One day after US equity futures hit a new all time high and European stocks traded just shy of their April 2015 record on fresh signs of "trade deal optimism"...
... S&P futures were unchanged, trading in a narrow overnight range as "uncertainty" about the fate of the trade negotiations between the United States and China re-emerged after Peter Navarro said late on Thursday that no decision on tariff rollbacks had been made yet...
Navarro: there’s no decision at this time to remove existing tariffs as part of a phase one deal; the only person who can make that decision is President Trump.— Jenny Leonard (@jendeben) November 8, 2019
Other officials say it’s certain there will be a rollback but the teams are still negotiating on what tariffs exactly. https://t.co/DSeqx3WSs6
... and the ball is now in Trump's court despite numerous media leak by "team Kudlow."
The European Stoxx 600 index opened down 0.4% at 405 points, 10 ticks from its April 2015 record of 415, before recovering almost all losses, while S&P 500 futures retreated 0.1% after closing at its highest ever level on Thursday.
And while markets awaited the daily dose of "trade deal optimism" or a tweet from Donald Trump that stocks will close the day higher, the risk-on mood that’s permeated global financial markets this week eased modestly as European stocks slipped along with Asian equities despite solid Chinese trade data, while treasuries traded in a tight range around 1.92% after sliding on Thursday.
The cautious mood contrasted with Thursday’s euphoric burst of optimism in global markets on news Beijing and Washington had agreed to roll back tariffs as part of a first phase of a trade deal. Fears the deal - which was supposedly completed a month ago yet apparently wasn't - could fall apart (again) prompted some investors to sell heading into the weekend.
"The trade deal is the predominant driver", for markets at the moment said Legal & General strategist Lars Kreckel, noting that this morning dip in market was a just knee-jerk reaction to the latest news on the U.S.-China front. Chris Jeffery, head of rates and inflation at the British financial service group said the “background music” to the trade row, a Federal reserve easing monetary policy and macroeconomic indicators stabilising had helped the recent rally.
In Europe, Germany’s DAX, which has become a de facto gauge of trade sentiment, moved alongside the rest of the market and eased modestly on Friday morning. German exports posted their biggest rise in almost two years in September, rising 1.5% on expectations of a 0.3% increase, providing some relief amid widespread concern that Europe’s largest economy will dip into recession in the third quarter.
"Market participants are getting increasingly ‘long’ on good news", said BMO European head of FX strategy, Stephen Gallo. "The ‘payback’ in risk assets for a very downbeat picture earlier in the year looks unstoppable at the moment", he added.
Earlier in the session, Asian stocks fell, as gains in health care stocks were offset by declines in consumer staples. Trade-talk progress continues to be closely watched by traders as the U.S. and China said they agreed to roll back tariffs in phases if a partial deal is reached, even though Navarro subsequently denied this. Markets in the region were mixed, with Singapore and Hong Kong falling and Japan rising. Singapore’s Straits Times Index snapped a four-day winning streak, retreating from its highest level in 15 months. Japan’s Topix eked out gains for a fourth day, notching a fifth weekly advance. India’s Sensex fell from record after Moody’s cut its outlook.
China’s Shanghai Composite Index failed to hold gains and closed 0.5% lower despite slightly better-than-expected trade data as exports declined less than expected in October, and while imports contracted for a sixth month, they too came in better than expected. Specifically, exports decreased 0.9% in dollar terms in October from a year earlier, better than the -3.9% expected, while imports dropped by 6.4%, stronger than the -7.8% expected. That left a trade surplus of $42.81 billion for the month.
Of note, China’s trade surplus with the US was $26.42 billion in October, as exports to the U.S. are now down 11.3% in dollar terms in the year to date from the same period in 2018.
The improvement in Chinese exports will likely provide some relief to companies, which are being squeezed by falling profits amid factory deflation, even as falling imports continued to point to a slowing domestic economy. "There are some signs of stabilization for exporters. And with the possible rollback of tariffs, next year is very likely to stage a recovery for exports," said Gai Xinzhe, a senior analyst at Sino-Ocean Capital in Beijing.
In any case, markets were unimpressed with China's data which, if anything, suggest less urgency for the PBOC to ease further after its recent cut in the MLF rate.
