S&P futures slumped on Wednesday and European stocks fell after Washington ordered a shutdown of the Chinese consulate in Houston, citing a need to protect American intellectual property and information, amid a sharp deterioration in relations between the two countries (at least we now know why the Houston consulate was furiously burning all of its documents late on Tuesday). The State Department later said the order was to protect intellectual property and "private information" of Americans. Beijing in return vowed to "react with firm countermeasures", and was reportedly considering the closure of the US consulate in Wuhan (of all places) escalating tensions between the world’s two largest economies and adding to concerns over the deteriorating relationship between the economic superpowers. Yields and the yuan fell, Hong Kong shares dropped and gold and silver dipped after soaring overnight on continued dollar weakness.
The U.S. Department of State confirmed the impending closure of the Houston consulate, after China’s foreign ministry reported it had been told to shut the mission. The closure had been ordered "in order to protect American intellectual property and American’s private information", State Department Morgan Ortagus said in a statement.
"The United States will not tolerate the PRC’s violations of our sovereignty and intimidation of our people, just as we have not tolerated the PRC’s unfair trade practices, theft of American jobs, and other egregious behavior,” she added, referring to China by its official name, the People’s Republic of China.
In turn, China denounced the US order as an "unprecedented escalation":
“The unilateral closure of China’s consulate general in Houston within a short period of time is an unprecedented escalation of its recent actions against China,” Chinese foreign ministry spokesman Wang Wenbin told a regular news briefing.
“We urge the U.S. to immediately revoke this erroneous decision. Should it insist on going down this wrong path, China will react with firm countermeasures,” he said.
The news comes after three straight sessions of gains for the S&P 500, driven by optimism about an eventual coronavirus vaccine, further fiscal support for the pandemic-hit economy and a batch of positive second-quarter reports. The index is less than 4% below its record closing high hit in February.
Some selling crept into stocks ahead of the Consulate news after Mitch McConnell warned that it is unlikely that a stimulus bill would be passed before the July 31 deadline when existing generous government handout programs expire.
Geopolitics aside, here are some company specific news:
- Snap Inc declined 8.3% as it said a bump in user growth at the start of coronavirus-induced lockdowns petered out sooner than expected, and it forecast fewer current-quarter users than the Wall Street consensus.
- United Airlines Holdings warned travel demand would remain suppressed until there was a widely accepted treatment or vaccine for COVID-19, which plunged the carrier to a deep quarterly loss. Its shares fell 0.1% in premarket trading.
- Texas Instruments rose 4% rose after the company beat on the top and bottom line and guided to a higher Q3: EPS 1.48 (exp. 0.88/0.86 reported); Revenue 3.2bln (exp. 2.94bln); Q3 Revenue view 3.26-3.54bln (exp. 3.07bln); Q3 EPS view 1.14-1.34 (exp. 0.97)
- Boeing 737 Max is unlikely to resumed widespread passenger flights until early next year, almost two months beyond prior guidance, amid regulatory delays, according to US officials cited by WSJ. Officials said the timetable could speed up and MAX operations could resume earlier, but it is not the expectations of those closely monitoring the process. Co. has a 4.5% weighting in the DJIA. Separately, a 737 craft has caught fire at the Shanghai airport, according to Xinhua.
Investors will also keep an eye out for quarterly results from Tesla and Microsoft after markets close.
"I’m more concerned going into the August, September period: what’s going to then be the next catalyst to take the broader market higher,” Andrew Sheets, a cross-asset strategist at Morgan Stanley, said on Bloomberg TV. It’s going to be “a tougher period for stocks," he said.
European stocks slumped on the latest diplomatic spat, the Stoxx 600 sliding as much as 1.2% shortly after the news, while Asian stocks also fell, led by communications and health care, after rising in the last session. Most markets in the region were down, with Hong Kong's Hang Seng Index dropping 2.3% and Singapore's Straits Times Index falling 1.3%, while Taiwan's Taiex Index gained 0.6%. The Topix declined 0.6%, with Access and Land Co falling the most. The Shanghai Composite Index rose 0.4%, with Junzheng Energy and Ningxia Xinri Hengli Steel Wire posting the biggest advances.
