Futures Slide On US-China Tensions, Fiscal Stimulus Worries, Poor Earnings

Tyler Durden's Photo
by Tyler Durden
Tuesday, Aug 04, 2020 - 08:09 AM

S&P futures posted a rare overnight drop alongside shares in Europe as President Trump’s moves to force China-owned TikTok into a sale of its U.S. operations drew a sharp rebuke from Beijing, ratcheting up tensions as the world slides into a pandemic-fueled recession; at the same time a string of poor earnings illustrated the continuing hit from the pandemic while jittery investors also awaited news on whether fresh fiscal stimulus in the U.S. will get approval. The dollar reversed overnight losses and 10Y yields tumbled back to all time lows.

On Monday, the S&P 500 closed Monday within 3% of its all-time high, powered over the past four months by a stimulus-led rebound and a rally in tech-related stocks including Apple Inc, Netflix Inc and Inc. In earnings-related news, insurer AIG fell 2.8% in premarket trading after posting a 56% fall in quarterly adjusted earnings. Take-Two Interactive Software Inc O) rose 4.7% as it raised its annual adjusted sales forecast on demand for its videogame franchises “Grand Theft Auto” and “NBA 2K”. Rival Activision Blizzard Inc gained 3.8% ahead of its results due after the closing bell.

"We see U.S. stocks at risk of fading fiscal stimulus," BlackRock Investment Institute strategists led by Mike Pyle wrote in a note. “U.S. employment figures are in focus this week as this fiscal cliff nears and the pandemic’s spread in Sunbelt states is starting to affect economic activity.”

The MSCI world equity index was up 0.4% after reaching a five-month high on Tuesday morning. Friction between the world’s top two economies took a back seat in the first half of 2020 as the COVID-19 pandemic crushed global growth, and an escalation now would hamper the recovery of some exporters and importers and fan fears of a deeper economic slump. With Microsoft Corp looking to buy short-video app TikTok’s U.S. operations, Trump said on Monday the U.S. government should get a “substantial portion” of any deal price. On Tuesday, state-backed newspaper China Daily said the country will not accept the “theft” of the technology company. Investors are also focused on whether U.S. Congress will approve fresh stimulus. The pressure is building, with the Senate set to leave on a break Friday, when crucial job data is due.

Europe's Stoxx 600 reversed an early gain of as much as 0.6%, dropping 0.4%, and London's FTSE 100 flat on the day with defensives shares among the worst performers. Disappointing earnings reports from the world’s largest spirits maker, Diageo Plc and German drugs and pesticides giant Bayer took the shine off growth-linked cyclical stocks. Food-and-drink shares fall the most after Diageo slumps on sales miss. Health-care shares also lag, while autos and banks outperform and BP boosts oil-and-gas shares. Shares in BP jumped after it cut its dividend and posted a record loss that was in line with expectations. On the other end, the Stoxx 600 Automobiles & Parts Index rises as much as 2.4% after Renault’s CEO outlines a focus on margins, Bankhaus Metzler double-upgrades Daimler on profitability prospects and Jefferies analysts say 2Q results support current terms for the PSA Group-Fiat Chrysler merger. The automotive index was +1.7% at 1:35pm in Paris, with Renault +5.5%, Nokian Renkaat +4.1%, PSA +3.7%, Fiat Chrysler +3.4%, BMW +2.2%; non-index member Schaeffler +8.6%. The sector has second-biggest gain in Stoxx Europe 600 Index, which is down 0.4%

Earlier in the session, stocks in most Asian markets rose, with gauges in Japan, Hong Kong, Shanghai, Taiwan and South Korea advancing led by energy and industrials, after rising in the last session. All markets in the region were up, with Japan's Topix Index gaining 2.1% and Hong Kong's Hang Seng Index surged in afternoon trade, with property stocks leading gains. The gauge rose as much as 2.2%, the most since July 21, before paring the gain to 1.9% led by Wharf Real Estate Investment +7% and New World Development +4.1%. Japan's Topix gained 2.1%, with GSI Creos and Plant rising the most. The Shanghai Composite Index rose 0.1%, with Heilongjiang Interchina Water Treatment and North Navigation Control Technology posting the biggest advances.

As noted above, U.S.-China tensions worsened as President Donald Trump said that he will ban Chinese app TikTok in the U.S. unless a tech company such as Microsoft buys it. China said it would not accept the “theft” of a Chinese company and that is has "plenty of ways to respond if the administration carries out its planned smash and grab."

"This kind of rhetoric lines up with our view that U.S.-China frictions may increase into the U.S. elections, injecting volatility into related assets like China tech ADRs (American Depository Receipts) while also supporting insurance assets like gold," wrote UBS Global Wealth Management’s chief investment officer, Mark Haefele.

