Futures Tumble After US Restarts Trade War With China, Locks Out Huawei; China Vows Retaliation Against Apple, Boeing

Well, we did warn you just two days ago that "US-China Relations Are About To Fall Off A Cliff." Sure enough...

It was shaping up as a nice, quiet rampy end a tumultuous week, when at 630am ET all hell broke loose after Reuters reported that the Commerce Department moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, by amending a foreign direct product rule to "strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology" in the process "cutting off Huawei’s efforts to undermine U.S. export controls."

And while the commerce department did extend the temporary general license for Huawei by another 90 days, the US now "anticipates" this will be the final 90-day extension, effectively giving Huawei - and Beijing - a 3 month ultimatum, one which expires just 2 months before the presidential election. 

The report, which culminated a week of increasingly acerbic and belligerent war of words, sent the e-mini S&P future sharply lower into negative territory from modestly positive while triggering a flight to safety...

... as countless US chip suppliers suddenly find themselves scrambling to find a new key client, as well as Huawei which will need an army of new suppliers of semiconductors. Today's news also confirms what we wrote all the way back in Dec 2018, when we explained that in the escalating trade war with China, Beijing has one giant weakness and that the US has all the leverage - if it wants to use it - with its near monopoly on advanced semiconductor production, the lack of which can stop Huawei dead in its tracks.

The rule change is a blow to Huawei, the world’s no. 2 smartphone maker, as well as to Taiwan’s TSMC, a major producer of chips for Huawei’s HiSilicon unit as well as mobile phone rivals Apple and Qualcomm.

Flaring U.S.-China tensions have hung over markets all week, and President Donald Trump said in remarks broadcast Thursday that he doesn’t want to talk to his Chinese counterpart Xi Jinping right now. Stress between the nations is an extra headache for investors as they grapple with the ongoing fallout of the coronavirus.

As if prepared for just this eventuality, mere minutes later China's Twitter mouthpiece, Global Times Editor in Chief Hu Xijing tweeted that "China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes."

Moments later, the Global Times added to this tweet, reporting that "China is ready to take a series of countermeasures against a US plan to block shipments of semiconductors to Chinese telecom firm Huawei, including putting US companies on an "unreliable entity list," launching investigations and imposing restrictions on US companies such as Apple and suspending the purchase of Boeing airplanes, a source close to the Chinese government told the Global Times."

"China will take forceful countermeasures to protect its own legitimate rights," if the US moves forward with the plan to bar essential suppliers of chips, including Taiwan-based TSMC, from selling chips to the Chinese tech giant, the source told the Global Times in an exclusive interview.

The measures include adding related US companies to China's "unreliable entity list," imposing restrictions on or launching investigations into US companies like Qualcomm, Cisco and Apple according to Chinese laws and regulations like Cybersecurity Review Measures and Anti-monopoly Law, and suspending airplane purchases from Boeing, said the source. Global Times was quick to add that "The US companies mentioned including Apple, Qualcomm, Cisco and Boeing are all highly dependent on the Chinese market."

The unreliable entity list will include foreign organizations, individuals and companies that block or shut supply chains, or take discriminatory measures for non-commercial reasons, and when their actions endanger the business of Chinese companies as well as global consumers and companies, MOFCOM spokesperson Gao Feng told a press conference in 2019.

This back and forth, which indicates that a fresh trade war has now broken out, sent futures from comfortably in the green to down almost 1% on the day. It also shook the Yuan out of its recent hypnosis, with the currency tumbling almost 200 pips to 7.13, the lowest level in over a week.

The good news: now we can rally on "hopes" for progress in the trade war as we did every single day of 2019, in addition to "hopes" for a quick reopening from a global pandemic that has cost 40 million US jobs.  In short, the world may be in a depression, and one false flag away from trade war turning into kinetic war, but stocks will keep rallying on "optimism."

Because in this centrally-planned market for idiots, hope is the only strategy.

There was little hope in Europe, where the Stoxx Europe 600 also trimmed its advance on the news, though it remained higher as Italy edged toward allowing free movement and Germany reported a drop in new infections.

Earlier in the session, Asian stocks gained, led by materials and energy, after falling on Thursday and closed well before the latest news rocked the global economy. Markets in the region were mixed, with Australia's S&P/ASX 200 and Japan's Topix Index rising, and India's S&P BSE Sensex Index and Jakarta Composite falling. The Topix gained 0.5%, with Nomura System Corp and LIFULL rising the most. The Shanghai Composite Index was little changed, with Inesa Intelligent Tech advancing and Jingjin Environmental Protection declining the most.