Elsewhere, treasuries edged higher and the dollar briefly rose on the latest geopolitical scandal.
The Bloomberg dollar index briefly erased a decline as haven demand picked on news that the U.S. abruptly ordered China to close its consulate in Houston. Earlier, the greenback came under pressure after President Donald Trump warned that the coronavirus crisis in the U.S. will probably worsen before improving. The Australian dollar and euro led gains, both rising for a fourth day against the greenback; the Aussie saw strong demand from exporters, real money and reserve managers, while the euro touched the highest since October 2018. The pound led losses, weighed down by a report that ministers believe the U.K. and EU may fail to sign a post- Brexit trade deal.
The euro gained a fourth day and touched its strongest level since October 2018 as investors chase the price action higher. In evidence of its strong momentum, the currency dipped twice during the London session toward 1.1510 and it was quickly bought both times; initially, it was unable to take out offers at 1.1550, especially after news that the U.S. abruptly ordered China to close its consulate in Houston. The common currency’s strength corners the Bloomberg Dollar Spot Index, which is testing a key support that has held since mid-2018; President Donald Trump’s warning that the coronavirus crisis in the U.S. will probably worsen before improving weighs on the currency.
In rates, Bunds outperformed Treasuries on haven demand, though Italian debt led gains in Europe following the EU’s recovery fund deal. Treasuries bull-flattened with yields lower by as much as 2bp across 20- to 30-year sectors, trailing long-end-led gains for German curve. U.S. session highlights include 20-year bond auction. Treasuries only marginally richer across front-end and belly, flattening 2s10s, 5s30s by 1bp and 1.7bp; 10-year yields around 0.587%, richer by 1.3bp while bunds outperform by 1bp.
In commodities, WTI and Brent futures have experienced some modest selling this morning. At present, the session low for WTI Sep’20 stands just above the USD 41/bbl mark and almost USD 1/bbl lower on the day. The downside stemmed from an escalation in reports relating to the US asking China to close their Houston consulate, which has been confirmed by both sides and seen China threaten to take retaliatory action unless this demand is rectified. For the complex itself newsflow has once again been very quiet, as a reminder the private inventory report last night showed an unexpected build of 7.54mln compared to consensus for a draw of 2mln going into the release, a release which placed the crude benchmarks under pressure. Turning to metals, where price action for spot gold has been comparatively quieter in the context of APAC price action. Overnight, the yellow metal extended on gains above the USD 1850/oz mark to a high of USD 1866.44/oz; price action which seemingly followed similar upward action in silver. In terms of a catalyst, no one driver has been attributed to the move but desks note COVID-19 reports alongside Fed nominee Shelton, a gold standard supporter, advancing at the Senate Banking Committee amongst factors.
Looking at the day ahead, the data highlights include the US existing home sales for June, the FHFA house price index for May, along with Canada’s June CPI reading. From central banks, we’ll hear from ECB President Lagarde and Vice President de Guindos. Finally, earnings out include Microsoft, Thermo Fisher Scientific and Tesla.