Emerging-market stocks trimmed their best week of gains in two months as traders sought details on an interim trade deal between the U.S. and China before pushing the risk rally further. The recent advance in developing-nation assets, fueled by signs a deal to end the trade war could be in sight, has taken equities to their highest since May and their fifth consecutive week of gains. Currencies also paused on Friday, led by the ruble’s retreat as oil dropped. The Indian rupee was the second-biggest decliner after Moody’s Investors Service lowered the nation’s rating outlook to negative citing growth concerns.
"The best fundamental and technical news is priced in for now," said Richard Segal, senior analyst at Manulife Investment Management in London. "Although many factors have been in play, the main one has been the increasing optimism about a trade deal between the U.S. and China, and the likelihood is either for further profit taking or a sell-off if the signing is delayed or if the details disappoint."
Elsewhere, moves in the currency market were restrained. The euro was steady at $1.1050, while the Yen resumed its slide, dropping to 109.44 tracking US Treasuries closely. The Bloomberg Dollar Spot Index was set for a weekly gain of 0.8% after last week’s decline of 0.5%, after strengthening against all of its G-10 peers this week. The biggest G-10 declines were seen in Sweden and Norway’s currencies, followed by commodity currencies the Australian and New Zealand dollars. A Reuters poll found that the dollar’s persistent strength would continue well into next year.
Overnight we got the latest RBA Statement on Monetary Policy which noted the board is prepared to ease policy further if required and that the pause in November allows time to assess effects of past easing and global events. RBA added the board is mindful rates are very low, that further cuts bring closer other policy options, and is aware more easing could convey overly negative view of the economy. Furthermore, RBA stated the Australian economy is gradually coming out of a soft patch and that global financial markets appear to have passed a trough of pessimism, while it lowered GDP growth forecast for December 2019 to 2.25% (Prev. 2.50%) but maintained December 2020 growth forecast at 2.75% and kept underlying inflation forecasts unchanged.
And speaking of rates, Treasuries edged lower in early U.S. trading led by front-end after retreating from session highs during European morning. Highs were reached after a White House adviser played down optimism about a U.S.-China trade deal. As Bloomberg notes, the long-end may face downside pressure from rate-lock selling and/or paying flows ahead of $30b AbbVie bond offering expected next week. And while the 10Y dropped to a session low of 1.895% when Europe opened, the early European session saw a flurry of downside Treasury hedges bought, targeting a further sell-off in 10- and 30-year bonds.
In commodities, crude oil futures fell amid lingering uncertainty over the long-awaited deal and rising crude inventories in the United States. Brent was down 16 cents, or 0.3%, at $62.13 a barrel after gaining 0.9% in the previous session. West Texas Intermediate crude was down 56 cents, or 0.9%, at $61.73 a barrel after rising 1.4% on Thursday.
Safe haven gold, which tends to rise during times of uncertainty, was a tad firmer, up 0.1% at $1,469.4 per ounce, having hit a five-week low of $1.460.7 on Thursday, and was headed for the biggest weekly loss in more than two years.
On deck today we have the September wholesale inventories data along with the preliminary November University of Michigan consumer sentiment survey. Away from that the Fed’s Daly speaks this afternoon.
- S&P 500 futures down 0.1% to 3,082.25
- STOXX Europe 600 down 0.4% to 404.86
- MXAP down 0.2% to 166.20
- MXAPJ down 0.5% to 534.71
- Nikkei up 0.3% to 23,391.87
- Topix up 0.3% to 1,702.77
- Hang Seng Index down 0.7% to 27,651.14
- Shanghai Composite down 0.5% to 2,964.19
- Sensex down 0.6% to 40,396.70
- Australia S&P/ASX 200 down 0.04% to 6,724.10
- Kospi down 0.3% to 2,137.23
- German 10Y yield fell 1.7 bps to -0.25%
- Euro down 0.04% to $1.1046
- Italian 10Y yield rose 15.9 bps to 0.82%
- Spanish 10Y yield fell 0.3 bps to 0.379%
- Brent futures down 1.3% to $61.49/bbl
- Gold spot down 0.1% to $1,466.88
- U.S. Dollar Index little changed at 98.21
Top Overnight News
- The U.S. and China have agreed to roll back tariffs on each other’s goods in stages as negotiations continue over resolving the more than year-long trade war, officials on both sides said
- Former New York City Mayor Michael R. Bloomberg is once again considering a run for president in 2020, with an adviser saying he is concerned that the current crop of Democratic contenders will not be able to defeat President Donald Trump
