Moments ago, US equity futures tumbled to their lowest level in the overnight session, down 22 points or 1.1% to 1924, following both Europe (Eurostoxx 600 -1.8%, giving up more than half of yesterday's gains, led by the banking sector) and Japan (Nikkei -2.2%), and pretty much across the board as DM bonds are bid, EM assets are all weaker, oil and commodities are lower in what is shaping up to be another EM driven "risk off" day. Only this time one can't blame the usual scapegoat China whose market is shut for the long weekend.
As Bloomberg's Richard Breslow points out, "yesterday, China being closed was a source of calm for the markets. This morning their being closed is seen as a lack of liquidity with traders looking elsewhere for hedges." He adds that "Draghi’s dovish comments from yesterday are being rediscussed as not hurrah for QE, but geez things must be really bad out there." And while the biggest risk event of the day will the nonfarm payroll print in just two hours, leading to much sought after clarity from the Fed as any number 190,000 or below cements the case of a rate hike delay, it was yesterday's G-20 statement language that "monetary policy tightening is more likely in some advanced economies" that precipitated a mini flash crash in the E-mini shortly thereafter and has led to the unwind of the Yen carry trade, pushing both the USDJPY under 119 and the ES to its low of the day.
Asia stocks traded lower despite the mostly positive close on Wall Street as the dovish ECB inspired gains were pared on position squaring ahead of today's key NFP release. Nikkei 225 (-2.15%) led the region lower as a cautious tone at the open saw JPY strengthen and pressure exporters, while ASX 200 (-0.1%) was weighed by weakness in energy and financials. The Hang Seng (-0.45%) traded negative on its return from Victory Day, after Hong Kong PMI (44.4 vs Prey. 48.2) printed its lowest reading since Apr'09 and new orders from China narrowed the most since 2008. JGBs traded higher as the demand for safer assets increased on the back of the cautious tone in the region, while the BoJ also entered the market to buy JPY 450b1n government bonds further stoking demand for 10yr JGBs.
Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday's ECB inspired surge in stocks and also positioned for the release of the crucial US monthly jobs report. As per the recent trend, the downside was led by energy names, while the 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern.
Bunds benefited from the flight to quality trade, with shorter-dated peripheral bond yield spreads continue to outperfor m10s equivalent, with the bid tone said to be supported by domestic accounts, especially Italian and Spanish based. The release of less than impressive retail PMIs, together with much weaker than expected German factory orders data which printed biggest fall since January further buoyed the bid tone in fixed income products.
In FX, safe haven related flows saw JPY gain across the board, with USD/JPY fell to its lowest level since 25th August after the pair took out stops on the break of 119.00 level and also the 50% retracement level of the 24th to 31st August move. Consequent USD weakness ensured that EUR/USD traded higher, in spite of the dovish rhetoric by the President of the ECB yesterday. Elsewhere, commodity sensitive currencies remained under pressure amid lower energy and base metal prices.
In the crude space, both WTI and Brent crude futures traded lower, weighed on the cautious sentiment which dominated the price action ahead of the eagerly awaited US monthly jobs report. Of note, despite the recent choppy price action, the CBOE Crude oil ETF volatility index has come off its highs over the past several sessions, but nevertheless remains elevated and trades at March levels.
Today's main event is of course the payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
Market Wrap:
- DAX -2%, Nikkei 225 -2.2%
- German 10Yr yield down 4bps at 0.68%
- Brent futures down 0.8% at $50.28/bbl
- Euro spot +0.2% at 1.1141
- V2X up 14% at 34.1
- S&P 500 futures down 1.1% at 1925
Bulletin Headline Summary from RanSquawk and Bloomberg
- Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday's ECB inspired surge and also positioned for the NFP release
- 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern
- Looking ahead, highlights include US Nonfarm Payrolls, US Unemployment Rate and Fed's Lacker making a case against further rate hike delays
- Treasuries gain as stocks decline before report forecast to show U.S. added 217k jobs in August while unemployment rate fell to 5.2% from 5.3%.