- S&P 500 futures down 0.6% to 3,230.50
- STOXX Europe 600 down 0.9% to 373.43
- MXAP down 0.8% to 166.73
- MXAPJ down 1% to 551.81
- Nikkei down 0.6% to 22,751.61
- Topix down 0.6% to 1,572.96
- Hang Seng Index down 2.3% to 25,057.94
- Shanghai Composite up 0.4% to 3,333.16
- Sensex down 0.4% to 37,791.32
- Australia S&P/ASX 200 down 1.3% to 6,075.06
- Kospi down 0.01% to 2,228.66
- German 10Y yield fell 1.4 bps to -0.474%
- Euro down 0.07% to $1.1519
- Italian 10Y yield fell 1.0 bps to 0.968%
- Spanish 10Y yield fell 0.3 bps to 0.353%
- Brent futures down 1.2% to $43.78/bbl
- Gold spot up 0.5% to $1,851.26
- U.S. Dollar Index up 0.2% to 95.33
Top Overnight News from Bloomberg
- The dollar briefly erased adecline as haven demand picked on news that the U.S. abruptly ordered China to close its consulate in Houston. Earlier, the greenback came under pressure after President Donald Trump warned that the coronavirus crisis in the U.S. will probably worsen before improving
- The Australian dollar and euro led gains, both rising for a fourth day against the greenback; the Aussie saw strong demand from exporters, real money and reserve managers, while the euro touched the highest since October 2018
- The pound led losses, weighed down by a report that ministers believe the U.K. and EU may fail to sign a post- Brexit trade deal
- Bunds outperformed Treasuries on haven demand, though Italian debt led gains in Europe following the EU’s recovery fund deal
APAC stocks traded mixed following a similar handover from Wall Street, in which the three indices saw downside in the latter part of the session as the US stimulus bill hit a bump amid differences over the size of the package and whether payroll tax cuts should be included. ASX 200 (-1.3%) lagged as cases stayed on an upward trajectory in Australia’s second largest state of Victoria, although miners saw a boost from the rally in precious metals. Nikkei 225 (-0.6%) failed to nurse opening losses as several large-cap stocks remained in the red, whilst recent JPY strength further weighed on exporters in the index. Conversely, Shanghai Comp (+0.4%) outperformed following yesterday’s pause, whilst Hang Seng (-2.5%) initially took a breather and remained in positive territory as oil giants kept the index afloat; before succumbing to the overall deterioration in sentiment. Finally, JGB futures ticked higher overnight after reports that that the Tokyo Governor is mulling stay-at-home orders, whilst the BoJ’s Rinban operations saw sizes for the 1-3yr, 3-5yr and 5-10yr buckets unchanged.
Top Asian News
- China Central Bank to Pause Further Monetary Policy Easing: Rtrs
- China Huarong Is Said to Buy BEA’s Tewoo Debt at 80% Discount
- Hong Kong Sees Record 105 Local Cases in ‘Most Severe Moment’
European equities have started the session off on the backfoot (Eurostoxx 50 -0.8%) following a mixed handover from the US and Asia with action exacerbated on increasing US-China tensions regarding the Houston consulate in EU hours. From a European perspective, little has fundamentally changed since yesterday’s close amid the fallout from the agreement in Brussels other than some rumblings from Parliamentary groups in the EU that do not accept the Multiannual Financial Framework as its stands; ahead of tomorrow’s plenary session to assess the Council conclusions. In terms of sectoral performance, auto names are lagging their peers after a solid session yesterday with Valeo (-9%) acting as a weight on the sector after its H1 update. Energy names are also seen lower this morning with WTI and Brent front-month futures having dipped below 41.50/bbl and 44/bbl respectively. For stocks specific developments, Kingfisher (+11.4%) sit at the top of the Stoxx 600 with the Co. anticipating HY adj. pretax profit to be above Prev. due to strong Q2 sales and cost reductions. Elsewhere, other gainers include Fresnillo (+9.1%) despite cutting gold production guidance as investors appear satisfied with the accompanying beat on silver production. ABB (+2.3%) are also seen higher after the Co. beat on both top and bottom lines, whilst to the downside Melrose (-17.5%) are a laggard in Europe after announcing a 27% decline in H1 revenues.
Top European News
- Fiat-Peugeot Deal Faces Delay as EU Stops Clock on Review
- Bailey Hires First Woman for BOE’s ‘Unofficial Governor’ Role
- Twitter Alerts Irish Privacy Regulator About Hacker Attack
In FX, the Dollar has bounced broadly on risk-off positioning and some profit taking after sustaining more heavy losses vs rival currencies, as US-China tensions ratchet up further over the closure of the Chinese Consulate in Houston by US ‘request’. In response, China’s Foreign Ministry has issued a warning about retaliation if the outrageous edict is not reversed and Usd/Cnh has rebounded firmly from circa 6.9640 to around 7.0160 awaiting further developments. Meanwhile, the DXY has pared more losses following another skirmish with 95.000, at 95.061 vs 95.043 at one stage on Tuesday to trade at 95.419 amidst a deeper pull-back in high beta/cyclicals that have gleaned most at the Greenback’s expense.