Then there is the coronavirus pandemic: while the likes of Germany are showing some success at containing the virus, other countries that had quelled the pandemic such as South Korea and China are seeing a rise in cases, underscoring the tough choices policy makers face as they try to resuscitate their economies. Hopes over the rate of infection and a potential compromise on a European recovery fund had helped investors look past data that showed the German economy shrank 2.2% in the first quarter, the most in more than a decade.

In FX, the Bloomberg Dollar Spot index and Treasuries traded in tight ranges Friday, with the former heading for this month’s first weekly gain. The greenback traded mixed versus Group-of-10 peers, before bursting higher following the Huawei news. The euro was steady, after briefly slipping below 1.08 per dollar; Australia’s dollar recovered from a loss that followed after a raft of mixed Chinese data highlighted the challenges confronting the world’s second-largest economy as it seeks to recover from the pandemic.

In commodities, Crude headed for a third weekly gain amid signs the oil market is slowly rebalancing.

Market Snapshot

  • S&P 500 futures down 0.9% to 2,819
  • STOXX Europe 600 up 1% to 330.06
  • MXAP up 0.3% to 144.97
  • MXAPJ up 0.2% to 466.60
  • Nikkei up 0.6% to 20,037.47
  • Topix up 0.5% to 1,453.77
  • Hang Seng Index down 0.1% to 23,797.47
  • Shanghai Composite down 0.07% to 2,868.46
  • Sensex down 0.5% to 30,967.95
  • Australia S&P/ASX 200 up 1.4% to 5,404.81
  • Kospi up 0.1% to 1,927.28
  • German 10Y yield unchanged at -0.543%
  • Euro up 0.09% to $1.0815
  • Italian 10Y yield rose 1.5 bps to 1.643%
  • Spanish 10Y yield fell 0.7 bps to 0.74%
  • Brent futures up 2.4% to $31.87/bbl
  • Gold spot up 0.4% to $1,736.66
  • U.S. Dollar Index down 0.2% to 100.22

Top Overnight News from Bloomberg

  • Sweden’s central bank just hired consultants from BlackRock to help it buy the corporate bonds at the center of a legal dispute with the country’s parliament
  • The German economy shrank 2.2% in the first quarter, the most in more than a decade, offering an early flavor of the damage from the coronavirus outbreak
  • Italy will allow citizens to move freely between its 20 regions starting June 3, according to a draft decree seen by Bloomberg, as Prime Minister Giuseppe Conte’s government opens up the country after more than two months of a stringent lockdown
  • China said it did not know until Jan. 19 how infectious the new coronavirus is, pushing back against accusations that it intentionally withheld
  • China’s industrial output increased in April for the first time since the virus outbreak, while retail sales slid more than projected information about the severity of the outbreak in Wuhan from the world
  • China has a total of five possible vaccines for the coronavirus already in human trials and more will be approved next month, signaling the Asian nation’s rapid progress in the race for immunization
  • Bank of America sold a $1 billion bond to fund Covid-19 relief efforts, marking the first issuance from a U.S. financial institution that explicitly earmarks all proceeds to tackle the pandemic
  • Britain and the European Union’s talks about their future relationship are stumbling toward the brink, with few signs of progress being made ahead of a key deadline next month
  • French Finance Minister Bruno Le Maire pledged government- support measures for the car and aviation industries by the end of June, including incentives to buy electric vehicles

Asian equity markets initially traded indecisively before moving into broadly positive territory; Wall St saw a financial-led session of gains. The APAC session saw mixed Chinese data in which Industrial Production topped estimates but Retail Sales disappointed with a larger than expected contraction. ASX 200 (+1.4%) was buoyed by strength in mining names and with financials cheering the outperformance of their Wall St peers, while Nikkei 225 (+0.6%) initially outperformed due to confirmation the government will lift the State of Emergency in 39 prefectures although the gains were briefly wiped out considering that Tokyo was not included in those areas and with the index oscillating around the 20K level. Hang Seng (-0.1%) and Shanghai Comp. (U/C) were choppy due to the mixed data releases and following the PBoC’s tepid actions whereby it announced a CNY 100bln Medium-term Lending Facility which was half of what had expired yesterday and kept the rate unchanged at 2.95%, but noted that the second phase of its previously announced RRR cuts took effect from today and would release about CNY 200bln of long-term liquidity. Finally, 10yr JGBs were higher but with the gains only marginal amid the indecisive overnight risk tone and with the BoJ also present in the market for relatively reserved JPY 80bln in up to 1yr JGBs, as well as JPY 370bln in the belly.

