US Equity Futures Slide Under 2000, Recover Losses After USDJPY Tractor Beam Reactivated

While some were wondering if last night's sudden, commodity-liquidation driven selloff [28]would last, most were not, expecting that the perfectly predictable levitation in the USDJPY around a round "tractor beam" number would provide a floor under the market .Sure enough, starting around midnight eastern, the USDJPY BTFDers emerged, oblivious to comments from former BOJ deputy governor Iwata who late last night said the obvious, and what we have been saying since January 2013, namely that a weak yen puts Japan at recession risk, and that a USDJPY in the 90-100 range reflects Japan fundamentals. And, as expected, the 109 level is where the algos have hone in today as a strange FX attractor, which also means that ES has reverse sharper overnight losses and was down just 7 points at last check even as the poundage in the commodity sector continues over rising fears of a sharp Chinese slowdown driven by its imploding housing sector (most recently observed here [29]) without an offsetting stimulus program, following several comments by high-ranked Chinese individuals who poured cold water on any hopes of an imminent Chinese mega-QE or even modest rate cut.

And speaking of pouring cold water on easing plans, the ECB did just that, when several of its governing council members, but most notably Ignazio Visco, said that the ECB may not do further easing after all because it had managed to punk the market once again [30], and the EURUSD is low enough to where the whole point of QE is now moot. In other words, the market once again discounted action by the ECB... which now will never come. It remains to be seen if the central bank FX traders (which as we now know are openly trading via the CME) will allow the EURUSD to return to its pre "discounting" levels as the ECB returns to full "jawbone Off" mode.

European, Asian stocks fall with oil, metals after China declines to make policy changes in response to slower growth. Miners among largest underperformers, iron ore prices lower. U.S. equity index futures decline. Yields on 10-year U.K. gilts, German bunds fall. Tesco leads FTSE 100 declines after saying it overstated 1H profit by GBP250m.

Australian stocks (-1.3%) erased all YTD gains and fell over 1.5% in their sharpest decline since mid-March as the USD strength and subsequent iron ore and gold weakness has weighed heavily on Australian mining stocks. Over in China, the renewed growth concerns sent the Hang Seng Index (-1.4%) lower, hitting its lowest level since late July at the midday break. Asian stocks fall with Shanghai Composite underperforming and Sensex, NZX outperforming. MSCI Asia Pacific down 0.8% to 143.35. Nikkei 225 down 0.7%, Hang Seng down 1.4%, Kospi down 0.7%, Shanghai Composite down 1.7%, ASX down 1.3%, Sensex up 0.2%. 0 out of 10 sectors rise with telecom, infotech, materials underperforming.

European equity markets trade softer, with the FTSE-100 underperforming as Tesco shares slumped as much as 12% after finding accounting irregularities on Friday that have trimmed their H1 profit guidance by GBP 250mln. As such, the UK’s largest retailer has erased the entirety of the gains seen over the past eleven years. Elsewhere, mining stocks fell sharply from the open, as the slide in commodities prices overnight hit profit margin expectations. Looking ahead, US stock futures are indicating a lower open, with the e-Mini S&P below the 2,000 mark as attention shifts to Alibaba’s second day of trading and preliminary sales figures for Apple’s newest iPhone 6 and 6+. 6 out of 19 Stoxx 600 sectors rise; basic resources, retail underperform; utilities, insurance outperform. 32.5% of Stoxx 600 members gain, 64.2% decline. Eurostoxx 50 -0.1%, FTSE 100 -0.5%, CAC 40 +0%, DAX -0.2%,

Looking at the day ahead and beyond, US existing home sales and eurp-area consumer confidence for September are the main release for today although we’ll also pay some attention to any soundbites from the Fed’s Dudley at a Bloomberg summit today. Draghi will also speak before the EU parliament in Brussels at 3pm local time. Then we have PMI Tuesday with the release of the Markit/HSBC PMI manufacturing September readings for China and the Eurozone. The former should provide us with further clues in light of the recent downward momentum in China data flow. On Wednesday, we’ll get US new home sales, Italian consumer confidence, and the German IFO report. The US durable goods data in August will be a highlight on Thursday on top of the usual weekly jobless claims report. We will wrap up the week on Friday with the third revision to the Q2 US GDP data where consensus is looking for a small upward revision. On top of all, this week also sees a handful of Fedspeak (Kocherlakota, Bullard, Powell, George, Mester, Evans and Lockhart) right on the heels of the FOMC meeting last week so we should get more Fed-related news flow in the coming days.

