One day after a solid start to the new quarter, and after the US took a day off for Independence Day, sentiment has reversed for the worse and US equity futures and European stocks followed Asian shares lower, while bonds declined after the latest China services PMI print from China came well below expectations (53.9 VS 56.2 expected) and raised fresh concerns about the outlook for the global economy. At 7:45am ET, S&P 500 and Nasdaq 100 futures both fell more than 0.5%, indicating US stocks will open lower when trading resumes after the Independence Day holiday. The yield on 2Y Treasuries drifted about five basis points lower to 4.89%. The China-driven weakness was broad based with Japan's NKY down -40bps, China's Shcomp sliding -60bps and the HSI -1.5%. The Stoxx Europe 600 Index slid about 0.6% after soft euro-zone May PPI data, with miners leading the retreat on concern about waning minerals demand from China. Most commodities were lower with copper -70bps, oil -50bps and iron ore -40bps. The Bloomberg dollar index is higher, gold is climbing, and oil is also edging higher.
In premarket trading, United Parcel Service fell as employees moved closer to a strike over pay. Monster Beverage gained more than 2% ahead of its earnings report on Thursday. Here are some other notable premarket movers:
- MP Materials gains 5.8% after China’s move to restrict exports of rare earth specialty materials germanium and gallium.
- Netflix gains 1.2% as Goldman upgrades the streaming service to neutral, saying management has executed its password sharing crackdown more effectively than expected. .
- Rivian rises as much as 7.1% after the company started delivering the electric vans it makes for Amazon.com Inc. to Europe — its first commercial shipments outside the US.
- Publicly traded special purpose acquisition company East Resources Acquisition completed its combination with asset manager Abacus Life, which specializes in life insurance products, it said on Monday.
- BioMarin Pharmaceutical gains 2.6% after BMO Capital Markets analyst Kostas Biliouris raises the recommendation to outperform from market perform, saying the stock’s valuation “skews risk/reward to upside.”.
- Conagra Brands falls 1.4% after Jefferies cuts its recommendation on the packaged goods company to hold, citing concerns about near-term volume growth potential. .
- Moderna rises 2% Wednesday on a report that the biotech company is set to announce its first investment in China, amounting to about $1 billion.
- Nikola Corp. drops 7.3% after the EV-maker disclosed that battery supplier subsidiary Romeo Power Inc. transferred assets to a firm that will handle liquidating or selling the assets for the benefit of creditors.
- Wolfspeed jumps 13% after Renesas Electronics makes a $2 billion deposit to secure a 10-year supply commitment of silicon carbide bare and epitaxial wafers from the chipmaker.
Risk sentiment was on the back foot from the outset in Europe after Chinese service PMI missed expectations...
... and stocks extended declines after the euro area print for June was revised lower, and the Composite PMI print dipped back into contraction (we already knew the Eurozone is in technical recession, but this is just another confirmation that the ECB keeps hiking into a recession).
The latest indication of slowing economic growth around the globe - in fact, everywhere except Biden's seasonally-adjusted US - is sapping demand for equities after a stellar rally in the first half, driven mostly by mega-cap tech stocks. Major central banks including the Federal Reserve and European Central Bank are still in tightening mode, clamping the brakes on economic growth.
“It’s too early to say how deep the recession that is to come will be, but clearly a slowdown is coming,” Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, said on Bloomberg TV. “It’s too early to throw in the towel on risk assets whether in equities or credit. But at the same time you have to stay pretty high on the quality pole.”
With more interest-rate hikes anticipated from the Fed and the ECB in July, an aggregate gauge of borrowing costs calculated by Bloomberg Economics now shows a peak of 6.25% this quarter, up from 6% foreseen three months ago.
Later Wednesday, traders will monitoring the minutes of the Fed’s last policy meeting, which left Wall Street perplexed as officials paused their rate-hike cycle after 10 consecutive moves, but forecast two additional increases this year.
European stocks were also in the red as investors fret over the prospects for global growth. The Stoxx Europe 600 Index slid about 0.6%, on course for its largest decline in two weeks with miners leading the retreat on concern about waning minerals demand from China. The gauge extended its decline after the Eurozone composite purchasing managers’ index was revised lower, offset by continued declines in Europe's PPI print. European bonds gained, with Germany’s 10-year yield dipping four basis points to 2.41%. Casino Guichard-Perrachon SA plunged as much as 42% as investors size up competing offers to rescue the troubled French grocer. Bunds rose to new highs on the aforementioned PMI data while falling consumer inflation expectations also played their part. German 10-year yields are down 5bps. Here are some of the most notable European movers this morning:
- Getlink shares gain as much as 2.3% after JPMorgan started coverage of the Eurotunnel parent with an overweight rating, saying near-term uncertainties are already priced in and that the market is underestimating its “superior” pricing power.