Top Asian News

  • China’s Industrial Economy Improves While Consumers Remain Wary
  • MUFG Sees Smaller-Than-Expected Profit Growth on Bad-Loan Costs
  • SoftBank Has Spent $2.3 Billion to Buy Own Shares Since March
  • Bidders Are Lining Up to Buy Virgin Australia After Collapse

European stocks initially held onto gains [Euro Stoxx 50 +0.6%], having missed out yesterday’s post-Europe rally. However, reports that the US is moving to block Huawei from acquiring US integrated semiconductors and chip sets pressured sentiment and stock markets. Spain’s IBEX (-0.5%) is the region’s underperformer amid steep losses in its Financial names – broad-based upside is seen across the rest of the region. Sectors are all in the green with Energy relinquishing its top spot to later underperform; sector breakdown sees Basic Resources and Autos outperforming while Banks reside alongside Construction & Materials. In terms of individual movers, BT (+4.9%) rose as much as 10% at the open amid source reports via the FT that the Co. is in talks to sell a "multibillion-pound stake" in its GBP 20bln Openreach unit to infrastructure investors, adding that talks were reportedly held with Macquarie. However, an internal memo pushed back against this speculator, thus shares trimmed some gains. Elsewhere, Richemont (-2.6%) shares lag the market amid a slew of downbeat YY metrics in which FY20 adj net, operating profit, diluted EPS and net cash position eroded. William Hill (+6.6%) trades higher after announcing that cash burn reduced to around GBP 15mln per month and liquidity in excess of EUR 700mln. The group also said revolving credit facility covenants waived for 2020 and reset for 2021.

Top European News

  • Germany Enters Historic Recession With Biggest Slump in a Decade
  • Riksbank Hires BlackRock to Help Pave Way for Corporate Bond QE
  • BT Insider Buying Brings Skepticism to Deal Talks, Say Analysts
  • Pandora Gains After Carnegie Increases Price Target by 42%

In FX, notwithstanding an element of Friday fatigue and cautious trade ahead of potentially market-moving US data in the form of retail sales and ip ahead of preliminary Michigan sentiment, the Yen and Dollar look tightly bound above 107.00 amidst a recovery in broad sentiment and particularly large expiries rolling off at the NY cut, with over 2 bn at the figure and 107.50 keeping Usd/Jpy contained. Moreover, the remaining Greenback/G10 pairings are also sticking to relatively tight lines awaiting more decisive direction following choppy and erratic price action so far this week, as the DXY consolidates just off yesterday’s new mtd high (100.56) within a 100.390-160 range.

  • EUR/AUD/CAD/CHF - As noted above, not much deviation or adverse reaction to Eurozone GDP data that was remarkably close to consensus and largely ignored on the basis that the current quarter will be more telling in terms of gauging COVID-19 contagion. Indeed, after Germany’s 2.2% q/q contraction the Economy Ministry noted no improvement in April vs tangible evidence of recovery from this month, but still predicts a 10% fall overall in Q2. However, the single currency is clinging to 1.0800 vs the Buck following Thursday’s foray below the round number that almost tripped stops at 1.0775. Meanwhile, the Aussie, Loonie and Franc are all meandering between narrow bands against their US counterpart around 0.6460, 1.4045 and 0.9725 respectively, with the former not gleaning much from mixed Chinese data overnight, but the Cad cushioned by firm crude prices and the Chf still wary about ongoing official intervention given further retracement from recent peaks against the Eur to fresh multi-year highs less than 10 pips from 1.0500.
  • GBP/SEK/NOK/NZD - Cable remains on the cusp of steeper declines unless 1.2200 continues to provide psychological support or the Pound survives another test of 1.2166 from a technical perspective awaiting updates on this week’s last session of UK-EU trade negotiations. Conversely, the Swedish and Norwegian Kronas appear to have run in to some resistance in Euro cross terms ahead of 10.5800 and 10.9500 respectively, but both retain upward thrust towards the upper bounds of 10.7100-10.5600 and 11.1855-10.9250 extremes on the week so far, in contrast to the Kiwi that is languishing under 0.6000 vs its US peer and not far from 1.0800 against the Aussie in wake of clear NIRP inferences from the RBNZ.
  • EM - Most regional currencies are going through the motions, but the Lira has now touched 6.9000 as its resurgence gathers more steam and the Mexican Peso is taking the Banxico’s latest 50 bp ease in stride. However, the Czech Koruna has been hit by comments from CNB Governor Runok playing down the prospect of implementing an FX regime and resorting to negative rates following mixed Q1 GDP reads vs forecasts, albeit q/q and y/y contractions vs better than expected Hungarian, Polish and Romanian prints.

