent press conference following the U.S. rate decision. “The risk for this Fed meeting is that, unless the FOMC meets the market’s dovish expectation for their stance, we would expect another leg higher in USD,” Mizuho strategists said in a note. As we previewed last night, the Fed expected to leave US rates unchanged amid a "goldilocks" economy, although there is a modest chance of an IOER cut. That said, the market remains convinced a rate cut is coming by December 2019.

A call from U.S. President Donald Trump for a cut in interest rates will likely be unheeded when the results of the Fed’s two-day meeting are released, but the unorthodox comments made on Twitter will increase focus on Powell at his press conference shortly after.

“We expect the Fed to reiterate their still patient stance, as they announced at the start of the year,” Stifel chief economist Lindsey Piegza told Bloomberg TV. “We also expect the Fed to re-characterize their expectation for growth at a somewhat tempered level, but still very positive.”

Corporate earnings and developments in the trade conflict between America and China are also on the radar, with U.S. Treasury Secretary Steven Mnuchin calling the latest round of meetings “productive.” Bullish investors are looking for fresh reasons to push the S&P 500 Index higher after it closed Tuesday at another record.

Additionally, with the whole "sell in May" mantra at their backs, trader caution is building ahead of the summer lull with investors questioning how much longer the rally across global equities can last with better economic data and a stabilization in earnings priced in. “Historically the more difficult half of the year starts today,” said Ian Williams, economics and strategy research analyst at Peel Hunt. “The next six months will present plenty of geo-political challenges.”

In FX, the U.S. dollar was down slightly, trading in a tight range after hitting a one-week low ahead of the Fed news. The Swiss franc and pound led gains among G-10 currencies as the dollar reversed an earlier advance ahead of the FOMC decision. Moves were muted as many markets in Europe and Asia were closed for holidays and traders were in a holding pattern before the Fed. The New Zealand dollar fell after weaker-than-forecast labor-market data caused investors to increase bets on an interest-rate cut as soon as next week.

Elsewhere, commodities were mixed with base metals prices rising on hopes of a breakthrough in the U.S.-China talks, while crude oil prices eased as data showed a rise in U.S. inventories. Brent crude oil futures were at $71.55 per barrel, down 0.8 percent, while U.S. West Texas Intermediate (WTI) crude futures were down 1.1 percent at $63.23 per barrel.

The Federal Reserve’s policy decision is due, along with manufacturing data from ISM and Markit. Scheduled earnings include Qualcomm, CVS Health and Estee Lauder.

Market Snapshot

  • S&P 500 futures up 0.4% to 2,959.25
  • STOXX Europe 600 up 0.09% to 391.70
  • MXAP up 0.2% to 162.60
  • MXAPJ up 0.3% to 539.76
  • Nikkei down 0.2% to 22,258.73
  • Topix down 0.2% to 1,617.93
  • Hang Seng Index down 0.7% to 29,699.11
  • Shanghai Composite up 0.5% to 3,078.34
  • Sensex down 0.09% to 39,031.55
  • Australia S&P/ASX 200 up 0.8% to 6,375.89
  • Kospi down 0.6% to 2,203.59
  • German 10Y yield rose 1.0 bps to 0.013%
  • Euro up 0.1% to $1.1227
  • Brent Futures down 0.8% to $71.48/bbl
  • Italian 10Y yield fell 2.9 bps to 2.184%
  • Spanish 10Y yield fell 1.2 bps to 1.001%
  • Brent Futures down 1.8% to $71.48/bbl
  • Gold spot down 0.2% to $1,281.13
  • U.S. Dollar Index down 0.04% to 97.44

Top Overnight Highlights

  • The latest round of U.S.-China talks wrapped up in Beijing, with U.S. Treasury Secretary Steven Mnuchin calling the meetings “productive” in a tweet. Negotiations will continue in Washington next week, Mnuchin said after Wednesday’s round concluded slightly later than scheduled
  • Fed policy makers may decide Wednesday that falling inflation reinforces a message of caution on interest-rate moves, rather than bowing to President Donald Trump’s demands for drastic action to boost the U.S. economy
  • U.S. Attorney General William Barr will face new scrutiny from lawmakers on Wednesday after a revelation surfaced that he misrepresented Special Counsel Robert Mueller’s findings about whether Trump obstructed justice
  • The U.K.’s main opposition Labour Party predicted Prime Minister Theresa May will have to accept a customs union with the European Union as the price for getting her Brexit deal ratified in Parliament
  • New Zealand hiring unexpectedly fell in the first quarter and wages rose at a slower pace, adding to signs that the jobs market isn’t generating significant inflation pressure

A quiet tone was observed in Asia-Pacific amid closures in nearly all the major regional bourses for Labour Day, although US equity futures were underpinned after-hours following Apple earnings in which the tech giant beat on top and bottom lines, authorized an additional USD 75bln share repurchase and raised its dividends by 5%. ASX 200 (+0.8%) was positive with the index led higher by tech on contagion from Nasdaq futures and with financials buoyed as ANZ shares rallied nearly 3% after its H1 results, while reports that the US dropped a key demand regarding cyber theft in an effort to accelerate a trade deal with China also added to the optimism although most of the region failed to capitalize with China, Hong Kong, India, Japan, Singapore, South Korea and Taiwan all shut.

Top Asian News

  • Mnuchin, Lighthizer Conclude ‘Productive Meetings’ With China
  • Japan’s New Emperor Naruhito Ascends World’s Oldest Monarchy
  • China Further Opens Financial Industry on Eve of Trade Talks
  • Qantas CEO Alan Joyce Commits to Three More Years at the Helm

Mass closures in Europe have extended the quiet tone seen across Asia, with only UK and Danish markets open today in the EU. The FTSE 100 (-0.1%) is relatively flat with sectors also showing no clear standouts. In terms of movers, Sainsbury’s (+4.7%) rose to the top of the index amidst optimistic revenue and profit numbers, alongside a net debt reduction which is ahead of target. To the downside, Persimmon (-1.8%) shares suffer after fire issues were found in houses developed by the company, the company is addressing the issue. State-side, Apple reported earnings aftermarket wherein the tech giant topped estimates on both top and bottom line, whilst Q3 guidance was also above analyst consensus, despite a sharp drop in Q2 iPhone sales. Apple shares spiked higher in excess of 5% post-earnings.