- China is considering further cuts to subsidies for electric-vehicle purchases, according to people familiar with the matter, threatening to deal another blow to a once- burgeoning industry that’s facing an unprecedented slump
- After a couple of days in which neither Boris Johnson’s Conservatives nor Jeremy Corbyn’s Labour Party have covered themselves in glory, the two parties on Friday are announcing voter-pleasing measures as they seek to invigorate their campaigns
- Saudi Arabia’s Crown Prince Mohammed Bin Salman needs to lower his valuation-target for Saudi Aramco a lot more, according to some of the world’s biggest investors. Aramco is worth “way below $1.5 trillion,” according to AllianceBernstein’s analyst Slava Breusov. The prince is said to be willing to accept a figure of about $1.7 trillion for the energy giant
Asian equities traded mixed as the region failed to sustain the momentum from the record levels on Wall St. where sentiment was initially boosted after US and China were said to have agreed to cancel existing tariffs in different phases, although some of the gains were later reversed on reports of fierce internal opposition from the US regarding the tariff rollbacks. ASX 200 (Unch.) and Nikkei 225 (+0.3%) were both lifted at the open although the sentiment in Australia gradually deteriorated amid hefty losses for gold miners and a growth forecast downgrade by the RBA, while Tokyo stocks also reversed course as a choppy currency overshadowed confirmation of an economic package and higher than expected Household Spending. Elsewhere, Hang Seng (-0.7%) and Shanghai Comp. (-0.5%) were mixed as participants digested the latest trade figures which were better than expected but continued to show a contraction in both USD-denominated Exports and Imports, with the mainland bourses slightly favoured after MSCI raised China A-shares weighting in its Emerging Market Index to 4.10% from 2.55%. Finally, 10yr JGBs were lower amid spillover selling from USTs and with prices reeling from the recent rise in yields, while weaker results in the 10yr inflation-indexed auction added to the uninspiring tone.
Top Asian News
- Vietnam’s Military Bank Is Said to Seek $240 Million in Stake Sale
- China Is Considering Cutting Electric-Car Subsidies Again
- Rupee Declines Most in Asia as Moody’s Cuts India Rating Outlook
- Malaysia Lowers Reserve Ratio After Resisting Rate Cut Calls
Major European bourses are cautious, as optimism regarding an imminent breakthrough on the US/China trade front abates slightly amid mixed reports. European indices, remain just off recent highs, following a strong start to the month of November. In terms of sector performance; defensives are on the front foot, with Utilities (+0.3%) and Telecoms (+0.1%) the only sectors in the green. Meanwhile, the more risk sensitive Tech (-0.6%), Consumer Discretionary (-0.8%) and Materials (-0.9%) sectors are the laggards. Financials (-0.6%) are also lower, with underperformance seen in Credit Agricole (-3.3%) and Natixis (-5.5%) following earnings. In terms of other notable individual movers; Richemont (-5.1%) were hit on an underwhelming earnings report, in which performance in Hong Kong was a dark spot; other luxury names were also pressured, including LVMH (-0.2%) and Kering (-0.7%). Elsewhere in earnings, a weak report from Fincantieri (-6.0%) saw its share price under pressure, while strong earnings from Leonardo (+0.5%) saw its shares advance. Delivery Hero (+0.8%) were boosted after being reiterated with a buy at Goldman Sachs.
Top European News
- Standard Chartered Slices CEO Pension After Shareholder Row
- Allianz Gets Boost from Pimco as Key Insurance Unit Slumps
- Steinhoff May Issue Shares to Fund Settlement of Lawsuits
- Equinor Exit From Troubled U.S. Shale Asset Seen as ‘Smart’ Move
In FX, we start with AUD/NZD/CAD - All on the back foot, but to varying degrees and not the weakest G10 links as the Greenback remains firm across the board. However, the Aussie has pulled back a bit further from 0.6900 in wake of the RBA’s latest Statement of Monetary Policy that revealed more detailed discussions on unconventional easing measures given that rates are relatively low and a GDP downgrade. The Kiwi is only holding up marginally better, but sub-0.6350 as the Aud/Nzd cross retains 1.0800+ statust, while the Loonie is on the defensive near 1.3200 against the backdrop of weaker oil prices and ahead of Canadian jobs and housing data.
- SEK/NOK - The Scandi Crowns are on the retreat after posting decent gains on Thursday and threatening or testing key resistance levels vs the Euro, but failing to breach or sustain momentum. Eur/Sek is back above 10.6500 and Eur/Nok over 10.1000, with the Swedish Krona not gleaning any support from solid household consumption or news that former SEB Chief Economist Bremen will become a Riksbank Deputy Governor and likely back a December repo rate hike.