In commodities, WTI and Brent front-month continue to grind higher amid rosier demand and storage prospects alongside a more bullish supply backdrop. Furthermore, the IEA’s more optimistic comments regarding the demand slump not being as steep as feared underpin the complex. That being said, desks note that despite the above, the market remains in surplus, but the magnitude of inventory builds has declined vs. April levels – resulting in strengthening time spreads and narrower contango – suggesting that market improving fundamentals. “we still believe that in the near-term, the upside is limited given that we are still in a surplus environment and as there is plenty of inventory for the market to digest.” ING writes. WTI June hovers around USD 28.00/bbl having printed a base at USD 27.24/bbl, whilst Brent July dipped just below 32/bbl in a USD 30.84-32.50/bbl intraday band. For reference, OPEC Secretary General Barkindo will be appearing on Bloomberg TV at 1500BST. Meanwhile, spot gold tracks Dollar action and gains further ground above 1700/oz – eyeing potential resistance at USD 1738.50/oz (April 23rd high), having traded in a USD 1729-38/oz band thus far. Copper prices move higher in tandem with the broader risk sentiment, but prices remain contained within recent ranges.

US Event Calendar

  • 8:30am: Retail Sales Advance MoM, est. -12.0%, prior -8.7%
  • Retail Sales Control Group, est. -4.95%, prior 1.7%
  • Retail Sales Ex Auto MoM, est. -8.5%, prior -4.5%
  • 8:30am: Empire Manufacturing, est. -60, prior -78.2
  • 9:15am: Industrial Production MoM, est. -12.0%, prior -5.4%
  • 9:45am: Bloomberg May United States Economic Survey
  • 10am: Business Inventories, est. -0.2%, prior -0.4%
  • 10am: JOLTS Job Openings, est. 5,800, prior 6,882
  • 10am: U. of Mich. Sentiment, est. 68, prior 71.8; Current Conditions, est. 62.8, prior 74.3; Expectations, est. 60.2, prior 70.1
  • 4pm: Net Long-term TIC Flows, prior $49.4b

DB's Jim Reid concludes the overnight wrap

If you promise not to tell anyone I’ll let you into a little secret. I logged off the earliest I have done in 8 weeks last night and went to play golf in what was a beautifully sunny evening. My first game since early March after courses reopened Wednesday. Right from the outset I ensured I was social distancing by driving it onto the third green instead of the first fairway. Thankfully it got better but I’m a bit surprised how shattered I am after a couple of months of not walking round with my clubs.

It’s also amazing how sentiment can turn after a few hours on the golf course. When the S&P 500 continued a tough week by being down -1.9%, 30 minutes into the US session, it was hard not to wonder whether the market was finally having its Wile E. Coyote moment and responding to gravity after successfully running off the edge of the cliff a few weeks back and somehow staying airborne. However the market’s weightlessness returned and an impressive snap back materialised with the S&P 500 closing +1.15% - over 3% up from the lows with Banks (4.10%) leading the charge.

For the majority of the day Technology stocks were down, but the late rally lifted all boats and 21 out of 24 S&P 500 industry groups finished in the green. Since the first historic spike of initial jobs claims on 19 March, 7 out of the 9 Thursdays have seen the S&P rally in the face of massive unemployment numbers. Energy stocks – one of the other laggards YTD with Banks – rallied as well on the back of a large rise in oil prices, with the sector up +0.94% - still lagging the overall index.

As mentioned above, oil had a strong day, with WTI (+8.98%) and Brent (+6.65%) both moving consistently higher throughout the day. The moves came as the International Energy Agency said in their monthly Oil Market Report that they were increasing their estimate of global oil demand in Q2 by +3.2m b/d, though this remained well below last year’s number by 19.9m b/d. Furthermore, they said that global oil supply would fall to a 9-year low in May, thanks to the OPEC+ agreement and other production declines. Saudi Aramco also cut sales to US and Europe by roughly 50%, more than they have cut to Asia already, in an effort to further reduce the overall global oversupply. DB’s Michael Hsueh’s turned bullish on oil yesterday as demand is recovering quicker than anticipated and supply cuts are holding better too. See his brief note here for more.

Overnight, China has released a mixed bag of April activity data. Industrial production surprised to the upside, printing at +3.9% yoy (vs. +1.5% yoy expected and -1.1% yoy last month) however retail sales were -7.5% yoy (vs. -6.0% yoy expected and -15.8% yoy last month). Fixed asset investment data was closer to expectations at -10.3% yoy (vs. -10% yoy expected and -16.1% yoy in YtD March) while the surveyed urban jobless rate came in at 6.0% (vs. 5.9% last month). The NBS noted that the Chinese economy “hasn’t returned to normal level,” and that there are “pent-up demand effects” in the data improvement.