The United States and China are also clashing over Chinese journalists working in the United States, who may be forced to leave the country if their visas are not extended.

Elsewhere, investors were waiting for Washington to make progress in talks over the next round of fiscal stimulus. A $600-per-week enhanced unemployment benefit, which provided a lifeline for the tens of millions of Americans who lost their jobs due to the pandemic, expired on Friday. Lawmakers said they had made "progress" in the talks, and U.S. House Speaker Nancy Pelosi will meet again with Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows on Tuesday, raising hopes for a breakthrough.

“A second wave of Covid-19, contested elections, civil unrest and escalating tensions with China could provide a toxic cocktail for the final quarter of the year,” Philip Marey, senior U.S. strategist at Rabobank, wrote in the bank’s monthly outlook. Marey said that he expects another economic contraction, or at least a “substantial slowdown” in the fourth quarter, which could force the Federal Reserve into action.

“If they don’t want to cut policy rates below zero, yield curve control is the next logical step,” he said. “Meanwhile, any failure by Congress and the White House to provide sufficient fiscal stimulus going forward will only speed up the Fed’s thinking process.”

In FX, the dollar rebounded from a new bout of overnight selling, as traders re- balanced their portfolios in the run-up to key U.S. economic data releases this week. The Australian dollar’s rally followed the central bank’s pledge to resume quantitative easing from Wednesday; the euro and Swiss franc also climbed. Japanese government bonds edged higher after an auction of 10-year debt attracted decent demand, while the yen halted a two-day loss

In rates, 10-year TSY yields were around 0.54%, richer by ~2bp vs Monday’s close; Bunds outperformed slightly with ten-year German bond yields edged down to -0.5400%, but remained above the two-month lows reached at the end of last week. European peripherals outperform, led by Portugal and Spain.

Long-end Treasuries were near session highs after catching a bid in London hours as S&P 500 E-mini futures pared gains, flattening the yield curve. Price action has been broadly muted ahead of Wednesday’s supply announcement, however, while another heavy IG credit issuance slate is possible following Monday’s strong start to the week. Yields lower by 1bp to 2.5bp from belly out to long end, flattening 2s10s spread by nearly 2bp, 5s30s by 1.4bp

Spot gold edged down from all-time highs, at $1,974.3033 per ounce, amid mounting COVID-19 cases and a warning from the World Health Organization that the road to normality would be long. Oil prices slipped on fears that a new wave of COVID-19 infections could curtail a pick-up in fuel demand, just as major producers ramp up output. WTI crude futures fell 59 cents, or 1.44% to $40.42 a barrel. Brent crude futures fell 59 cents, or 1.3% to $43.56 a barrel

Looking at the day ahead, economic data include June factory orders and final reading for durable goods. Disney, Fox Corp, Activision Blizzard, Twilio and KKR are due to report earnings

Market Snapshot

  • S&P 500 futures down 0.3% to 3,279.25
  • STOXX Europe 600 down 0.2% to 362.90
  • MXAP up 1.7% to 168.02
  • MXAPJ up 1.5% to 558.93
  • Nikkei up 1.7% to 22,573.66
  • Topix up 2.1% to 1,555.26
  • Hang Seng Index up 2% to 24,946.63
  • Shanghai Composite up 0.1% to 3,371.69
  • Sensex up 1.6% to 37,535.54
  • Australia S&P/ASX 200 up 1.9% to 6,037.55
  • Kospi up 1.3% to 2,279.97
  • Brent futures down 1% to $43.72/bbl
  • Gold spot unchanged at $1,976.95
  • U.S. Dollar Index down 0.06% to 93.49
  • German 10Y yield fell 1.0 bps to -0.533%
  • Euro up 0.1% to $1.1776
  • Brent Futures down 1% to $43.72/bbl
  • Italian 10Y yield fell 0.5 bps to 0.882%
  • Spanish 10Y yield fell 3.7 bps to 0.299%

Top Overnight News

  • House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin head into another round of negotiations on a new virus relief package after talks on Monday yielded “a little bit” of progress
  • With the talks dragging on, President Donald Trump on Monday said he was considering executive action to restore a moratorium on evictions that expired, and the White House was looking at other steps the administration could take without action by Congress
  • China’s government may take action against Washington, if a sale of TikTok’s U.S. operations to Microsoft Corp. is forced, the state-run China Daily said in an editorial
  • California and Arizona reported fewer new coronavirus cases after battling a surge in infections last month, while Germany and Poland recorded increases
  • BP Plc slashed its dividend for the first time in a decade after the coronavirus pandemic upended the oil business