Top European News

  • Lloyds Gets Capital Relief From Bank of England Risk Change
  • Sainsbury Gets Boost as CEO Clings On After Asda Failure
  • U.K. Mortgage Approvals Decline, Consumers Rein In Borrowing
  • U.K. Manufacturing Growth Slows as Firms Reduce Stockpiling Pace

In FX, Cable extended gains through more chart resistance levels on the way to circa 1.3073, like the 30 DMA (1.3052), a Fib (1.3053) and daily tech formation (1.3065), eyeing 1.3090 next (55 DMA) before the 1.3100 handle. A broadly in line and less stockpile-inflated UK manufacturing PMI amidst mixed BoE mortgage and consumer data was largely shrugged off, but Sterling also eked more upside vs the Euro as the cross eased a bit further below 0.8600 to test bids just ahead of a 50% retracement (0.8583) following more reports about constructive cross party Brexit talks as discussions are put on hold due to Thursday’s local elections. More immediately, focus on the Fed before the BoE tomorrow – see the Ransquawk headline feed for detailed previews of the 2 events. Conversely, weaker than forecast NZ jobs data has raised the stakes in terms of RBNZ rate cut expectations for next week and Nzd/Usd retreated in response through 0.6650, as the Aud/Nzd cross rebounded firmly from around 1.0560 to just over 1.0600. However, the Kiwi has pared some losses since with the probability of an ease still close enough to 50% for reasonable doubt.

  • CHF - Another major outperformer or rather beneficiary of a deeper pull-back in the Dollar ahead of the FOMC, as the Franc edges towards 1.0150 and DXY slips to 97.359, very close to a 97.355 Fib and nearer the 30 DMA (97.216).
  • AUD/EUR - Also firmer vs the Greenback as Aud/Usd consolidates recovery gains around 0.7050 and the single currency builds a foothold above 1.1200. Eur/Usd has eclipsed Fib resistance at 1.1217 and is now approaching convergence at 1.1242 (another Fib and 30 DMA) before 1.1250 and 1.1275 (latter roughly coincides with the 50 DMA).
  • JPY/CAD - Both narrowly mixed vs the Usd, as the Yen attempts to breach the 30 DMA (111.40) and retest Tuesday’s peaks, while the Loonie continues its recovery from yesterday’s post-Canadian GDP lows within a 1.3400-1.3375 range in advance of the manufacturing PMI and more from BoC’s Poloz and Wilkins.

In commodities, the energy market had a stellar performance in April as the benchmarks climbed over 6% amidst intensifying tensions in Venezuela, tightening US sanctions on Iran and ongoing OPEC supply cuts. Ahead of the end of Iranian oil waivers later, oil Journalist Reza Zandi notes that Iranian officials are reportedly discussing three potential Iranian scenarios in OPEC:  1) Iran suspends its membership in OPEC until sanctions are removed, 2) Iran departs from OPEC and 3) Iran continues its membership. In today’s trade, oil prices have reversed a bulk of the April gains following a much wider-than-forecast build in API crude stockpiles (6.8mln vs. Exp. 1.5mln), marking the 4th stock build in April. PVM analysts also highlight the uptrend in US stockpiles which is described as a “deepening pocket of weakness” amid a host of a bullish catalysts. WTI and Brent futures have thus retreated back below/around USD 64/bbl and USD 72/bbl respectively ahead of today’s EIA data wherein the market is geared for a headline build of 1.485mln barrels.  Elsewhere, gold remains within a relatively tight range around 1280/oz ahead of the FOMC rate decision (preview available in the Research Suite) whilst copper mirrors the humdrum tone with most the region away on holiday. Finally, aluminium prices remain pressured following on from the weaker-than-forecast Chinese manufacturing data coupled with producers revising down their demand growth estimates for the year.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -7.3%
  • 8:15am: ADP Employment Change, est. 180,000, prior 129,000
  • 9:45am: Markit US Manufacturing PMI, est. 52.4, prior 52.4
  • 10am: ISM Manufacturing, est. 55, prior 55.3;
  • 10am: Construction Spending MoM, est. 0.0%, prior 1.0%
  • 2pm: FOMC Rate Decision (Upper Bound), est. 2.5%, prior 2.5%
  • Wards Total Vehicle Sales, est. 17m, prior 17.5m

DB's Jim Reid concludes the overnight wrap

Welcome to May, a month which traditionally has been associated with the adage of ‘sell in May and go away’. However, with the S&P 500 having not seen a negative May performance since 2012 and the US expansion now only one more month away from matching the longest expansion ever at 120 months, it feels like it would take a brave person to do that now. The first day of a new month also means we have our latest performance review which you’ll find as a separate document to this and in your inboxes a short while ago. Needless to say April was another strong month for risk assets, and it means we’ve now seen the strongest start to a year through the first four months in the post-GFC era.

The end of the month saw the S&P 500 stick to the playbook after advancing a modest +0.10% yesterday despite some earnings headwinds and intensified concerns over trade. However, the NASDAQ did fall -0.81% as Alphabet tumbled -7.50% and the most since 2012 following that softer than expected earnings report late on Monday. That move erased more than $69 billion of Google’s market cap, which is equal to more than 3x the median S&P 500 company. On the other hand, Pfizer had reported earnings and revenue that beat expectations, propelling the stock up +2.58% and helping the DOW gain +0.15%. After markets had closed, Apple reported strong sales and profits as well, with iPhone sales notably healthy after recent concern over the product’s outlook. The company’s shares were nearly +5% higher overnight, helping NASDAQ futures advance +0.73% this morning. That’s all to report this morning with most of Asia not trading due to public holidays. Meanwhile, the STOXX 600 ended yesterday close to flat (+0.01%) with banks partially retracing their rally from Monday (-0.35%). Peripheral equities and bonds outperformed, led by Spain’s IBEX and Italy’s FTSE MIB, which gained +0.56% and +0.43%, respectively.