- Boiron gains as much as 24%, to €48.90, after the Boiron family said it plans a simplified public tender offer valuing the pharmaceutical company at €50 per share, including a special dividend.
- Continental AG gains as much as 2.2% after being raised to outperform from neutral at BNP Paribas Exane, which sees conditions in place for the German maker of auto parts and tires to re-rate amid a more supportive macro backdrop.
- Shares in EssilorLuxottica rise as much as 2% after Morgan Stanley assumes coverage with an overweight recommendation, noting that an inflection is now “in sight” for the eyewear manufacturer.
- Datawalk shares jump as much as 24% after BOS Bank raises its rating for the Polish data processing company to buy, pointing to new contracts signed in the US and Poland and the potential for future deals.
- Adyen shares fall as much as 3.1% after the payment firm was downgraded to neutral from buy at UBS, which said the global e-commerce market has become more mature and its growth is unlikely to return to pre-Covid highs.
- Casino falls as much as 30% after the French grocer laid out the competing proposals received to recapitalize the company, both of which would leave existing shareholders with almost nothing.
- SIG shares drop as much as 10%, dragging peers lower, after the building-products supplier said it expects full-year profit to come in toward the lower end of market expectations amid softer demand and higher operating costs.
Earlier in the session Asian stocks were briadly lower following the US holiday and as participants digested the latest huge miss in the Chinese Caixin Services PMI data, while geopolitical concerns also lingered after Ukraine and Russia accused each other of planning an overnight attack on the Zaporizhzhia nuclear plant.
The Hang Seng and Shanghai Comp were subdued by ongoing trade-related frictions with warnings of more retaliatory measures against Western tech export controls, while initial losses in Chinese equities deepened and the offshore yuan reversed an advance after the Caixin China services purchasing managers’ index was weaker than expected and printed its slowest pace of increase since January. The yuan’s drop was also notable because it came despite the central bank earlier maintaining its support for the currency in its daily fix. “This brings focus back on slowing growth momentum and the recent step-up in geopolitical angst,” Charu Chanana, market strategist at Saxo Capital Markets, said of the China services data.
The fading optimism over the outlook for China has also driven investors to lower their expectations for gains in Asian equities this year. A survey of 17 strategists and fund managers by Bloomberg News indicates MSCI Inc.’s Asia-Pacific Index may only rise about 5% by year end from Tuesday’s closing level.
Japan's Nikkei 225 slumped at the open but recouped some of the losses after it held above the 33,000 level. Australia's ASX 200 was marginally lower amid underperformance in the largest-weighted financials sector and after mostly softer data releases from Australia.
In FX, the Bloomberg Dollar Spot Index is up 0.1%. The Canadian dollar is the weakest of the G10 currencies, falling 0.3% versus the greenback. The USD/JPY consolidates near mid 144-145 while EUR/USD is steady to hold under 1.09. GBP/USD drifts lower and nears 1.27 as AUD/USD weakens to remain under 0.67.
In rates, cash treasuries reopened after the July 4 holiday richer across the front-end of the curve as 2-year yields gap lower, lessening inversion of 2s10s spread back to around 106bp from as much as 110.8bp Monday, a new cycle wide. Front-end yields are richer by ~3bp, steepening 2s10s spread by 2.5bp; 10-year little changed ~3.85% with bunds richer by 2bp in the sector. European bonds gained, with Germany’s 10-year yield dipping four basis points to 2.41 after an ECB survey shows consumer inflation expectations continued to decline in May. US economic data slate includes May factory orders (10am) and FOMC June 13-14 meeting minutes (2pm)
In commodities, Brent oil was steady after rallying on Tuesday on Saudi Arabian and Russian output cuts. Traders are waiting for potentially critical commentary from Saudi energy minister. Gold was little changed.
Looking at the day ahead, data releases include the global services and composite PMIs for June, Euro Area PPI for May, and the final reading of US factory orders for May. From central banks, we’ll get the Fed’s minutes from the June meeting and the ECB’s Consumer Expectations Survey. Speakers include the Fed’s Williams, as well as the ECB’s Nagel, Visco, Villeroy and De Cos.