Asian equity markets traded positively as the region took its cue from the constructive handover from Wall St where sentiment was underpinned by strong ISM Manufacturing PMI data and with advances led by a continued tech rally after Apple shares extended on record highs and with Microsoft the biggest gainer in the DJIA amid a potential TikTok acquisition. ASX 200 (+1.9%) outperformed and broke above the 6000 level as tech names found inspiration from their counterparts stateside and a potential WFH boost due to the impending tougher lockdown restrictions in Victoria state, with notable strength also seen in the top-weighted financials sector. Nikkei 225 (+1.7%) remained underpinned by favourable currency flows and with slight encouragement also provided by firmer than expected Tokyo inflation data, as well as comments from BoJ Governor Kuroda that the central bank could extend the period of corporate support. Hang Seng (+2.2%) and Shanghai Comp. (+0.1%) conformed to the upbeat tone but with less conviction in the mainland after another notable liquidity drain by the PBoC and continued US-China tensions with the US attempt to force a sale of TikTok being branded by Chinese press as a robbery and with allegations from US Secretary of State Pompeo that the Chinese Communist Party is running an espionage operation in the US. 10yr JGBs were initially flat with demand sapped by the gains in Tokyo stocks and as participants were sidelined ahead of the 10yr JGB auction which saw mixed results but nonetheless attracted higher prices and eventually spurred 10yr JGBs in late trade.

Top Asian News

  • RBA Keeps Key Rate, Yield Unchanged, Will Resume Bond Purchases
  • Modi Reimposes Kashmir Clampdown a Year After Autonomy Ended
  • Most Valuable Indian Lender Gets New Chief After 26 Years
  • China’s Hottest Stocks Stumble in Push Toward Five Year- High

The initial optimism seen in Europe at the cash open somewhat petered out – with the region now posting a mixed performance despite a lack of fresh fundamental catalysts and a positive APAC handover. No major under/outperformers are seen across major European bourses, but DAX saw a notable reversal into negative territory from a firm positive performance earlier in the session – potentially on the back of heavyweight Bayer (-3.3%) extending on post-earnings losses after cutting its guidance, whilst the turnaround in the tech sector prompted SAP (-2.5%) to tumble to the bottom of the index, albeit Infineon (+4.7%) remains positive despite the broader erosion in the tech sector after raising its revenue guidance.. Sectors are now mixed as earlier gains recede, albeit the detailed breakdown sees cyclical sectors Oil & Gas, Autos, Bank and Travel & Leisure retaining their top positions whilst defensives hold onto losses. The auto sector has seen little by way of fresh news, although pre-market, the German Ifo institute noted that the auto industry business expectations rose significantly for a second straight month, thus potentially underpinning the sector. Individual movers largely consist of earnings: BP (+7.5%) extends on gains despite a 50% cut to dividends after posting a smaller than expected loss and noting that the current financial breakeven is at USD 40/bbl. Diageo (-5.5%) holds onto losses after missing on expectations across the main metrics whilst refraining from providing guidance. Easyjet (+12%) drifts higher after upping its Q4 capacity to 40% from the prior 30%, with the performance also supporting the likes of Air France-KLN (+5.5%), Lufthansa (+3.5%) and peers. Other earnings-related movers include Hugo Boss (+2.1%), Fraport (+0.3%), Evonik (+3.6%) and Metro AG (+4%).

Top European News

  • Bond Titans Led by Pimco Double Down on Their Bet on Europe
  • Former King Abandons Spain in Disgrace as Legal Woes Pile Up
  • Schaeffler Mulls More Cost-Cutting to Deal With Covid Crisis
  • German Bonds Fated to Stay Rich If ECB Has Any Say: Markets Live

In FX, it remains to be seen whether the Buck stops retreating and stages another rebound, but for now it looks as though yesterday’s narrow failure to recapture the 94.000 level in DXY terms was telling from a psychological standpoint if nothing else. Indeed, the index has drifted down from a lower 93.612 high through 93.500 to 93.268 and lost inverse correlation with broad risk sentiment that briefly returned yesterday. Ahead, relatively 2nd tier data scheduled and unlikely to have a major impact given the lack of meaningful or last reaction to Monday’s manufacturing ISM that was largely better than expected in headline and sub-component terms. However, technical factors may direct trade given near term support at 93.169 and resistance at 93.997 ahead of last Friday’s 94.007 high.