- Deputy PBOC governor Yi Gang, said China’s economy is solid despite the stock market selloff and that the yuan will be stable; signaled China won’t get dragged into tit-for-tat currency valuations
- UBS lowered its target for Hong Kong’s benchmark stock gauge by 25%, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline
- Far from weakening the Chinese military, the troop cuts announced by President Xi Jinping will help counter U.S. advantages and improve the country’s ability to project force further from its shores
- Prime Minister David Cameron yielded to pressure over the migration crisis engulfing Europe and said Britain will take in “thousands more” refugees from Syria
- Vice President Joe Biden opened up for the first time publicly about his painful deliberations over whether to run for president so soon after his son Beau’s death to brain cancer, saying the key question is “whether my family and I have the emotional energy to run”
- Sovereign 10Y bond yields lower. Asian and European stocks fall, U.S. equity-index futures decline. Crude oil, gold and copper decline
US Event Calendar
- 8:10am: Fed’s Lacker speaks in Richmond, Va., speech titled "the case against further delay [38]"
- 8:30am: Change in Non-farm Payrolls, Aug., est. 217k (prior 215k)
- Change in Private Payrolls, Aug., est. 204k (prior 210k)
- Change in Mfg Payrolls, Aug., est. 5k (prior 15k)
- Unemployment Rate, Aug., est. 5.2% (prior 5.3%)
- Average Hourly Earnings m/m, Aug., est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, Aug., est. 2.1% (prior 2.1%)
- Average Weekly Hours All Employees, Aug., est. 34.5 (prior 34.6)
- Underemployment Rate, Aug. (prior 10.4%)
- Change in Household Employment, Aug. (prior 101k)
- Labor Force Participation Rate, Aug., est. 62.7% (prior 62.6%)
- G-20 finance ministers, central bankers meet in Ankara
DB's Jim Reid concludes the overnight recap
As we discussed in our 'Back to School' credit strategy note earlier this week we think the global financial system is so fragile and the global economy so lethargic and asset prices generally so high (with exceptions) that it near forces central banks into a continuation of easy monetary conditions. So while our inclinations are to be bearish we are not due to what is still extraordinary global central bank liquidity and the promise of more to come. For now the ECB have laid the groundwork for such an occurrence.
More on the ECB later but next stop payrolls. As we noted yesterday, DB’s Joe Lavorgna has been highlighting that August tends to be a seasonally weak month for payrolls reports. Joe highlights in particular that the August reading has missed consensus expectations in 21 out of the last 27 years. The last four August payrolls reports have come in below consensus, averaging a 55k miss, while the data is even more compelling the further you go back in time. Since 1988 the average forecasting error has been -61k in the month of August while the median forecast error sits at -42k. Joe also highlights that even in relatively strong years for hiring there are typically pockets of payrolls weakness. Taking the three strongest years for hiring in the last four decades, in 1977 the US economy generated 4m jobs, yet there were three months when payrolls were very disappointing: June (135k), August (92k) and October (119k). The same happened in 1978 when despite generating 4.3m jobs, payrolls dipped well below trend in April (175k), August (113k) and September (-58k) while in 1984, when 3.9m jobs were added, August was again one of the three months of relative softness. So Joe’s forecast is for 170k while the market is sitting at 217k.
We head into today’s print with a September hike probability currently priced at 30%, down slightly from 32% this time yesterday. Meanwhile, it’s been a weak session across Asian equity markets this morning although with not a lot in the way of newsflow. The Nikkei (-2.65%), Kospi (-1.41%) and Hang Seng (-0.60%) have all seen declines while the ASX (+0.29%) is a touch higher. Treasury yields have fallen a couple of basis points, while S&P 500 futures are indicating a soft start, down around half a percent. Oil has softened too, down around a percent while credit indices in Asia are largely unchanged.
Staying in Asia briefly, our China Chief Economist Zhiwei Zhang published an interesting note overnight evaluating the risk of capital outflows in China. Zhiwei’s view is that he thinks the problem of capital outflows is manageable. He highlights that a common misconception in the market is that a decline of foreign reserves is equivalent to capital outflows. He notes however that what happened from July 2014 to July 2015 is that, while foreign currency reserves, managed by the SAFE, dropped by some $350bn, the PBoC’s net foreign assets only declined $82bn, which was more than offset by a rise of private foreign assets held in domestic banks ($188bn). As a result, the net foreign asset position of the entire banking system actually rose in this period. Zhiwei estimates the size of PBoC intervention in August to be between $100bn and $150bn, but only a fraction have turned into capital outflows. This is different from the balance of payment crises which happened in other emerging markets with open capital accounts, where capital flight led to a downward spiral. Ultimately the real challenge the PBoC faces is how to exit the current arrangement and what new ER regime it should follow. More details on Zhiwei’s piece is in the link at the bottom of today's note.