- GBP - Sterling never really took advantage of the aforementioned Dollar drubbing, with Cable only extending advances beyond the 200 DMA (around 1.2705) to 1.2740 at best before reports emerged in the UK press suggesting that the Government is resigned to life post-Brexit transition period without an EU trade deal. The Pound has subsequently given up 1.2700+ status and Eur/Gbp is testing 0.9100 from a few pips off 0.9000 only yesterday.
- CHF/AUD/NZD/EUR/CAD/JPY - All conceding ground to the recovering Buck, but not much in the grand scheme, as the Franc flits between 0.9314-37, Aussie remains above 0.7100 and not far from Fib resistance that was breached on the way up towards 0.7167 and Kiwi pivots 0.6650. Elsewhere, the Euro ran into reported fund supply at 1.1550, but is holding above 1.1500 after Tuesday’s big figure break despite potentially damaging news on the EU Budget as main EP groups back a motion of non-acceptance of the deplorable deal. Separately, Eur/Usd may be deriving a degree of underlying support from decent 1.27 bn option expiry interest at the round number. The Loonie is straddling 1.3450 in the run up to Canadian CPI and the Yen has drifted down to 107.00 or so following a break above that faded just ahead of near double top resistance at 106.67-65.
- SCANDI/EM - The latest strains in relations between Washington and Beijing and associated aversion has undermined the Sek and Nok especially as oil prices recoil, but EMs are also suffering due to their more risk sensitive nature. Nevertheless, the Rand is still deriving some traction from Gold reaching fresh multi-year peak and only appearing to wane beyond Usd 1850/oz amidst speculation about hedging from bullion producers.
In commodities, WTI and Brent futures have, alongside broader market performance, experienced risk-off moves this morning. At present, the session low for WTI Sep’20 stands just above the USD 41/bbl mark and almost USD 1/bbl lower on the day. The downside stemmed from an escalation in reports relating to the US asking China to close their Houston consulate, which has been confirmed by both sides and seen China threaten to take retaliatory action unless this demand is rectified. For the complex itself newsflow has once again been very quiet, as a reminder the private inventory report last night showed an unexpected build of 7.54mln compared to consensus for a draw of 2mln going into the release, a release which placed the crude benchmarks under pressure. Attention now turns to the EIA report later today for confirmation of such a build in stocks; currently, the EIA report is expected to show a crude draw of 2.088mln which would be smaller than last week’s 7.5mln draw and in contrast to last night private inventory build. Turning to metals, where price action for spot gold has been comparatively quieter in the context of APAC price action. Overnight, the yellow metal extended on gains above the USD 1850/oz mark to a high of USD 1866.44/oz; price action which seemingly followed similar upward action in silver. In terms of a catalyst, no one driver has been attributed to the move but desks note COVID-19 reports alongside Fed nominee Shelton, a gold standard supporter, advancing at the Senate Banking Committee amongst factors. For reference, the next level to watch out for is USD 1885.72/oz which is the high from September 9th 2011 and the ATH at USD 1921.17/oz.
US Event Calendar
- 7am: MBA Mortgage Applications, prior 5.1%
- 9am: FHFA House Price Index MoM, est. 0.3%, prior 0.2%
- 10am: Existing Home Sales, est. 4.75m, prior 3.91m; Existing Home Sales MoM, est. 21.36%, prior -9.7%
DB's Jim Reid concludes the overnight wrap
The best thing about working I can find other than to pay the mortgage and constant renovation bills is that I didn’t have to go to Peppa Pig world yesterday with my family. It was chaos apparently. However this trip may have pushed back retirement plans even further as they came back with more Peppa Pig merchandise than Hamleys stock at Xmas.
Christmas came early yesterday in markets with numerous asset classes reaching their strongest levels since financial markets reacted to the global spread of the pandemic back in March. Having said that, US stocks came off their highs on stimulus doubts in the last hour of trading. Nevertheless the S&P 500 advanced by +0.17% to reach its highest level since 21st February, which was the Friday before the weekend when Italian cases surged into triple digits and sent markets into a tailspin. The rise in the S&P was led by Energy (+6.15%) and Banks (+3.55%) as the growth over value trade had a rare reversal. In fact, Energy stocks led the rally on both sides of the Atlantic (+2.37% for STOXX 600 Oil and Gas sector) against the backdrop of a surge in oil prices with Brent crude (+2.40%) and WTI (+2.82%) both climbing to their highest levels since early March. Tech underperformed with the NASDAQ falling -0.81%.