Not helping sentiment also was a WSJ article suggesting that the US favoured leaving punitive tariffs in place as a way of enforcing any trade deal. During the US session, Acting White House Chief of Staff Mulvaney said that talks “won’t go on forever” and if they can’t reach a deal soon then “you throw up your hands and say ‘this is never going anywhere.’” So things certainly seem to be approaching an inflection point, but to be fair we’ve heard similar rhetoric before. USTR Lighthizer and Secretary Mnuchin are in Beijing today negotiating, with the Chinese team set to return to the US next week to continue talks. In other US political news, congressional Democrats met with President Trump yesterday to discuss an infrastructure deal and agreed to meet again in three weeks to discuss funding options. That will be the key area of disagreement, since Senate Minority Leader Schumer has already called for a partial rollback of Trump’s signature tax reforms, while Majority Leader McConnell has already rejected that idea. The sides at least agreed that $2 trillion should be the target for the overall plan, which would certainly be a positive for the economy if realized.

While that should hover in the background, the good news is that we’ve got the welcome distraction of a Fed meeting to look forward to this evening. No policy change is expected and our US economists anticipate that the meeting statement and press conference will reflect the dichotomy of improving growth prospects and easy financial conditions on the one hand, and softening inflation pressures on the other. As such our colleagues believe patience in assessing any adjustments to the policy stance will remain the order of the day for the foreseeable future. However the wildcards are further announcements about balance sheet normalization and the potential for a cut to the IOER. The latter became a bit more likely after yesterday’s fed funds fixing rose to 2.45%, which takes it within 5bps below the top of the target range. That’s the level which has prompted the Fed to lower the IOER in the past. For what it’s worth, President Trump was vocal about the Fed again yesterday, criticizing them for “incessantly” lifting rates amid “wonderfully low inflation” and suggested that the US economy would soar “like a rocket” if they cut rates by a full point and did more QE. Anyway, you can see our economists’ full Fed preview here.

Coming back to yesterday, where the other story was the contrasting slew of data releases on both sides on the pond. It started in Europe with a better than expected Q1 GDP reading for the Euro Area at +0.4% qoq (vs. +0.3% expected). The unrounded reading was +0.38% qoq with the data getting a boost from country level readings for France, Spain and Belgium before. At the same time the March unemployment rate also ticked down to 7.7% which is in fact the lowest in the current cycle now, having peaked at 12.1% in 2013. For what it’s worth, the 2007 low was 7.3%. So the labour market is seemingly still extremely robust, which as our European economists noted reduces the chances of manufacturing sector weakness being transmitted to services through an income-induced hit to domestic demand. We should note that Italy also reported a +0.2% qoq GDP reading yesterday which officially means it has emerged from recession.

Also generating some airtime yesterday morning were the country level April inflation readings. There wasn’t any great surprises for the data in France, Spain, or Italy, however the big positive surprise came in Germany where the +1.0% mom print smashed expectations for just +0.5%. That left the annual rate at +2.1% yoy compared to +1.4% in March. There was talk of an unusually large increase in prices for packages around the Easter holidays as explaining the upside surprise, which may result in some payback next month. Nevertheless, Bunds got as high as 0.046% intraday before fading slightly to close +0.9bps higher on the session at 0.011%.

In any case, stronger growth and higher inflation is certainly food for thought for the ECB even if the data in Europe remains a bit noisy at the moment. Meanwhile, there was no shortage of data in the US yesterday either. It started with a +0.7% qoq reading for the employment cost index which matched expectations, while the breakdown didn’t reveal any great surprises, however the private wages and salaries component was a little firmer at +0.8%. Overall, another fairly benign inflation reading however. Even softer though was the April Chicago PMI which tumbled -6.1pts to 52.6 compared to expectations for 58.5. That is the weakest reading since January 2017 which perhaps paints some downside risk for the 55.0 consensus for today’s ISM print, though it’s interesting to note that the Chicago reading has moved in the opposite direction as the ISM in every month so far this year.

The other data out in the US yesterday included consumer confidence, which rose +5pts to 129.2, remaining near its cyclical high. Pending home sales rose +3.8% mom versus expectations for +1.5%, which is the second highest rate since 2010, only eclipsed by January’s print. Some further evidence of firming activity in the housing market, though on the other hand an index of US house prices rose only +3.0% yoy, which was its slowest pace since 2012. Since shelter prices make up 40% of core CPI, this will definitely be an area to watch moving forward.

The end result of all that was for 10y Treasuries to trade in a 4.9bps range but ultimately settle -2.4bps lower at 2.503%. Elsewhere, BTPs rallied -3.0bps. Though there wasn’t a clear driver, euro area inflation expectations also repriced notably higher. The 5y-5y forward inflation swap rate rose +7.2bps, its biggest move since 2015, though it remains somewhat depressed at 1.42%. The USD (-0.39%) faded with EM FX ending +0.18% higher. Speaking of EM, there was some focus on Venezuela yesterday after opposition leader Juan Guadio called for the military to join with him to overthrow the Maduro regime. He was reportedly seen with national guardsmen, but Madura said on Twitter that the military remains loyal to him. Brent crude oil spiked as high as +1.71% before ending the session +1.05% higher, however it has since given up most of that move this morning.

Looking at the day ahead, the obvious focus is on the aforementioned Fed meeting tonight however it’s also another busy day of data releases with March money and credit aggregates data due in the UK this morning along with the April manufacturing PMI, before we get the April ADP employment change reading in the US along with the April ISM and manufacturing PMI, March construction spending and April vehicle sales. Away from that we’re due to hear from the ECB’s Guindos while US Attorney General Barr is due to testify before the Senate on the 2016 election and specifically Russian interference. The earnings highlights today include Qualcomm, GlaxoSmithKline and Kraft Heinz.