Back to the ECB, the staff growth and inflation forecasts were revised down, a little more than our economists expected with the Council seeing downside risks. Draghi repeatedly mentioned EM which was a signal that they're concerned and as DB's Mark Wall suggested, the rhetoric on the willingness to respond was dialled up to “willingness, readiness and capacity to act”. Supporting this was the decision to raise the issue limit on individual securities purchases to 33% from 25%. So they have given themselves room to act although there was no discussion on the immediate use of this facility so its use would require fresh info. Nevertheless this should create a mini ECB put on financial assets if turmoil returns.
The dovish stance saw reasonable downward pressure on European rates yesterday. 10y Bund yields fell nearly 6bps (-5.8bps) to 0.722% while the moves were more exaggerated in the peripherals with the likes of Portugal and Italy falling 11bps and 7bps respectively. The Euro tumbled and eventually finished the session down 0.93% at $1.112 while risk assets benefited from a decent bid. The Stoxx 600 closed up 2.37% while there were +2% moves for bourses in Germany, France and Italy too. Credit markets also had a decent day with Crossover eventually finishing 10bps tighter while the comments also helped spark a brief 4% surge in the Oil complex, before WTI and Brent settled down but still up 1.08% and 0.36% respectively.
These moves were in contrast to what felt like another nervous session across the pond. The S&P 500 got off to a decent ECB-boosted start, reaching an intraday high of 1.3% although that marked the high in optimism as the market then proceeded to sell-off once markets in Europe closed, eventually settling +0.12% at the closing bell with anxiety levels clearly on the rise ahead of today’s big data release. The Dow (+0.14%) traded in similar fashion but it was a weak day in the tech space with the Nasdaq (-0.35%) down and dipping back into negative territory for the year in the process.
Yesterday’s dataflow in the US contributed to the better tone early in the session. Much of the focus was on the August ISM non-manufacturing reading which, while declining 1.3pts from July came in nearly a point ahead of expectations at 59.0 (vs. 58.2 expected). The important employment subcomponent declined to 56 last month, from 59.6 but more importantly still sits at the high end of its post-recession range. Initial jobless claims rose 12k last week to 282k (vs. 275k expected) while there was some improvement in the final services PMI reading for August, revised up 0.9pts to 56.1 which helped keep the monthly composite reading unchanged at 55.7. Meanwhile the July trade balance showed a slightly smaller than expected deficit for the month, shrinking over 7% to $41.9bn (vs. $42.2bn expected) and the smallest gap now since February. That print, along with the non-manufacturing ISM and vehicle sales data from a couple days ago saw the Atlanta Fed upgrade their Q3 GDP forecast 0.2pp to 1.5%.
Just staying on the data briefly, Europe saw some positive numbers too yesterday. Of most significance was the final composite Euro area PMI reading for August, revised up 0.2pts to 54.3 and to a new cyclical high and a reading which our colleagues in Europe believe supports their 0.5% qoq GDP growth forecast for Q3. With the exception of France, regionally the data was supportive also. Germany saw the composite reading revised up 1pt to 55.0 thanks to a strong services print. Spain was nudged up 0.5pts to 58.8 while a 2.6pt revision upwards in Italy’s services reading saw its composite print hit a new cyclical high of 55.0. France was the clear disappointment however with the composite down to 50.2 after downward revisions of over 1pt in both sectors.
Before we turn over to the day ahead, DB’s George Saravelos published his latest report on Greece yesterday, reviewing the two major developments we saw in August - the conclusion of the 3rd ESM program and the precipitation of a new general election on September 20th. George believes that the ingredients are in place for a stable political outcome after the general election, irrespective of which of the two major parties comes first (Syriza or New Democracy). Beyond that, George expects it to be political rather than financial risk that will continue to drive Greek developments going forward. The economy is set to suffer under the recent imposition of capital controls and large upfront fiscal tightening, but the worse could well be behind us by the turn of the year. Greece’s willingness to constructively, rather than confrontationally, engage with creditors will ultimately determine whether Eurozone membership can be sustained. In turn, this will depend on strong popular support towards the euro persisting which has so far survived unscathed despite the recent crisis. Ultimately, the ingredients may be in place to generate a gradually improving outlook in coming months. Key dates for our diary in the meantime will be the September 12th Eurogroup meeting where the prior actions required to unlock the second sub-tranche of the first loan installment will be discussed. This is followed two days later by a TV debate between party leaders Tsipras and Meimarakis which will likely have a large influence on public opinion.
Onto the day ahead now. It’s relatively quiet on the data front in Europe this morning with just German factory orders and French consumer confidence prints due. The main event is of course this afternoon in the US with the aforementioned payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
