Futures Tumble Again On Global Equity Weakness

If yesterday's selloff catalysts were largely obvious, if long overdue, in the form of the record collapse of Espirito Santo coupled with the Argentina default, German companies warning vocally about Russian exposure, the ongoing geopolitical escalations, and topped off by a labor costs rising and concerns this can accelerate a hiking cycle, overnight's latest dump, which started in Europe and has carried over into US futures is less easily explained although yet another weak European PMI print across the board, with UK manufacturing growing at the slowest pace in a year in July as a cooling in new orders and output ended the first half’s "stellar growth spurt", probably didn't help.

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This is how Goldman explained the latest manufacturing surveys out of Europe:

The Euro area final manufacturing PMI printed at 51.8 in July, 0.1pt below the Flash and the consensus estimate (Flash, Cons: 51.9). This implies a flat reading relative to the June print. The French component was revised up relative to the flash (+0.2pt), while the German component was revised down (-0.4pt). The July figure showed a loss of momentum in both Italy and Spain, with the manufacturing PMI easing 0.7pt in both countries (against a consensus expectation of around flat outcomes in July).

The Euro area aggregate Final manufacturing PMI printed at 51.8, 0.1pt below the July Flash owing to a considerable 0.4pt downward revision in Germany, outweighing a 0.2pt upward revision in France.

Relative to the June print, the Final July manufacturing PMI shows a 0.4pt increase in Germany (to 52.4) and a 0.4pt decline in France (to 47.8). The Italian manufacturing PMI fell by 0.7pt (to 51.9) against expectations of a stable reading (Cons: 52.5). The Italian PMI has eased 2pt since its recent peak in April, but otherwise remains close to or above the levels observed since the spring of 2011. Its Spanish counterpart also declined by 0.7pt (Cons: 54.5), but remains robust at a relatively high level of 53.9, close to its highest level since mid-2007. Developments outside the EMU4 were mixed: the Dutch PMI rose 1.2pt (to 53.5) while the Greek PMI declined 0.7pt (as in Spain/Italy) to 48.7. The Irish PMI ticked up 0.1pt and remains very solid at 55.4.

However, one can hardly blame largely unreliable "soft data" for what is rapidly becoming the biggest selloff in months and in reality what the market may be worried about is today's payroll number, due out in 90 minutes, which could lead to big Treasury jitters if it comes above the 230K expected: in fact, today is one of those days when horrible news would surely be great news for the momentum algos.

More importantly even than the noisy jobs number, the Fed will increasingly be looking at the quality composition of jobs (full time vs part time), and whether wages are growing: watch hourly earnings today as the FOMC have shifted towards wages as one of their main criteria for when to become more hawkish. The market is expecting this to stay at 0.2% M/M but the year-on-year number is tipped to increase to +2.2% Y/Y (vs 2.0% previous).

Still, with futures down 0.6% at last check, it is worth noting that Treasurys are barely changed, as the great unrotation from stocks into bonds picks up and hence the great irony of any rate initiated sell off: should rates spike on growth/inflation concern, the concurrent equity selloff will once again push rates lower, and so on ad inf. Ain't central planning grand?

Heading into the North American open, stocks in Europe are seen lower across the board, with peripheral indices underperforming where Banco Espirito Santo (-6.47%) remained in focus and revived investor angst over the stability of the banking system. The broad based sell off saw DAX index fall to within a touching distance of the low printed in mid-April at 9166.53. Of note, front page of the WSJ reads 'hedge funds wager on a fall' saying that many Wall Street money managers who anticipated the US housing bubble see more trouble on the horizon. (WSJ)

Turning to overnight markets, Asian equities are trading lower as a carryover of what we saw yesterday. However, all major bourses are off their respective opening lows and S&P500 futures are up 0.22%. The Asia and Australian iTraxx indices are off the wides of around +4-5bp. Given the sharpness of the EM selloff yesterday, Indonesian USD sovereign bonds have sold off 10bp but there has been some reported buying at the lows. The official Chinese manufacturing PMI was better than consensus estimates (51.7 vs 51.4) and this is also helping risk sentiment recover a bit through the session.

Today’s calendar starts with the final European PMIs this morning. But today’s tone will be largely set by how non-farm payrolls print. The data is due at 1:30pm London. At the same time as payrolls we’ll also get the June personal income/spending numbers which will be accompanied by the PCE data – the June PCE was included in Wednesday’s Q2 GDP data. Following on from all that, we have the non-manufacturing PMI. On the corporate reporting calendar, AXA, ArcelorMittal, SocGen and Chevron will be reporting earnings today.