Published:5/1/2019 7:00:28 AM
[Markets] The Dow Futures Is Ready to Rise Because Apple Stock Is Ripping STOCKSTOWATCHTODAY BLOG 6:43 a.m. The Dow Jones Industrial Average looks set for a higher open Wednesday morning after (AAPL) (AAPL) reported better-than-expected earnings. Dow futures have advanced 78 points, or 0. Published:5/1/2019 6:29:38 AM
[Markets] Misguided fears mean there’s now a big buying opportunity in health-care stocks Investors in health-care stocks could be forgiven for asking: “What rally?” While the Dow Jones Industrial Average and the S&P 500 index have both soared more than 20% from their Christmas Eve lows, health-care stocks have gained less than half as much. As the S&P (SPX) sets new all-time highs and the Dow (DJIA) approaches its record, the Health Care Sector SPDR ETF (XLV) remains well below its own all-time closing high of $95.87 on Nov. 30. Behind health-care stocks’ underperformance is sheer panic at the emergence of Democratic presidential candidates like Senators Bernie Sanders, Elizabeth Warren and Kamala Harris, all of whom have called for some form of “Medicare for All” that would replace private medical insurance with single-payer coverage from the U.S. government. Published:5/1/2019 5:01:21 AM
[Markets] Blow Off Top: Bay Area Median Home Price Drops For First Time In 7 Years

San Francisco Bay Area homes declined last month on a y/y basis for the first time in seven years, according to CoreLogic.

The median price paid for an existing home in the nine counties (Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano, and Sonoma) was $830,000, down 0.1% compared with March 2018.

The last time prices fell on a y/y basis was March 2012. After that, the Federal Reserve injected several more rounds of quantitative easing that sent home prices soaring for 83 consecutive months. In March 2018, the median home price gained 16.2% over March 2016.

In 2H18, the appreciation rate dramatically slowed due to quantitative tightening, mortgage rate increase, and the start of a synchronized global slowdown.

"It's not that surprising that we hit the wall, at least in terms of a pause," said Andrew LePage, a CoreLogic analyst, wrote in a release.

Glen Bell, a real estate broker with BetterHomes and Gardens Reliance Partners in the East Bay region, said home sales and prices tend to accelerate between February and March as buyers prepare to move before the summer months. He said there was a slight pick up in activity, "but not as strong as last year."

"It reflects a trend that began in mid-2018 when home sales slowed and inventory grew, forcing sellers to be more competitive," LePage said."The year-over-year increase in the region’s median sale price was 16.2% in March last year. But after that, the gains in the median gradually decreased each month and fell to the 2 to 3% range early this year and then disappeared this March."

Sales of homes in the nine counties were 15% lower in March when compared with last year. It was the lowest March in terms of sales in 11 years. Sales have been slowing on a y/y basis for the last 10 months - an ominous sign that not just the top is in, but a quick reversal in price is immient.

Santa Clara County noticed the most significant y/y median home price declines, falling 10% to $1.08 million in March. It was one of the hottest markets on the West Coast, if not the entire country last year - has fallen into a dangerous slump where prices are crashing.

"We've definitely seen some softness and some slowing," said Michael Repka, chief executive and general counsel of DeLeon Realty in Palo Alto.

The total number of homes sold in the nine counties hit 6,124, up 39% from Feburary, but down 14.8% y/y, CoreLogic reported.

The slowdown in home sales and a decline in price last month "mainly reflect buyers purchasing decisions in Feburary," LePage said in the press release. In early 1Q19, the market was recovering from a slowdown in the economy and a volatile stock market from Christmas.

Since Feburary, stock market volatility has dropped, mortgage rates are much lower, and since mid-March, IPOs have been debuting, which could bring more buyers to the market in the coming months.

Jason Nelson, an agent with Alain Pinel/Compass in Mill Valley, said that in Southern Marin, "there might be a slowdown in the market especially on the higher end."

S&P Dow Jones Indices published S&P CoreLogic Case-Shiller Indices Tuesday, indicating that the decline in home prices wasn't just centered in the San Francisco Bay Area, but rather seen across the entire US.

Published:4/30/2019 9:24:56 PM
[Markets] The Dow Is Having Its Best Year Since 1999 The S&P 500 is having its best first four months since 1987. The Dow Jones Industrial Average rose 0.15% to close at 26,592.91. The S&P 500 added 0.10% to end at 2945.83, and the Nasdaq Composite slipped 0.81% to end at 8095.39. Published:4/30/2019 4:53:36 PM
[Markets] GLOBAL MARKETS-Stocks edge up as S&P 500 erases early losses; euro firms Global equity markets edged higher on Tuesday as the Dow and S&P 500 indexes erased early lows caused by weak Chinese business surveys and a tumble in shares of Google parent Alphabet, while the euro strengthened on the heels of data that showed euro zone growth topped expectations. Shares of Alphabet dropped 7.8%, making it the biggest drag on both the S&P 500 and Nasdaq indexes a day after both hit record highs, as the company reported its slowest revenue growth in three years. Published:4/30/2019 3:24:24 PM
[Markets] PVH licensing deal to make Nike-branded men's underwear a 'win-win' for both companies PVH Corp.'s new licensing deal with Nike Inc. to make Nike-branded men's underwear is a "win-win" for both parties, said CFRA analyst Camilla Yanushevsky, because it allows the two companies to leverage each other's audience reach. Meanwhile, PVH's stock fell 0.7% ibn midday trade and Nike shares slipped 0.5%. Earlier, PVH, which owns brands including Calvin Klein, Tommy Hilfiger and Speedo, said the licensing deal if for the design, sourcing, marketing and distribution of Nike-branded underwear. No financial terms were disclosed. Yanushevsky reiterated her buy rating on Nike and $100 stock price target. She said according to her analysis, men are shopping for apparel more than women, "a trend we see continuing through 2021." Shares of PVH have lost 18.8% over the past 12 months while Nike has run up 28.3% and the Dow Jones Industrial Average has gained 9.7%. Published:4/30/2019 11:59:37 AM
[Markets] Apple is biggest loser as Dow drops 130 points early Tuesday Apple is biggest loser as Dow drops 130 points early Tuesday Published:4/30/2019 10:29:26 AM
[Markets] GE's power challenges to continue, but revenue falls less than expected Shares of General Electric Co. shot up 9.9% premarket trade Tuesday on the back of first-quarter results, as the industrial conglomerate's power business continued to struggle, but performed better than Wall Street's expectations. Power revenue dropped 22% to $5.66 billion, but the FactSet consensus was for revenue of $5.33 billion. Orders fell 14% to $4.80 billion, as equipment orders declined 17% to $1.9 billion and services orders slipped about 9% to $2.9 billion. Segment profit fell to $100 million from $300 million, as profit margin decreased to 1.4% from 3.8%. GE said the operating environment in power continues to be challenging, given by "significant overcapacity" in the industry, market penetration and uncertainty in timing of deal closures given complexities of working in emerging markets. GE said in its 10-Q filing that "market factors such as increasing energy efficiency and renewable energy penetration continue to impact our view of long-term demand." GE's stock has tumbled 28.1% over the past 12 months through Monday, while the Dow Jones Industrial Average has gained 9.9%. Published:4/30/2019 6:52:46 AM
[Markets] Dow Futures Are Going Nowhere but General Electric Is Soaring Following Earnings STOCKSTOWATCHTODAY BLOG 6:52 a.m. The Dow Jones Industrial Average looks set for a quiet open Tuesday, even as General Electric stock soars following its better-than-expected earnings. Dow futures have ticked up 16 points, or 0. Published:4/30/2019 6:20:02 AM
[Markets] S&P Hits Record High, Most Overbought Since VIXmageddon