Market Wrap

S&P 500 futures down 0.4% to 1994.9
Stoxx 600 down 0.3% to 347.6
US 10Yr yield down 1bps to 2.57%
German 10Yr yield down 1bps to 1.04%
MSCI Asia Pacific down 0.7% to 143.4
Gold spot down 0% to $1215.3/oz

Bulletin Headline Summary from RanSquawk and Bloomberg:

Commodities slide as markets nervously look ahead to tomorrow’s preliminary Chinese HSBC Manufacturing PMI after the country’s finance minister warned growth risks remain to the downside
EUR regains some poise after ECB’s Visco, Noyer and Coeure downplayed the prospect of QE at the weekend’s G20 summit in Cairns, Australia
Focus shifts to an appearance from ECB’s Draghi at EU Parliament today at 1400BST/0800CDT
Treasury yields drop overnight as investors prepare for $106b in U.S. auctions this week; 2Y closed Friday at highest yield since May 2011, 30Y at its lowest level in a week after FOMC meeting offered a dovish statement and more hawkish “dots.”
Shares fell around the world and commodities tumbled to a five-year low amid speculation China will accept slower growth after Finance Minister Lou Jiwei said there won’t be major changes in policy in response to individual economic indicators
U.S. dollar has climbed to its highest level since 2010 against a broad range of currencies, transforming losses into gains for most foreign holders, who own $6t Treasuries
Alibaba Group Holding Ltd.’s initial public offering became the biggest ever at $25b, after bankers exercised an option to boost the deal size by 15% on strong demand, a person familiar with the matter said
Hedge funds extended this year’s longest exit from bullish gold bets as slumping prices and investor outflows since June erased $7.16b from the value of exchange-traded funds backed by the metal
G-20 finance chiefs and central bankers said low interest rates could lead to a potential increase in financial-market risk, as major economies rely on monetary stimulus to bolster uneven growth
The World Bank warned that the economic costs of the Ebola outbreak in West Africa will escalate to “catastrophic” proportions if the virus spreads
Sovereign yields mostly lower except for Greece and Spain. Asian, European stocks drop, U.S. equity-index futures fall. WTI crude, gold and copper fall

US Economic Data

8:30am: Chicago Fed National Activity Index, Aug., est. 33 (prior 0.39)
10:00am: Existing Home Sales, Aug., est. 5.20m (prior 5.15m)
Existing Home Sales m/m, Aug., est. 1% (prior 2.4%) Central Banks
9:00am: ECB’s Draghi speaks in Brussels
10:05am: Fed’s Dudley speaks in New York
7:30pm: Fed’s Kocherlakota speaks in Marquette, Mich.

ASIA

FIXED INCOME

Bund futures gapped higher at the open, taking the lead from T-notes overnight, who rallied alongside softer Asia-Pacific stocks and lower US equity futures. The French/German spread has tightened by approx. 1.5bps (4.5% equivalent) after the French sovereign rating was affirmed at Aa1 at Moody’s on Friday, despite speculation that the government could suffer a downgrade. The Spanish bond market is the worst performer of the day as reports of domestic accounts selling lift Spain’s 10yr yields towards 2.25%.

EQUITIES

AUD and CAD underperform as the downside in commodities strikes currencies, however NZD slightly outperforms as NZ PM Key has secured the first government parliamentary majority in just under two decades at the weekend’s elections. His pro-fiscal prudence stance and history of infrastructure rejuvenation has buoyed the currency today, with NZD/AUD now targeting the 100DMA at 0.9158. Elsewhere, EUR trades stronger against the USD as various ECB members including Noyer, Visco and Coeure highlighted the weak efficacy of outright QE at the weekend’s G20 conference.