- GBP/EUR/CHF/JPY - Narrowly mixed vs the Dollar, as the DXY inches a tad further above 98.000 to notch a fractional new post-FOMC high (98.246), but extremely or even excruciatingly rangebound amidst a paucity of independent factors/drivers. Indeed, Cable is trapped within a 1.2825-1.2796 band awaiting Moody’s UK ratings review after hours and Eur/Usd is meandering between 1.3037-28, while Usd/Chf and Usd/Jpy pivot 0.9950 and 109.25 respectively.
- EM - The Rand remains on a roller-coaster, but still hampered by the ongoing Eskom power issues that is keeping Usd/Zar anchored around 14.8000, albeit with the broad Buck strength also impacting.
In commodities, energy markets remain subdued with WTI and Brent futures below the 56.50/bbl and 61.50/bbl marks respectively with lack of immediate fundamental catalysts at the time. In terms of technicals, Brent took out its 100 DMA to the downside (61.60/bbl) ahead of the 61.0/bbl psychological level with its 50 DMA seen at 60.93/bbl, whilst WTI sees support at 56/bbl which also coincides with its 100 DMA. Some cite recent downside in the complex to lower probably of deeper OPEC+ cuts in December given the seemingly improving US-China trade environment. Further, sources earlier in the week noted of hesitation from Saudi Arabia and Russia to reduce output. Participants may also eye geopolitical events after reports that Iranian Air Defences have shot down drone over the port of Mahshahr, on the edge of Persian Gulf, although it is not clear to whom the drone belongs to. Turning to metals, gold prices remain modestly subdued with markets on standby for the latest in the US-Sino saga with the yellow metal below its 100 DMA (1476.90/oz). Finally, Copper prices are drifting lower towards the 2.7/lb level amid the cautious risk sentiment, again on the lookout for the latest trade headlines.
US Event Calendar
- 10am: Wholesale Inventories MoM, est. -0.3%, prior -0.3%; Wholesale Trade Sales MoM, est. 0.15%, prior 0.0%
- 10am: U. of Mich. Sentiment, est. 95.5, prior 95.5; Current Conditions, est. 113.5, prior 113.2; Expectations, est. 85, prior 84.2
DB's Jim Reid concludes the overnight wrap
The unrelenting bond sell-off kicked up another gear yesterday and somewhat inevitably it was almost always going to be trade developments which acted as the catalyst. Before we get to that though, just a quick refresh of where bond markets stand now the dust has settled. Starting with Treasuries, 10y yields topped out at 1.971% last night which was +14.3bps higher on the day. They’ve pulled back to 1.907% this morning but that’s still up nearly 20bps from this time last week. That also means yields are up +42bps from the October intraday lows and an even more impressive +50bps from the early September intraday lows. The big move has been in breakevens while real yields have essentially gone sideways. At the short end 2y yields were a more modest +5.9bps higher yesterday which means the 2s10s curve steepened 2.8bps to put it at 24.4bps and the steepest since July.
Yields were also higher in Europe where we even saw 10y OATs (+9.4ps) turn positive for the first time since 16 July, along with 10y yields in Belgium in Sweden. As for Bunds, they were +9.9bps higher and closed at -0.238% - the highest they’ve been since July. That also means Bunds are up +36bps from the October closing lows and +48bps from the all-time lows made back in late August. The other interesting development was that the massive sell-off in BTPs yesterday (+16.2bps) means that the gap between Italian 10yr bonds and their Greek counterparts has shrunk to just 5.3bps. So, this has been a fairly impressive selloff of late and the stock of globally negative yielding debt actually dropped to $11.9tn yesterday. As a reminder that peaked at over $17tn in August.
To fill you in on what happened yesterday, equity markets initially rallied after headlines hit the wires just after the EMR went to print, quoting a spokesman for China’s Commerce Ministry who said that China and the US have agreed to lift tariffs in phases as a deal progresses. The exact quote from the spokesman was “in the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement”. The spokesman went on to say that “if China and the US reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement”. Later during the US session, we then got the news from a US official that the US had agreed to roll back tariffs on China as part of a phase one agreement.