The last time the S&P 500 was at a record high and this overbought was January 2018 - right before the world fell out of the bottom of VIX shorts...

And remember, VIX traders have never been shorter vol than they are now...

Notably, extending last week's decoupling, VIX was higher as stocks rose today... The last time we saw this was January 2018's melt-up as buyers bid up vol on the back of call options

Ignore this...

"Probably nothing"

After the worst week in six months last week,  Chinese stocks were very mixed overnight with ChiNext dumping and the big cap SSE50 rallying...

Notably, SHCOMP broke below the 3100 level and its 50DMA...

 

The day started ugly for Spain after their elections but a magic bid arrived across Europe and lifted everything back to breakeven by the close...

 

After Friday's late-day melt-up, was there ever any doubt that the S&P 500 would break to record intraday highs...

 

Small Caps led on the day, Trannies lagged...with the Dow managed to just hold green

 

Treasury yields rose on the day with the long-end the biggest price laggard, steepening 3bps against the short-end (NOTE - Japan on golden week)...

30Y remains well below 3.00% though.

 

The slide in the dollar continues (albeit modestly)...

 

Cryptos were mixed with Bitcoin and Ether higher, Bitcoin Cash and Litecoin lower...

 

Copper and Crude managed gains as gold (and worse silver) slipped lower (despite a flat dollar)...

 

Finally, we ask a simple question - if everything is so awesome (which it 'clearly' is, just ask stocks), why are markets pricing in 29bps of rate cuts in the rest of 2019?

 

Published:4/29/2019 3:16:50 PM
[Markets] DowDuPont Is Splitting Into 3 Companies. Here’s Everything You Need to Know. Dow will be dedicated to commodity chemical production, DuPont to specialty chemical production, and Corteva will be dedicated to agricultural chemicals. Published:4/29/2019 10:46:50 AM
[Markets] S&P 500 hits record high on upbeat consumer spending, earnings optimism The benchmark index crossed its record high of 2,940.91 hit on Sept. 21, a day after hitting another closing record high. At 9:32 a.m. ET the Dow Jones Industrial Average was up 4.92 points, or 0.02 percent, at 26,548.25, the S&P 500 was up 1.36 points, or 0.05 percent, at 2,941.24 and the Nasdaq Composite was up 7.17 points, or 0.09 percent, at 8,153.57. Published:4/29/2019 8:45:38 AM
[Markets] Cooper Tire & Rubber earnings fall below expectations as tariffs weigh, but sales beat Cooper Tire & Rubber Co. reported Monday first-quarter earnings that fell below expectations, hurt by tariffs, higher costs and a higher tax rate, while sales rose more than expected. The stock was still inactive in premarket trade. Net income fell to $7.0 million, or 14 cents a share, from $8.3 million, or 16 cents a share, in the same period a year ago, to miss the FactSet consensus of 17 cents. Sales rose 2.9% to $619.2 million, above the FactSet consensus of $608.1 million, as Americas tire sales grew 6.1% to $515 million to beat expectations of $498.1 million. The company said the tariffs for tires imported into the U.S. from China had a $10 million negative impact on profits, while it also had $3 million of unfavorable raw material costs and $3 million of higher other costs. The tax rate increased to 46.9% from 27.8%, give the impact of final regulations related to tax reform. For 2019, the company lowered the expected charges related to its restructuring in England to $8 million to $11 million from $10 million to $15 million. The stock has shed 5.8% year to date, while the Dow Jones Industrial Average has gained 14%. Published:4/29/2019 6:45:25 AM
[Markets] US Futures Drift Lower As Chinese Stocks Extend Worst Drop Of 2019

US equity futures and European bourses drifted lower, failing to carry over Asian optimism into Monday trading, while Chinese stocks extended the worst weekly loss of 2019 with another 0.8% drop to start the week despite profits at Chinese industrial firms growing for the first time in four months and a strong GDP print, if only superficially, on Friday. Most European markets were mostly in the red, with Italy sliding despite S&P reaffirming Italy's BBB rating late on Friday, while the dollar rose alongside US Treasury yields, while the yen slumped as Japan remains closed for a weeklong holiday.