In a further sign of normalisation though, Bloomberg’s index of US financial conditions closed in positive territory for the first time since the pandemic began or more specifically 26 February (meaning financial conditions are marginally more accommodative now than at their pre-GFC average from 1994 to July 2008). Over in Europe, equities earlier also gave up some of their gains towards the end of the session with the STOXX 600 (+0.32%) similarly reaching a post-pandemic high. At one point in trading the DAX (+2.04% at the highs) actually ventured into positive territory on a YTD basis, before ending the session up +0.96%.
The corollary of this risk-on move was a broad dollar breakdown, with the dollar index down by -0.75% to its lowest level in over 4 months, having weakened for 7 of the last 8 sessions now. The move saw the euro rise to $1.153, finally breaching the $1.145 high back in March that means the single currency is now at its strongest level against the dollar since January 2019. As a reminder, our FX strategists see the euro heading up to $1.20 by year-end, partly supported by an expected divergence in the Europe data relative to that in the US as the resurgence in cases knocks confidence.
Speaking of the US, Republican leaders in Congress and the White House met to finish off the party’s opening bid to House Democrats for the latest round of stimulus. Treasury Secretary Mnuchin and White House Chief of Staff Meadows seem to agree that an additional round of stimulus checks directly to individuals, a more tailored extension of supplemental unemployment benefits, and additional funding for covid-19 testing would all be included. However, the party still sees some dissent for the payroll tax cut that the President has advocated for. Congress has already approved $2.9tr in fiscal stimulus this year, and now Republicans are trying to keep the current bill to another $1tr vs the House passed bill for $3.5tr. The timeline is getting tight for Congress as much of the original stimulus is set to expire within the next few weeks but with US lawmakers on recess in the second week of August. Late in the session, it was reported that Senate Majority leader McConnell does not expect stimulus to get done in two weeks as the White House had wanted. Overnight, Bloomberg has reported that Senate Republicans are considering whether to cut the unemployment insurance subsidy to 70% of the $600 weekly addition to state-run unemployment programs provided by the last round of economic aid, or pushing for 70-75% of prior wage replacement, a smaller benefit. Final details on this are likely to be out today.
Staying with the US Congress, the Senate Banking Committee heard a pair of Fed confirmation votes. Judy Shelton has been a contentious pick by President Trump for the Federal Reserve’s Board of Governors, but yesterday she won confirmation by a party-line vote, 13-12, of the Senate Banking Committee. Shelton has drawn criticism in the past for being an informal adviser to the Trump campaign in 2016, which might affect the image of her independence. She has also held more unorthodox monetary policy views including a return of the US to the gold standard and questioning a need for a central bank controlled benchmark rate. With far less contention, Christopher Waller, who is currently the director of research at the St. Louis Fed passed 18-7 through his own confirmation vote. Both Shelton and Waller will now be voted on by the entire Senate in order to join the Fed Board. Senate Majority leader McConnell will likely only bring votes to the floor once he knows he has at least 50 votes and so it will be notable if the chamber votes on Waller, clearly the far less controversial candidate, well ahead of Shelton.
In terms of the latest on the coronavirus, California has overtaken New York overnight to become the most infected state in the US in terms of total infections since the start of the pandemic as it reported 14,369 new cases (vs. 7-day average of 8790) or a 3.6% daily rise (vs. 7-day average of 2.5%). California’s total infections now stand at 409,305 versus 408,181 in New York. Governor Newsom noted that California is likely to have adequate hospital capacity, with Covid-19 patients occupying just 17% of available beds across the state. In Florida, cumulative hospitalizations rose 2.4%, to 21,780, while the daily increase of 517 is the most on record. Cases rose by just over 9400 (vs. 7-day average of 11,172) yesterday in the state or 2.6% (vs. 7-day average of 3.5%), but Tuesday has routinely been lower than the rest of the week and so should be taken with a degree of caution. According to the Texas Medical Center, the number of covid-19 patients in Houston-area hospitals, which at one point were using surge beds to deal with the overflow of patients, should decline for at least the next two weeks, given recent admission stats. New York continues to add to its “Quarantine list”, with 10 new states including Alaska, Delaware, Indiana, Maryland, Missouri, Montana, North Dakota, Nebraska, Virginia and Washington, but Minnesota has been removed. Meanwhile, President Donald Trump has rebooted his coronavirus briefings and warned yesterday that the coronavirus crisis will probably worsen before improving.