  • AUD/EUR/CHF/CAD - The Aussie has taken advantage of Greenback’s pull-back to reclaim 0.7100+ status and the 10 DMA (0.7144) in wake of the RBA policy meeting that maintained rates and guidance, but in acknowledgement of the COVID-19 resurgence in Victoria will see the Bank resurrect its QE program from Wednesday. Elsewhere, the Euro has retested 1.1800 from Monday’s low just under 1.1700 and the Franc is back over 0.9200, with the former topping out ahead of Fib resistance at 1.1823 and the latter into 0.9150, while the Loonie is meandering between 1.3404-1.3360 parameters in the run up to Canadian manufacturing PMI.
  • JPY/NZD/GBP/NOK/SEK - Lagging their G10 counterparts, albeit to varying degrees, as the Yen pivots 106.00, Kiwi straddles 0.6600 in advance of NZ jobs data and Pound fades within a 1.3107-1.3047 range having failed to get close enough to stir or arouse stops said to be waiting for a break of 1.3120. Similarly, the Scandinavian Crowns have slipped both slipped from best levels against the Euro, though in tight bands of 10.7675-7200 and 10.3045-2740 respectively and the Nok eyeing softer crude prices.
  • EM - Try in focus due to Turkish inflation data, but not deflated even though CPI slowed more than forecast on the headline and core measures, with the Lira hovering towards the upper end of 6.9170-9795 extremes vs the Usd. The aforementioned weaker Dollar is clearly a factor, while Usd/Try may also be taking on board Turkey’s manufacturing PMI extending its rising trend to 3 months in a row and reaching its best level since early 2011. Over in Asia, the HKMA has been active again to keep the Hkd pegged, selling over 1.16 bn of the local currency.            

In commodities, WTI and Brent front month futures remain subdued in early European trade as investors weigh the impact a second COVID-19 wave could have on lockdown impositions and reopening delays alongside rising OPEC supply with the implications as reflected by prelim numbers. Aside from that, traders will be eyeing the weekly Private Inventory figures – with expectations currently positing to a headline draw of 3.5mln barrels, with a draw seen in gasoline and a build in distillates. WTI and Brent futures trade ~40.50 (vs. high 40.99/bbl) and around 43.50/bbl (vs. high 44.11/bbl) respectively. Elsewhere, precious metals are uneventful with spot gold trading on either side of 1975/oz, whilst its silver counterpart remains contained below 24.50/oz. Data compiled by Bloomberg showed that ETFs increased gold holdings for a 27th straight session yesterday – equating some USD 580mln at yesterday’s spot price, whilst UBS expects spot gold prices to rise to around USD 2000/oz in H2 2020. In terms of base metal prices, Dalian iron ore saw another day of gains amid concerns regarding Brazilian miner Vale’s ability to increase production of the raw material, whilst London copper prices continue to ease, in-fitting with the performance in sentiment.

US Event Calendar

  • 10am: Factory Orders, est. 5.0%, prior 8.0%; Factory Orders Ex Trans, prior 2.6%
  • 10am: Durable Goods Orders, est. 7.3%, prior 7.3%; Durables Ex Transportation, est. 3.3%, prior 3.3%
  • 10am: Cap Goods Orders Nondef Ex Air, prior 3.3%; Cap Goods Ship Nondef Ex Air, prior 3.4%

DB's Jim Reid concludes the overnight wrap

Yesterday it was Bronte’s turn to provide the high drama at home as on a dog walk with my wife and three kids she ate a whole discarded chocolate bar in one sitting having come across it on the floor. She is totally food obsessed but never goes for chocolate as there must be some knowledge that it is potentially lethal for dogs. We must be starving her. Anyway a trip to the vets, forcing her to be sick, and a big bill later and all was well. That wasn’t the only big bill yesterday. We are looking to convert a dilapidated building in our garden at some point over the next year and require planning permission. As part of this we need to do a bat survey to check there are none living in it as they are a protected specie. We were confident there weren’t. On the day of the survey yesterday the “bat man” found fresh bat droppings and says we now have to send it off for analysis and then have a team camp out overnight in the garden to “track and trace” the bat and find a way of protecting Mr or Mrs Bat and any offspring. When I saw the potential bill for this I went a bit batty. Think of a suitable number and then times it by about 7 and you’ll be at around the right ballpark. So an expensive animal led day yesterday.