- S&P 500 futures down 0.2% to 4,481.25
- MXAP down 0.5% to 164.90
- MXAPJ down 0.8% to 519.44
- Nikkei down 0.3% to 33,338.70
- Topix little changed at 2,306.03
- Hang Seng Index down 1.6% to 19,110.38
- Shanghai Composite down 0.7% to 3,222.95
- Sensex down 0.1% to 65,404.89
- Australia S&P/ASX 200 down 0.4% to 7,253.17
- Kospi down 0.6% to 2,579.00
- STOXX Europe 600 down 0.5% to 459.16
- German 10Y yield little changed at 2.43%
- Euro little changed at $1.0880
- Brent Futures down 1.0% to $75.48/bbl
- Gold spot up 0.0% to $1,926.31
- U.S. Dollar Index up 0.10% to 103.15
Top Overnight News
- Expansion in China’s services industry slowed in June from the previous month, according to a private survey, providing more evidence that the key driver of the country’s post-Covid recovery is cooling.
- Prime Minister Kyriakos Mitsotakis is stepping up the pace of reform at the start of his second term in office as he looks to capitalize on a commanding majority to consign Greece’s crisis years to history.
- The Federal Reserve on Wednesday will shed some light on the discussions at their June meeting that left Wall Street perplexed.
- Chinese leader Xi Jinping called on nations to spurn decoupling and the cutting of supply chains, one day after his nation imposed limits on exports of two key metals used to make chips to counter Western restrictions on Beijing.
- Stubborn inflation keeping US and European officials in tightening mode is likely to further decouple global monetary policy in coming months as the rest of the world forges its own path.
- The UK’s financial regulator said it’s in contact with the police about allegations of sexual assault against Crispin Odey, as it investigates whether the hedge fund manager passes its ‘fit and proper’ test to operate in the financial industry.
- The US is preparing to curtail Chinese companies’ access to cloud-computing services including those provided by Amazon.com Inc. and Microsoft Corp., the Wall Street Journal reported, citing people familiar with the situation.
- Oil edged lower after rising more than 2% Tuesday on Saudi Arabian and Russian output cuts, with traders waiting for potentially critical commentary from Saudi Energy Minister Prince Abdulaziz bin Salman.
- Brazil’s autonomous central bank must respect the economic plans of the elected government as the country needs growth to shore up its fiscal future, according to one of President Luiz Inacio Lula da Silva’s picks to join the monetary authority’s board.
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower following the holiday lull stateside and as participants digested the latest Chinese Caixin Services PMI data, while geopolitical concerns also lingered after Ukraine and Russia accused each other of planning an overnight attack on the Zaporizhzhia nuclear plant. ASX 200 was marginally lower amid underperformance in the largest-weighted financials sector and after mostly softer data releases from Australia. Nikkei 225 slumped at the open but recouped some of the losses after it held above the 33,000 level. Hang Seng and Shanghai Comp were subdued by ongoing trade-related frictions with warnings of more retaliatory measures against Western tech export controls, while the latest Chinese Caixin Services PMI missed forecasts and printed its slowest pace of increase since January.
Top Asian News
- China's Global Times noted that China's metal export curbs are a warning to the US and its allies. It was separately reported that China's former vice commerce minister said China's export control measures of chipmaking materials are just a start and China has more sanction tools and measures, while countermeasures will further escalate if high-tech restrictions targeting China continue to escalate, according to China Daily.
- Dutch Foreign Ministry said it is still unclear what the impact of the new Chinese export restrictions will be and that it is primarily up to the EU to respond to China’s trade policies, according to Reuters.
- Japan's Labour Confederation Rengo said the average 2023 wage hike is 3.58% which is the biggest since 1993, according to Reuters.
European bourses are in the red, following a subdued APAC handover given soft data and the region thereafter impaired by its own bleak Final PMIs; Euro Stoxx 50 -0.7%. Sectors are mainly in the red and continue to exhibit the defensive bias from the morning's cash open, though with Auto names outperforming after strong Volvo Cars numbers. Stateside, futures are similarly softer and have been moving in tandem with European trade ahead of their return from the market holiday and looking ahead to key FOMC minutes and data releases before hand; ES -0.5%.
Top European news
- BoE is considering a clampdown on foreign bank branches and is looking at plans to force more international banks to set up subsidiaries in the UK, according to FT.
- ECB Poll: Consumer Inflation Expectations - 12-months ahead 3.9% (prev. 4.1%); 3-year ahead stable at 2.5%.
- ECB's Visco says interest rate decisions are taken meeting by meeting on the basis of incoming data, to ensure a rapid fall in inflation; more rate hikes are not the only way curb inflation can maintain rates adequately high for a sufficiently long time.
- French Finance Minister Le Maire says inflation has started easing in July.
- DXY tethered to 103.000 level as US returns from July 4th and headline events of the week.
- Loonie lags as crude prices dip on bearish supply/demand dynamics, USD/CAD elevated within 1.3220-78 range.
- Aussie undermined by dips in PMIs and slowdown in China's Caixin surveys, AUD/USD also capped by psychological factors between 0.6698-65 parameters.