Following that, markets in Asia have eked out small gains this morning with the Nikkei (+0.11%), Hang Seng (+0.40%), Shanghai Comp (+0.18%) and Kospi (+0.14%) all up. Meanwhile, futures on the S&P 500 are down -0.08% while WTI oil prices are up +0.76% to $27.77 as we type.

In other overnight news, Mexico’s central bank lowered rates by 50bps to 5.5% as expected. The central bank board stated in the communique that accompanies its decision that it saw an economic slump deepening in the second quarter, along with a significant contraction in employment.

Back to yesterday where the late US rally was in the face of more worrying news flow yesterday. Starting with the politics, concerns over another escalation in the China-US trade war were sparked by a Fox Business Network interview with President Trump, who said in reference to Chinese president Xi that “right now, I don’t want to speak to him. I don’t want to speak to him.” Furthermore, he added that “we could cut off the whole relationship. If we did, what would happen? You’d save $500 billion”. So certainly not comments that bode well for the prospects of global trade once the coronavirus has passed. And when it came to the coronavirus, Trump described himself as “very disappointed” in Beijing’s failure to prevent the virus at the start. Meanwhile, the US Senate passed a legislation yesterday that would pave the way for targeted sanctions against government officials in China over alleged human rights abuses against Muslim ethnic minority groups in the country’s northwest. The legislation directs the White House to submit a report to Congress within 180 days identifying those deemed responsible for torture, extrajudicial detention, forced disappearance and other “flagrant denial(s)” of human rights in China’s Xinjiang Uygur Autonomous Region.

The jitters were then further exacerbated after the weekly US initial jobless claims were released. They showed that 2.981m made claims in the week through May 9. That was well above the 2.5m reading expected, and was the smallest weekly decline (-195k) since the peak back in late March, raising fears that the scale of the ongoing job losses aren’t easing as fast as investors had been hoping for, particularly given the equity rally we’ve seen in recent weeks. However, Connecticut said later in the day that it incorrectly reported unemployment claims at 298,680, about 10 times higher than the correct number of 29,846 due to a “data entry reporting error” which likely inflated the initial claims number. Any revisions will be reflected in the next release on May 21. The one consolation with yesterday’s data was that continuing claims, which covered the previous week up to May 2, came in at 22.833m (vs. 25.120m expected), with the insured unemployment rate up “just” 0.3 percentage points to 15.7%.

Before the late US rally these negative stories set the tone and Europe closed weak with the Stoxx 600 falling -2.17%. Even with the eventual rally in US stocks and oil, investors still sought out safe havens, with gold climbing +0.82% to reach a new 7-year high. Indeed, the turmoil this year has meant that gold is one of the top-performing global assets, with a YTD return of +14.04%. US Treasuries also rallied, with 10yr yields down -3.1bps to 0.622%. In Europe, peripheral spreads over bunds widened however, with those on both Italian (+2.8bps) and Spanish (+2.5bps) ten-year debt paring back yesterday’s moves tighter.

The global negative rates chatter continued yesterday, though once again it was generally denied. Bank of England Governor Bailey said that negative rates were “not something we are currently planning or contemplating”, though he did also add that it’s “always wise not to rule anything out forever”. Meanwhile St. Louis Fed Bullard added to Chair Powell’s remarks the previous day, saying that the Fed wasn’t considering negative interest rates. And over in Japan, Governor Kuroda said that he didn’t think it was necessary for the BoJ to cut the policy rate further.

Finally, the latest round of Brexit negotiations between the UK and the EU on their future relationship will wrap up today. That leaves just one more round at the start of June before a key high level meeting takes place later next month. Yesterday, we heard from Prime Minister Johnson’s spokesman that the UK’s chief negotiator, David Frost, told the cabinet that the EU had “asked far more from the UK than they have from other sovereign countries with whom they have reached free trade agreements”. One of the key points of contention between the two sides have been EU demands that the UK sign up to a so-called level-playing field, where the UK will commit not to undercut the EU on areas such as workers’ rights or environmental standards. We should hear more on the latest round from the EU’s chief negotiator, Michel Barnier, in a press conference later today.

To the day ahead now, and the data highlights from Europe include the first look at German GDP in Q1, as well as the second estimate of Q1’s Euro Area GDP. Alongside that, from the US we’ll get retail sales, industrial production and capacity utilisation for April, along with May’s Empire State manufacturing survey and the preliminary University of Michigan sentiment indicator.