With slightly better than expected PMIs in major countries and technology stocks continuing to lead the way, US equities started August on the front foot. The S&P 500 rose +0.72%, led by a mix of Software (+2.90%), Autos (+2.17%), and Tech Hardware (+2.03%), while defensives like Real Estate (-1.47%) and Utilities (-1.14%) lagged. With the strength in technology stocks it was another record close for the Nasdaq, finishing +1.47% higher. In line with PMIs, equites in Europe outpaced those in the US with the STOXX 600 finishing +2.05% higher, the biggest 1 day rise since mid-June with every sector finishing higher. With the economic optimism from macro data, cyclical sectors like autos (+3.76%) and construction (+3.15%) led the index higher yesterday. Bank underperformed, but were still up (+1.57%), with poor earnings results from SocGen and HSBC who cited trading losses and a weak economic outlook respectively.

On those final July PMI data points, similar to the flash PMI readings roughly two weeks back, final July manufacturing PMI readings showed stronger economic momentum in Europe than in the US. Although the US PMI impressed. In general PMIs mostly beat estimates or the recent flash levels, which is good news for the recovery, but there is one note of caution. A recurring theme from the data was a weaker employment component, showing that there is still fragility on this front. The Euro area saw an upward revision from the flash estimate, up to 51.8 from 51.1, with gains in output overcoming continued job cuts as corporates report they are operating under capacity. It was the first time the measure was in expansion for the Euro area as a whole since January 2019.

Germany also came in above the flash estimate at 51 vs. 50, with new orders driving the improvement from June, however again the rate of job losses was near the largest since 2009. France’s final July PMI was only marginally higher than the flash (52.4 vs 52.0), as both softer demand and employment levels dragged on the index. Italy (51.9 vs. 51.2) and Spain (53.5 vs. 52.3) saw their strongest levels since Q2 2018. The UK was one of the few countries that was slightly lower, with the final manufacturing PMI 0.3 lower than the 53.6 flash print. In the US, the ISM manufacturing index rose to 54.2 from 52.6 last month, (vs. 53.6 estimates), which was the fastest pace since Mar 2019. The US Markit PMI measure was at 50.9, under the 51.3 flash print, but still the best print since January and just slightly in expansionary territory.

Back to markets and core sovereign bonds were slightly higher or unchanged as risk sentiment improved yesterday. German 10yr yields were largely unchanged (+0.1bps) at -0.52%, while US 10yr yields were +2.6bps higher at 0.554%. The dollar rose +0.21%, rising for consecutive sessions for the first time since 29 June.

Asian markets have largely tracked Wall Street this morning with the Nikkei (+1.42%), Hang Seng (+0.83%), Kospi (+1.06%) and ASX (+1.82%) all posting decent gains but with the Shanghai Comp trading flat. Futures on the S&P 500 are marginally down at -0.08%.

On the virus, Norway’s government is banning cruise ships from entering all ports for two weeks after an outbreak on board a cruiseliner led to about 40 new cases, according to Trade Minister Nybov yesterday. Meanwhile, the UK is in talks with Portugal to ease quarantine rules on travelers returning from the country on the Iberian Peninsula. The UK are looking into more closely tailoring rules for specific regions, according the government. This comes while the government has put together plans to lockdown London in case of another surge of cases, according to Prime Minister Johnson’s Spokesman Slack. The plan, he said, sets out “the possibility of a power to restrict people’s movement and potentially close down local transport networks.” Concerns across the continent are rising as daily case growth is again starting to accelerate from low levels in much of Europe, even as it's gently falling from high levels in the US. Across the other side of the world, state of Victoria in Australia has announced that it will start imposing on the spot fines of as much as AUD 5,000 on anyone who flouts isolation rules while repeat and serious offenders could attract a court imposed penalty of AUD 20,000. The move comes as the state is battling to control the spread of virus.

Back to the US and the main late-June/mid-July hot spots are continuing to cool down with California reporting the fewest new cases in four weeks (4,982), which is well below the average increase of 8,700 over the past 7 days. Arizona also saw new cases hit the lowest levels since the end of June, with just over 1030 versus the 7-day average of over 2400. Regardless of the improving news, as highlighted above the overall numbers are still high with economic restrictions in place to reduce these case numbers. This continues to encourage focus on the fiscal stimulus package that Congress is debating. Republican and Democratic leaders have still been unable to agree on the specifics of the latest stimulus bill ahead of their month long recess from this Friday. There was a little more positivity yesterday but nothing concrete yet.

Here in the UK, Bloomberg has reported overnight that the government will invest c.GBP 1.3bn in building projects and provide GBP 2bn in energy efficiency grants in an effort to create jobs and rally the pandemic-hit UK economy. Relatively small numbers but the direction of travel is clear.

Finally to the day ahead, markets will receive data on the Euro Area June PPI while, manufacturing PMI from Canada will be seen alongside US June factory orders, and final durable goods orders. In terms of earnings, there will be results from Bayer, Diageo, Fidelity, BP, Walt Disney and Activision Blizzard.