However, markets partly reversed after a Reuters report then contradicted this, saying that the roll back faced “fierce internal opposition at the White House and from outside advisers”, and that there were divisions within the Trump administration as to whether a roll back in tariffs would give up leverage in the negotiations. To make things more confusing the White House’s Kudlow said that “if there’s going to be a phase one deal, there are going to be tariff agreements and concessions” but trade adviser Peter Navarro said “there is no agreement at this time to remove any of the existing tariffs as a condition of the phase one deal”.
The S&P 500 ended the session +0.27% and still at a new record high, although this was down from its intraday peak of +0.68%. The DOW (+0.66%) also reached a new high, while the NASDAQ closed up +0.28% (leaving the index a mere 0.002% increase away from its own all-time closing high). Europe also had a good day with the STOXX 600 up 0.37% at its highest level since July 2015, while safe havens suffered, with Gold down -1.48% to reach a three-month low thanks to the positive trade developments.
That fading momentum has played out in Asia this morning where most major markets are mixed. At time of writing, the Nikkei (+0.14%) and the Shanghai Comp (+0.35%) have both advanced, while the Hang Sang (-0.44%) and the Kospi (-0.32%) have both lost ground. S&P futures are also down -0.19%, suggesting the index may come off its record highs as we end the week. Continuing with trade, data overnight showed the Chinese trade balance increased to $42.8bn in October (vs. $40.1bn expected). Exports were down -0.9% yoy in October in dollar terms (vs. -3.9% expected), while imports were down by a larger -6.4% (vs. -7.8% expected).
Separately, news came out last night that Michael Bloomberg, the former mayor of New York City and the founder of Bloomberg LP, was considering a run for US President. A statement from a Bloomberg adviser said that “We now need to finish the job and ensure that Trump is defeated - but Mike is increasingly concerned that the current field of candidates is not well positioned to do that”. That said, we have seen news flow before like this, with Bloomberg reportedly considering an independent run in 2016 before declining to jump into the race.
Back to yesterday, where as expected the BoE kept rates unchanged but the bigger takeaway was the dovish message. It started with the 2 dissenters who voted for a cut, indicating that they thought that some monetary stimulus was required to ensure inflation returned to target. The meeting also included three key changes to the BoE outlook according to our economists. The first was as expected, that was the MPC revising down its near term growth and inflation outlook. The second was the MPC revising down its estimate of potential supply and the third the BoE’s condition assumptions on Brexit changing materially. The end result is that our economists continue to see January as a live meeting for a rate cut with the election outcome and upcoming growth and labour market data releases taking on added significance. Indeed, with Saunders and Haskell dissenting, the bar to a cut has been lowered. Sterling weakened through the meeting and closed down -0.30%.
Staying with the UK, and amidst the ongoing election campaign we got the significant announcement in a speech from Chancellor Javid that a re-elected Conservative government would revise the current fiscal framework to allow higher borrowing. Javid did say that the current budget would remain balanced, but that borrowing for capital projects could rise to 3% of GDP (up from a long-term average of 1.8%). Another rule proposed was that debt servicing costs would remain below 6% of tax revenues. Meanwhile the opposition Labour Party’s shadow chancellor, John McDonnell, said that Labour’s fiscal rule would not include borrowing for investment in the borrowing targets. While there would be a target to improve Public Sector Net Worth over the next Parliament, McDonnell did acknowledge that this would add to the government debt. This moves Labour away from their 2017 manifesto, which committed to the national debt being lower at the end of the next Parliament than its current levels. So it appears that whatever the outcome of next month’s election, the UK is set for much looser fiscal policy over the coming years.
As for the data, in the US initial jobless claims dropped a slightly greater than expected 8k to 211k which keeps the four-week moving anchored around 215k and fairly consistent for the last few months. Later on the September consumer credit data was much weaker than expected, with total credit up $9.5bn (vs. $15.0bn expected), which was the smallest increase since Jun 2018. In Germany industrial production in September was slightly weaker than expected (-0.6% mom vs. -0.4% expected) and a slight disappointment following the stronger orders data the day prior.
Finally, we got the European Commission’s Autumn economic forecasts yesterday, which unsurprisingly saw further downgrades compared with the summer forecast back in July. The Commission downgraded their 2019 Eurozone growth by a tenth to 1.1%, and their 2020 forecast down two-tenths to 1.2%. The inflation forecasts were also downgraded, with 2019 and 2020 both a tenth lower at 1.2%.
To the day ahead now, which this morning includes September trade data in Germany and September industrial production in France. Also due out is September wholesale inventories data in the US along with the preliminary November University of Michigan consumer sentiment survey. Away from that the Fed’s Daly speaks this afternoon.