The MSCI All-Country World Index was flat after the start of European trading, lifted higher by Asian markets (ex China) but pressured by poor European trading. After rising initially, the Stoxx 600 dropped to session lows while the Spain’s IBEX 35 index underperformed peers, down over half a percent after Prime Minister Pedro Sanchez overcame a challenge from nationalists in elections on Sunday. The elections had little immediate impact on the country’s bond market. Shares in Italian banks got a boost and Italian government bonds rallied after S&P Global affirmed Italy’s sovereign credit rating.

Also in Europe, the ECB reported that Eurozone credit growth decelerated markedly despite decent M3 growth, as loan growth to firms decreased to 3.5% in March from 3.8% in Feb, while loans to households stood at 3.2% in March, down from 3.3% in Feb.

Earlier in the session, a similar see-saw pattern was observed in Chinese stocks, which initially moved higher but closed near session lows, down 0.8% after losing 5.6% last week, the worst of 2019.

The latest Chinese data showed industrial profits grew in March after four months of contraction, but analysts said sentiment remained fragile. Economists polled by Reuters expect factory activity in the world’s second largest economy to grow at a steady but modest pace in April.

Australian shares were down 0.4% after hitting an 11-year closing high on Friday, while Seoul’s KOSPI was up 1.4 percent. While Japan’s cash markets are closed for a long national holiday this week, Nikkei 225 futures index in Singapore was 0.9% higher.

Emerging-market stocks headed for their biggest advance in almost two weeks and currencies traded stronger for a second day after the S&P 500 hit a record on Friday while the dollar rally cooled.

In currencies, with Japan on an extended break, currency markets were calm ahead of the FOMC meeting and U.S. jobs numbers. The dollar was 0.2 percent higher against the yen at 111.74, and the euro was up 0.1 percent at $1.1162. The dollar index, which tracks the greenback against a basket of six major rivals, slipped 0.03 percent to 97.985. South Africa’s rand led the gains, set for its best run in almost a month with elections approaching at the start of May. Turkey’s lira edged higher even as Goldman Sachs Group Inc. questioned the central bank’s credibility and predicted losses for the currency over the coming 12 months.  The pound led Group-of-10 currency gains as some strategists predicted the Bank of England to adopt a slightly more hawkish tone at this week’s meeting. The euro held up and bunds slipped amid fading fears of political instability in Spain, with Pedro Sanchez set to return as prime minister after Sunday’s election saw the Socialists emerge as winners.

Monday's directionless trading followed data showing U.S. gross domestic product grew at a 3.2% annualized rate in the first quarter, but the internals were far weaker. Nomura FX strategist Jordan Rochester noted last week’s U.S. GDP was driven by a surge in inventories, government spending, and a big contribution from net trade. “None of those are likely to be sustained, hence why market reaction was limited,” he said in a note to clients. “But overall, the past week has been dominated by higher U.S. equity prices and consequently a U.S. dollar outperformance story. In our view, this week should see a test of that new trend,” he said, referencing upcoming economic data this week.

Investors were mostly on the sidelines ahead of an event-packed week, and were looking forward to the latest Fed meeting and Chinese factory data for further clues on policy direction in the world’s biggest economies.

“For stock traders, it seems that the important catalysts are pointing higher: the U.S. sees strong domestic growth, low inflation keeps the Fed at bay and could potentially trigger a rate cut so it seems that equities have nowhere to go but higher - at least in the short term,” said Konstantinos Anthis, head of research at ADSS.

The March reading for core personal consumption expenditures (PCE), the Fed’s favored inflation measure, is due later on Monday. The central bank’s Federal Open Market Committee (FOMC) will announce its policy decision on Wednesday, with Chair Powell expected to balance the strong domestic growth data against persistent concerns over the global outlook.  Markets will also be looking to global factory activity surveys this week, particularly official and private readings on Chinese manufacturing which will both be released on Tuesday.

Alphabet is the highlight of Monday’s earnings, with Spotify and NXP Semiconductors also reporting. Data on personal income and spending is due.

In commodities, oil prices fell, extending a slump from Friday that ended weeks of rallying, after President Donald Trump demanded that producer club OPEC raise output to soften the impact of U.S. sanctions against Iran. Brent crude fell half a percent to $71.80 per barrel. Spot gold was down 0.3 percent, trading at $1,281.81 per ounce

Market Snapshot

  • S&P 500 futures down 0.1% at 2,939
  • STOXX Europe 600 up 0.1% to 391.55
  • MXAP up 0.3% to 162.56
  • MXAPJ up 0.5% to 540.49
  • Nikkei down 0.2% to 22,258.73
  • Topix down 0.2% to 1,617.93
  • Hang Seng Index up 1% to 29,892.81
  • Shanghai Composite down 0.8% to 3,062.50
  • Sensex up 0.9% to 39,067.33
  • Australia S&P/ASX 200 down 0.4% to 6,359.49
  • Kospi up 1.7% to 2,216.43
  • German 10Y yield rose 1.5 bps to -0.007%
  • Euro up 0.07% to $1.1159
  • Brent Futures down 0.7% to $71.67/bbl
  • Italian 10Y yield fell 10.3 bps to 2.213%
  • Spanish 10Y yield fell 1.9 bps to 1.005%
  • Brent Futures down 0.7% at $71.67/bbl
  • Gold spot down 0.4% at $1,281.70
  • U.S. Dollar Index down 0.02% at 97.98

Top Overnight Headlines from Bloomberg

  • Socialist Sanchez is set to return as prime minister of Spain with his left-leaning allies close to a majority, though he may still rely on Catalan separatists to govern
  • Economic confidence in the euro area dropped for a 10th month in April to the lowest in more than two years, indicating the region may struggle to pick up from its recent slump
  • The next round of China-U.S. trade talks will get under way in Beijing this week with significant issues still unresolved, according to a senior Trump administration official
  • The Bank of England got its Brexit forecasts wrong, according to lawmakers and pundits. Mark Carney would beg to differ, and has defended pre-referendum predictions that a vote to leave would lead to slower growth, a drop in the pound and faster inflation -- all of which transpired
  • China’s largest lenders posted increases in first-quarter profit and higher interest income as authorities encouraged fresh lending to support the economy. Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of Communications Co. and Bank of China Ltd. reported net income rose as much as 4.9 percent in the three months ended March 31
  • Chinese industrial firms’ profits rose 13.9% in March y/y, vs a 14% decline in the first two months of this year combined
  • President Trump urged Japan to end tariffs on U.S. farm products when he met Prime Minister Shinzo Abe, who appears to have deflected the most damaging U.S. demands on trade weeks before the pair are likely to meet again