Bulletin Headline Summary from Ransquawk and Bloomberg

Yesterday’s slide on Wall Street sent jitters through European stocks, with poor earnings and mixed European PMIs eroding sentiment further
Core and peripheral fixed income markets also fell as support seen earlier in the week from coupon payments, redemptions and month-end extensions faded
Volumes remain quiet ahead of today’s Nonfarm Payrolls, expected at 230K, with the unemployment rate expected unchanged at 6.1%
Treasuries decline with global stocks before report forecast to show U.S. economy added 230k jobs in July, with unemployment rate holding at 6.1%.
U.K. manufacturing grew at the slowest pace in a year in July as a cooling in new orders and output ended the first half’s “stellar growth spurt,” Markit Economics said
Euro zone final manufacturing PMI unchanged at 51.8 in July from preliminary 51.9 reading; index is unchanged “only thanks to an improvement in Germany while manufacturing activity in Spain, Italy and France seems to be weakening,” according to Bloomberg Economics
The euro-area units of OAO Sberbank and VTB Group, two Russian lenders targeted by a fresh round of EU sanctions, can maintain access to ECB funding as long as they don’t channel the funds back home
Across much of the euro area, young adults are worst hit by wage deflation or stagnation, which increasingly is seen as a threat to the 18-member bloc’s nascent economic recovery
China’s manufacturing expanded in July at the fastest pace in more than two years, signaling a pickup in economic growth is strengthening amid government support policies
RBS, Britain’s largest state-owned lender, said it’s cutting lending to Russian companies, following European banks including Societe Generale SA and Natixis SA in complying with the latest round of sanctions over Ukraine
Fighting erupted in Gaza just hours after a three-day cease- fire cobbled together by John Kerry began, with Israel and Hamas accusing each other of responsibility for the breach
Sovereign yields higher. Euro Stoxx Banks falls 1.4%; down by 3.8% on the week. Asian and European equities, U.S. stock futures fall. WTI crude and copper lower, gold gains

US Event Calendar

8:30am: Change in Nonfarm Payrolls, July, est. 230k (prior 288k)
- Change in Private Payrolls, July, est. 227k (prior 262k)
- Change in Manufacturing Payrolls, July, est. 15k (prior 16k)
- Unemployment Rate, July, est. 6.1% (prior 6.1%)
- Average Hourly Earnings m/m, July, est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, July, est. 2.2% (prior 2%)
- Average Weekly Hours All Employees, July, est. 34.5 (prior 34.5)
- Change in Household Employment, July (prior 407k)
- Underemployment Rate, July (prior 12.1%)
- Labor Force Participation Rate, July (prior 62.8%)
8:30am: Personal Income, June, est. 0.4% (prior 0.4%)
- Personal Spending, June, est. 0.4% (prior 0.2%)
- PCE Deflator m/m, June, est. 0.2% (prior 0.2%)
- PCE Deflator y/y, June, est. 1.7% (prior 1.8%)
- PCE Core m/m, June, est. 0.1% (prior 0.2%)
- PCE Core y/y, June, est. 1.4% (prior 1.5%)
9:45am: Markit US Manufacturing PMI, July, est. 56.5 (prior 56.3)
9:55am: University of Michigan Confidence, July final, est. 81.8 (prior 81.3)
10:00am: ISM Manufacturing, July, est. 56 (prior 55.3); ISM Prices Paid, July, est. 58 (prior 58)
10:00am: Construction Spending m/m, June, est. 0.5% (prior 0.1%)
TBA: Domestic Vehicle Sales, July, est. 13.2m (prior 13.25m)
TBA: Total Vehicle Sales, July, est. 16.79m (prior 16.92m)

FIXED INCOME

Bunds failed to benefit from lower stocks and traded lower, albeit marginally, as the support from month-end and also coupon/redemption related flow which was evident throughout the week waned. PO/GE 10y spread widened by almost 10bps as concerns over the beleaguered lender Banco Espirito Santo (-6.47%) raised fears that state aid may be needed to shore up capital base and in turn undermine country's financial position.

EQUITIES

GBP/USD plunged below the 100DMA after UK Manufacturing PMI (55.4 vs. Exp. 57.2) fell to the lowest level in a year, lifting EUR/GBP to two week highs. EUR/USD has been somewhat supported, with option barrier interest ahead of 1.3300 and 1.3350 keeping a floor under the pair. USD/JPY remains higher despite a poor showing from the Nikkei 225 overnight, as higher treasury yields prompted favourable rate differential flows.

COMMODITIES

WTI and Brent crude futures have echoed the trend seen in stocks, with refinery outages in Kansas also limiting crude demand from Cushing, Oklahoma. Spot gold has languished close to recent lows, with the USD still remaining close to 10-month highs and keeping pressure on base metals alongside market expectations of a sooner-than-expected rate hike from the Federal Reserve.