COMMODITIES

Commodities fell from the open, as renewed issues surrounding Chinese growth emerged after the Chinese finance minister Lou highlighted the downside risks to Chinese growth ahead of tomorrow’s preliminary HSBC Manufacturing PMI (Exp. 50.0, prev. 50.2). This, allied with renewed focus on Fed tightening has weighed on metals across the globe, with Dalian iron ore futures printing contract lows for the second consecutive session and hitting five-year generic contract lows as silver slides to 2010’s levels. Gold still remains just above the YTD lows but has traded within USD 15.00 of the key USD 1,200/oz support, last convincingly broken in late December.

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DB's Jim Reid concludes the overnight Recap

After a couple of weeks of focusing a lot of attention on the FOMC and the Scotland vote, markets will no doubt move on and start finding something else to think about this week. The themes bubbling under the surface at the moment are that the low TLTRO take up might encourage full European QE, that global inflation is again edging lower and that China's economy looks to be slowing.

The G20 meeting in Australia was the main source of weekend headlines. The world’s finance ministers and central bankers once again reaffirmed their commitments on global economic growth with investment seemingly a key theme this time. Indeed the leaders agreed that investment is critical to boost demand and collectively have agreed to a Global infrastructure initiative to increase quality investments. In implementing this initiative, leaders have reaffirmed support to quality public and private investments which will include the optimal use of government’s balance sheet while maintaining appropriate risk controls. They hope this will eventually facilitate the normalisation of monetary policy in advanced economies. The communiqué suggested that they were mindful of the potential build up of financial market risk given the environment of low interest rates and low asset price vol. One has to be guarded when reading such statements as the practice of implementing such initiatives has proved to be much more challenging than the promise of them since the GFC.

In synch with this infrastructure investment theme, the former US Treasury Secretary Larry Summers was on a Fox programme on Sunday urging for a major plan to boost the US economic growth by more infrastructure investments. He is of the view that government borrowing at these Treasury yields now for the renewal of ageing infrastructure would be beneficial in the long run.

In terms of markets, Dollar strength has been one of the key themes over the last few months although we seem to be taking a breather overnight. Indeed that and a rebound in JPY seems to be adding some negative pressure on Japanese equities overnight. The Nikkei is around 0.8% lower as we type although relatively speaking still outperforming a very weak session in China. The Shanghai Composite, HSCEI and Hang Seng indices are -1.4%, -1.8% and -1.3% lower. In reality we’ve seen a run of very weak Chinese economic data of late which for August included a meaningful drop in the growth rate of investment and industrial production (which hit a post-2008 low) and a further drop in property sales (which contracted at a rate of 9% YoY). In the same month we learnt that China’s imports contracted -2.4% YoY leaving the 6m moving average rate at its lowest level since the GFC and subsequent global slowdown. Chinese iron ore import prices have also fallen to lows also not seen since 2009 on the back of this.

Clearly one has to be careful not to call a trend on the back of a month’s worth of data (especially given that this is China), however two points make these recent developments worrying. First the fact data has been so bad across a range of statistics (including power consumption) suggests a very real slowdown in growth. Second the Chinese economy is breaking out of a pattern it has followed each year for the past few, with a weak start to the year prompting government growth policies which in turn helped growth to pick up. This year the government once again announced policies to rev up growth after a slow start to the year however their positive effects appear to have been more short lived (lasting just a month or so) and it looks like major stimulus is not on the cards right now. At the G20 meeting China’s finance minister Lou Jiwei said that the country faces downward pressure and reiterated that there will not be any major policy change in response to individual economic indicators. There was news that Nanjing has lifted home purchase restriction over the weekend in a latest effort by local governments to stimulate housing demand. So China could be a story to watch in the coming weeks.

Back to markets, Asian IG spreads are 1-2bp tighter across key benchmarks which pretty much took the lead from the fairly firm US session on Friday. Indeed the CDX IG was nearly 1bp tighter which was a relative outperformer against a softer finish to the week in equities. The S&P 500 and NASDAQ were both modestly lower on the day which also saw further gains in Treasuries. The 10yr UST yield finished Friday 4bps lower and is another 1-2bp lower in Asia overnight at 2.56%.