There are also concerning reports from Asia, as both Hong Kong and Tokyo are seeing a rise in cases. Tokyo has seen more than 1,600 coronavirus cases in the past week with between 230 to 240 cases today, and Governor Yuriko Koike is considering urging residents to avoid unnecessary trips outdoors during an upcoming four-day weekend. Australia’s Victoria state also registered 484 new cases setting a nation record while State Premier Daniel Andrews said that the lockdown may be extended unless people comply with restrictions.
The Nikkei (-0.47%) and the ASX (-1.28%) are the notable underperformers this morning following the latest virus data, while in contrast the Hang Seng (+0.08%), Kospi (+0.11%) and most notably the Shanghai Comp (+1.20%) are all up. Futures on the S&P 500 are up +0.35% and in commodities spot silver and gold prices are up a further +4.93% and +0.72% respectively. In terms of data releases, Japan’s preliminary June manufacturing PMI came in at 42.6 (vs. 40.1 last month) while the service PMI printed at 45.2 (vs. 45.0 last month) bringing the composite reading to 43.9 (vs. 40.8 last month).
Over in Europe, we just caught the news in yesterday’s edition that EU leaders had agreed a final deal on the recovery fund, made up of €390bn in grants and €360bn in loans. Our European economists have now put out an in-depth note looking at the final deal (link here), where they argue that there are two key positives from a financial market point of view. The first is the precedent it sets as the EU’s first common counter-cyclical instrument. The second is that it has an optimal design in that it is large enough for the scale of the crisis, it is targeted at the most growth-enhancing opportunities, and it incentivises structural reforms.
In line with the broader risk-on move yesterday, the market reaction in Europe continued to be positive. 10yr yields on Italian (-1.1bps) debt over bunds narrowed to their lowest levels in over 4 months. Credit default risk also fell, with the iTraxx Europe falling by -1bp to its lowest level since late February, with the iTraxx Crossover (-3bps) at its lowest since early March. Nevertheless, inflation expectations fell back, in spite of reaching a 4-month high on an intraday basis with 5yr5yr inflation breakeven swaps for the Euro Area closing down -1.2bps at 1.12%.
Aside from the dollar, a number of safe havens actually recorded a strong performance, with the precious metal rally we mentioned yesterday gathering further steam. By the close, gold had risen a further +1.33% to a fresh 8-year high of $1842, while silver surged by +7.01% to surpass its 2016 peak and reach a 6-year high. The +21.39% advance for gold since the start of the year makes it one of the few major assets to have seen big positive returns in 2020 so far. US Treasuries also advanced, with 10yr yields down -1.0bps to 0.60%.
It was another day of fairly light data releases, though from the US we did get the Chicago Fed’s national activity index which saw a rise to 4.11 in June (vs. 4.00 expected). Elsewhere, Canadian retail sales rose by +18.7% in May (vs. +20.0% expected), and the UK’s main measure of public borrowing rose to £35.5bn in June (vs. £38.0bn expected), a move which took the debt-to-GDP ratio to 99.6%, the highest since the financial year ending March 1961. While we’re on the UK public finances, it’s worth noting that Chancellor Sunak launched the Comprehensive Spending Review for 2020 yesterday, which will be published in the autumn. Notably it warned of “tough choices” that lie ahead given the economic impact of the pandemic. Overnight, the British Chambers of Commerce has said in a report that Sunak should reduce social security contributions by GBP500 per employee as it will help to “protect businesses and preserve jobs.”
To the day ahead now, and the data highlights include the US existing home sales for June, the FHFA house price index for May, along with Canada’s June CPI reading. From central banks, we’ll hear from ECB President Lagarde and Vice President de Guindos. Finally, earnings out include Microsoft, Thermo Fisher Scientific and Tesla.