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Finally, DB's Jim Reid completes the overnight recap

So today's payroll number comes on the back of a turbulent couple of days for markets after a potent cocktail of a stronger US GDP print, higher yields, a slew of weaker earnings, the aftermath of the Argentinean default and more concerns over Banco Espirito Santo. DB's Joe LaVorgna has been at the bullish end of the street for some time now and expects payrolls of 250k and a 0.1ppt drop to 6.0% in the unemployment rate today. The market is at 230k and 6.1% respectively. It’s fair to say that given the nervousness, a very strong number could create chaos in the rates, credit and EM markets and cause collateral damage in equities. Equally a more tame release could help markets regain some poise in what is usually the most illiquid month in a structurally illiquid market for many asset classes. It’s also worth watching the trend in hourly earnings today as the FOMC have shifted towards wages as one of their main criteria for when to become more hawkish. The market is expecting this to stay at 0.2% M/M but the year-on-year number is tipped to increase to +2.2% Y/Y (vs 2.0% previous).

The abovementioned cocktail of concerns resulted in the S&P500 (-2.00%) notching up its largest fall in three-months yesterday. It was ironic that US treasuries closed flat on the day, given that the sell-off originated from higher yields yesterday as markets began to question the path of Fed policy. Though yields were virtually unchanged at the close this masked a fair bit of intraday volatility. Indeed 10yr yields traded up as high as 2.61% (or +6bp on the day) following a stronger than expected Employment Cost Index print (0.7% QoQ vs 0.5% expected). From that point, we saw a sharp rally back to unchanged-on-the-day helped by the shock 10pt plunge in the Chicago PMI (52.6 vs 63.0 consensus). No doubt the continued sell down of equities & credit eventually prompted a flight to treasuries in the second half of the session. However, there was also market chatter of large duration extensions into month end, which may have driven the rally in rates back to unchanged. After a period of low volatility, 10yr UST yields have now traded in 16bp range over the last two and a half days. It was also interesting to see that despite the rally in treasuries and a 28% spike in VIX, this was not accompanied by a rise in gold prices which finished at the lows for the day (-1.06%).

Compared to the rates market, the price action in equities and credit was certainly more linear. The Dow (-1.88%) and S&P500 both closed at the lows, on volumes which were 30% higher than the 15-day moving average. Credit sold off across cash & index, and finished at the wides. The sharpest moves were in Xover (264.25bp, +17.625bp) and Eur financial senior (73.25bp, +5.375bp) – the latter driven by renewed concerns around BES and also some disappointing earnings from the likes of BNP. The CDX HY index added 20bp in spread terms to 344bp.

On the topic of HY, we’ve written for a while now that US HY fund flows are worth watching. The latest weekly flow data from EPFR has indicated that US HY funds suffered -$3.72bn of outflows in the week to July 30. This represents 1.2% of AUM and is the fourth consecutive weekly outflow bringing YTD cumulative flows to negative territory (-0.5% of AUM). During these four weeks, the weekly outflows have gotten progressively higher. There was -$421m in flows the week to July 9th, -$2.34bn in the week to July 16th, and -$3.67bn in the week to July 23rd. The latest weekly outflows of -$3.72bn obviously doesn't capture what happened in the last 24 hours but if we use the largest US HY ETF (iShares iBoxx HY) as an imperfect proxy, that ETF recorded -$363m of outflows yesterday according to Bloomberg. This is the largest one day outflow since February 3rd – on that day the S&P500 fell 2.28%. The iShares iBoxx HY ETF is currently trading at a discount of 0.58% to its NAV which is the largest discount since August 2013. Across the Atlantic, it’s worth noting that Western European HY fund flows have held up well so far with the supportive backdrop of the ECB and still low inflation (we learnt yesterday that July core CPI was 0.8%, unchanged from June). However, Western Europe HY funds registered an outflow of -$297m (or -0.7% of AUM) in the week to July 30th, the largest weekly outflow since June 2013. We think the flows out of the HY should slow down soon unless rates continue to rise, but watch this space.

On a more micro level, there were a number of company-specific stories which exacerbated Thursday’s selloff. On a day where nerves were already heightened, any bad news was quickly and severely punished by markets. An example of this was Adidas which fell 15.4% after the company issued a large profit warning. Amongst its commentary, the sportswear company noted that it was being hit by the downturn in Russia and it would respond by accelerating the closure of its Russian stores because of increasing risks to consumer spending. Volkswagen (-0.37%) reported earnings yesterday and said that Russian sales had declined 8% yoy in 1H14 (FT). In what is likely going to concern policymakers, Adidas and Volkswagen join Siemens, Metro and Royal Dutch Shell in warning about the actual or potential impact of the Russia/Ukraine conflict. The EU’s announcement that it will add Russia’s Sberbank, VTB Group and OAO Gazprombank to its sanction list is unlikely to help. Another micro-level story was Banco Espirito Santo, which fell 42% after resuming trading post its 1H14 results. This together with BNP’s result yesterday set a negative tone for European financials (-1.6%) who underperformed the broader Stoxx600 (-1.3%).

A busy end to a challenging week