Asian equities traded mixed despite last Friday’s gains on Wall St where strong Q1 GDP and soft Core PCE Prices suggested a Goldilocks economy and propelled US stock markets to fresh record closes, as this week’s looming risk events and holiday closures restricted upside for the region. ASX 200 (-0.4%) was the laggard amid losses in its largest-weighted financials sector and with energy names also downbeat after a pullback in oil prices, while this week’s array of key releases including Chinese PMI, US NFP, BoE and FOMC announcements also added to the tentative tone. Elsewhere, Hang Seng (+0.9%) was positive after data showed Chinese Industrial Profits recovered in March and with focus on earnings including Agricultural Bank of China which kicked off the Big 4 bank earnings with an improvement in Q1 net, while Shanghai Comp. (-0.7%) was less decisive after the PBoC refrained from liquidity operations and with the mainland only open for the first 2 days of this week. As a reminder, Japan is closed until May 7th.

Top Asian News

  • CIC Said to Estimate 3-4% Overseas Investment Loss for 2018
  • China Firm’s Plunge Is Said to Cost Interactive Brokers Millions
  • Thai Finance Ministry Cuts 2019 GDP Growth, Export Forecasts
  • Goldman Says These Australia Stocks at Risk of Profit Warnings

Major European indices are choppy but overall marginally lower [Euro Stoxx 50 -0.5%], following on from their Asian counterparts ahead of a week with multiple market closures and several key risk events. Sectors are similarly mixed, with some mild underperformance seen in energy names in-line with the complex in general. The IBEX 35 (-0.4%) is lagging its peers this morning following on from the Spanish elections where the incumbent Socialist party emerged as the only one with the potential to form a coalition; within the index utility names are underperforming, which is dragging the utility sector in general down, with some speculation that this may be due to the success of the far right Vox party which secured 24 seats. Downside in utilities likely stemming from pledges by Vox to keep nuclear plants open, which contradicts the incumbent socialist party’s policies of closing nuclear plants and supporting renewable energy, which has been beneficial to Spanish utility names. Notable movers this morning include, Altice (+5.1%) who have reportedly attracted 3 potential bidders for their fibre optic network. Following the dissolution of merger discussions, Commerzbank (+1.6%) have rebutted speculation that the Co. may be sold, stating that they are strong enough alone and their customer relationships remain intact. Elsewhere, Bayer (-2.5%) are down after a spokesman stated that the majority of the Co’s investors voted against ratifying the executive boards 2018 business conduct, for reference the Co. are trading ex-div today.

Top European News

  • Czech Bank Stocks Slump as Babis Mulls Turnaround on Extra Tax
  • Caius Capital Hires Credit Analysts in Distressed-Debt Expansion
  • Opus Jumps to Highest Since January on China-Linked Rail Deal
  • UBS Banker Cleared After Seeing Tip on Eurostar Neighbor’s Phone

In FX, the Greenback has regained some composure after last Friday’s post-data downturn, but remains on a mixed footing vs G10 peers and EM currencies at the start of what looks like a busy/pivotal week on paper at least. First up, more inflation data and the Fed’s preferred price measure in the form of core y/y PCE following softer than expected Q1 reads within the advance GDP release, and then it’s month end on Tuesday with FX rebalancing models suggesting a Usd sell signal that could be countered to an extent by supportive SOMA flows. On to May 1, and the FOMC follows the first NFP proxies for Friday via the ADP survey plus employment readings in the manufacturing PMI and ISM. In the run up, the index is straddling 98.000 in a relatively narrow 98.066-97.917 range, with last week’s new 98.330 ytd peak providing resistance vs support at 97.693 that held on Friday.

  • GBP/EUR/AUD/NZD - Cable continues to display resilience ahead of the 1.2900 handle even though Brexit remains up in the air and talks between the Tory and Labour Party are still grid-locked, but the Pound is still looking toppy around 1.2950 amidst offers at 1.2945 (last month’s low) and with DMAs in close proximity (100 and 200 from 1.2962-65). Similarly, the single currency is finding support off 1.1100 and 2019 lows, as mostly weaker than forecast Eurozone sentiment indicators are countered by a degree of relief post-Spanish election and S&P reaffirming Italy’s BBB rating. Meanwhile, an improvement in Chinese industrial profits and latest US-China trade reports suggesting negotiations are reaching the last stretch are propping up the Aussie and Kiwi circa 0.7050 and 0.6670 respectively.
  • CHF/CAD/JPY - All on a more even keel vs the Usd and in relatively thin confines as the Franc meanders between 1.0200-1.0185 and Loonie roams from 1.3472-51 amidst a further pull-back in crude and ahead of tomorrow’s Canadian monthly GDP and PPI data. Meanwhile, Usd/Jpy has extended its trading parameters, but only to 111.54-77 in the absence of Japanese markets at the start of Golden Week and with strong chart support sub-111.50 as the 30 DMA, 38.2% Fib retracement of April peak to March trough (112.40-109.70) and last week’s low all fall at 111.37.
  • EM - At last some respite for the beleaguered Lira as an improvement in Turkish industrial confidence nudges Usd/Try off near 5.9600 peaks awaiting Tuesday’s CBRT inflation report for more independent impetus. As we reported last night, Goldman Sachs sees EUR/USD declining to 1.10 in the next 3 months and DXY rising to 99.00, while it suggested global growth is unlikely to be strong enough to weigh on the greenback. Furthermore, Goldman Sachs forecasts USD/TRY at 6.25 in 3 months, 6.50 in 6 months and 7.00 in 12 months.

In commodities, Brent (-0.9%) and WTI (-0.5%) prices are subdued in reaction to US President Trump’s comments on Friday that he contacted OPEC and told them to lower oil prices; although, there were subsequent reports that OPEC or Saudi officials have not spoken to President Trump regarding oil prices. However, some of the downside was mitigated by the Baker Hughes total rig count which fell by 21, with oil rigs falling by 20 to 805 in the steepest decline since January. Regarding the Iranian waivers a Trump Official says there is no wind down period or short-term waiver being considered for China’s oil purchases from Iran, and that it should be easy for China to comply as business with the US is more important for them than Iran. Elsewhere, sources report that exports of Nigeria’s Amenam crude oil is currently under a force majeure; these exports are operated by Total and typically equal 100k BPD. Gold (-0.3%) is marginally weaker, although the yellow metal is trading within a relatively narrow USD 5/oz range. After the metal printed its biggest daily gain in over a month on Friday, following US data which was disappointing in-spite of the larger than expected headline GDP print of 3.2%. Elsewhere, China’s Iron and Steel association stated that the industry is at risk from excess capacity which could impact profits in the industry.

US Event Calendar

  • 8:30am: Personal Income, est. 0.4%, prior 0.2%
  • 8:30am: Personal Spending, est. 0.7%; Real Personal Spending, est. 0.3%
  • 8:30am: PCE Deflator MoM, est. 0.3%; PCE Deflator YoY, est. 1.6%
  • 8:30am: PCE Core Deflator MoM, est. 0.1%; PCE Core Deflator YoY, est. 1.7%
  • 10:30am: Dallas Fed Manf. Activity, est. 10, prior 8.3

DB's Craig Nicol concludes the overnight wrap

If markets had the excuse of having too few catalysts to trade off in the last couple of weeks then the same excuse need not apply this week as we’ve got a star-studded line of up events to look forward to. We’ll touch on them in more detail further down but to whet the appetite they include Fed and BoE policy meetings, the latest US employment report, the final PMIs around the world, Q1 GDP in the Euro Area, various inflation readings in the US and Europe, more US and China trade talks and another bumper week of earnings. Last week it felt like the market was having a bit of a tug of war on the global growth narrative particularly with the US versus Europe story and then separately DM versus EM. So, this week could be a very important test and could very well go a long way to answering some of the lingering questions out there at the moment.

All that to look forward to then but in the meantime, it’s straight to the weekend news where the highlight was the election in Spain. With all votes counted, the centre-left PSOE was the clear winner with 123 seats and 28.7% of the vote, up from 85 seats in 2016, with 176 needed for a majority. DB’s Marc De-Muizon notes that this was broadly in line with polls. The centre-right PP gained the second most seats but suffered a huge drop, going from 137 seats to 66 seats. Citizens Party gained 57 seats compared to 32 seats previously while Podemos dropped to 42 seats from 71 previously.

Marc highlights in his report this morning (see here ) that there appears to be only two options to form a government that in Sanchez’s words will be a “pro-EU government, to fortify and not weaken Europe”. One is a PSOE-Podemos alliance supported by regionalist and Catalan independent parties. The other is a PSOE-Citizens alliance. The latter does, however, appear fairly unlikely at this point. In any case parties are unlikely to reach an agreement before June given upcoming regional and European elections, so it’s likely to drag on for some time.

The hasn’t been much of a reaction in the Euro post that result, making a modest +0.08% advance this morning. Risk assets more broadly in Asia are lacking direction meanwhile, with the Hang Seng (+0.78%) and Kospi (+1.07%) making decent gains, but the Shanghai Comp (-0.11%) and ASX (-0.51%) both down. Markets in Japan are closed for an extended holiday-week. Meanwhile bond markets are quiet, and US equity futures are slightly up.

Back to this week where for the Fed on Wednesday, while no policy change is expected, all eyes will be on how Powell and the Committee balance the dichotomy of improved growth prospects and easy financial conditions on the one hand and easy softening inflation pressures on the other – as Friday’s Q1 GDP report details showed (more on that below). Our economists ultimately believe that the Committee is likely to continue to emphasize that the current policy remains appropriate and that patience remains the proper prescription. You can see their full preview here .

As for the data, we’ll warm up with the March PCE report in the US today before China’s official April PMIs become the next focal point early tomorrow morning. The Q1 GDP print for the Euro Area in just over 24 hours’ time follows that where the market is looking for a +0.3% qoq reading. There’s little slowdown as Wednesday follows with the April ISM manufacturing reading in the US before we get the final April manufacturing PMIs in Europe on Thursday. A reminder that the Euro Area reading ‘improved’ to 47.8 when we got the flash albeit with <50 readings for Germany and France, with Italy also expected to post a similar reading. If that wasn’t enough then Friday ends with a bang with the April employment report where our economists expect a slight slowdown for nonfarm payrolls growth to 160k, albeit enough to hold the unemployment rate at 3.8%. They also expect earnings to rise +0.2% mom, which would be enough to hold the year-on-year rate at +3.2%.

There’s also the not-so-insignificant obstacle of 164 S&P 500 earnings reports to get through this week including the likes of Google today and Apple tomorrow. And last but by no means least, Lighthizer and Mnuchin travel to Beijing tomorrow for yet another round of trade talks. However, given that both sides have signalled hope of getting to a draft agreement by the end of next month, these talks may go some way to deciding the fate of that pledge. Interestingly, a Bloomberg story this morning suggests that Trump may walk away from talks with China should he not be satisfied with how talks progress this week.

Plenty to keep us all busy then. Turning now to a recap of Friday’s action, where US equities advanced strongly and treasury yields fell. The S&P 500 ended the week +1.20% higher (+0.47% on Friday) as economic data came in stronger-than expected and earnings reports continued to surprise to the upside. With 230 of S&P 500 companies having reported first quarter results, 78%