- Yen benefits from yield retreat and threat of intervention around 145.00 as USD/JPY straddles 144.50.
- Euro hampered by weak EZ PMIs, cooler 1 year ECB consumer inflation expectations and hefty option expiries in Eur/Usd at 1.0900. Sterling mostly solid around 1.2700 vs Dollar either side of unrevised final UK services and composite PMIs.
- PBoC set USD/CNY mid-point at 7.1968 vs exp. 7.2180 (prev. 7.2046).
- Bonds overcome several early wobbles mount decent recovery from lows through largely weak services and composite PMIs
- Bunds and Gilts rebound from 132.94 and 94.72 to 133.68 and 95.48 respectively with extra impetus via strong demand for German and UK issuance
- T-note more contained within 112-04-111-25+ range awaiting return of cash traders from Independence, US data, FOMC minutes and Fed's Williams
- WTI and Brent futures show a divergence in intraday price percentage changes as the former did not see a settlement amid the US Independence Day, with initial pressure on soft data and subsequent upside from the OPEC+ conference.
- Spot gold is relatively flat intraday as a firmer Dollar and the broader risk-averse mood keeps prices stable in their recent range.
- Base metals are mostly softer amid the firmer Dollar and sullied sentiment, with 3M LME copper retreating towards USD 8,250/t from a USD 8,377/t intraday peak.
- Saudi Foreign Ministry said Saudi Arabia and Kuwait have full sovereign rights to exploit natural wealth in the divided region and called for Iran to start negotiations with them to demarcate the eastern border of the divided area.
- Saudi Energy Minister says fresh cuts prove wrong "cynical spectators" of the Russia-Saudi relations. Says “The market will not be left unattended”. Adds, OPEC+ will do "whatever is necessary" to support the market, according to Reuters.
- UAE’s energy minister says his country will not be announcing any extra voluntary cuts, according to EnergyIntel.
- Caspian Pipeline Consortium says consequences from power outage in Western Kazakhstan have not been fully removed; Tengiz pumping station has been halted. Artyrau station has been stopped, as well as oil intake from all supplies. Tengiz station receives oil from TCO.
- Oil production in Kazakhstan down 21% on July 4 from July 2, refining volumes decline 46% following power outages, according to data from the energy ministry.
- Russia's Kremlin on Grain Deal says there is still time for the West to fulfil those parts of the deal which concern Russia; we will announce our decision in a timely manner; those parts of the deal that concern Russia are still not fulfilled.
- India's April-May finished steel imports from China at a six-year high; steel imports at three-year high; steel exports to Italy at six-year high; steel consumption at six year high.
- Chinese President Xi personally warned Russian President Putin against using a nuclear weapon in Ukraine, according to FT citing Western and Chinese officials.
- Ukrainian President Zelensky said he warned French President Macron about dangerous provocations by Russia at the Zaporizhzhia Nuclear Plant, according to Reuters.
- Ukraine’s military said Russia placed objects resembling explosives on the 3rd and 4th power units of the Zaporizhzhia Nuclear Power Plant and accused Russia of preparing a terrorist attack overnight which would not damage the power units but could create the impression that Ukraine is shelling the nuclear plant. It was also reported that Russian agencies quoted an adviser to the head of Rosenergoatom who alleged Ukraine will attempt to attack the Zaporizhzhia station overnight using long-range precision equipment and attack drones, according to Reuters.
- UK armed forces chief rejected suggestions that Ukraine’s counter-offensive was proceeding slowly and stated that Russia had lost half of its combat capability in Ukraine, according to FT.
- US President Biden spoke with German Chancellor Scholz on Tuesday regarding preparations for the NATO summit, according to Reuters.
- Russia and Syria are to hold military drills in Syria from July 5th which will last 6 days, according to RIA.
- China's Defence Ministry said it resolutely opposes US arms sales to Taiwan and has lodged stern representations to the US, according to Reuters.
- South Korea retrieved North Korean spy satellite wreckage and said the spy satellite was not worthy of military use, according to Yonhap citing the military.
- Russia's Kremlin, on the Zaporizhzhia nuclear power plant, says the situation is tense, threats of sabotage is great, and the consequences could be catastrophic.
US Event Calendar
- June Wards Total Vehicle Sales, est. 15.4m, prior 15.1m
- 10:00: May Durable Goods Orders, est. 1.7%, prior 1.7%
- May -Less Transportation, est. 0.6%, prior 0.6%
- 10:00: May Factory Orders, est. 0.8%, prior 0.4%
- May Factory Orders Ex Trans, prior -0.2%
- 10:00: May Cap Goods Ship Nondef Ex Air, prior 0.2%
- May Cap Goods Orders Nondef Ex Air, prior 0.7%
- 14:00: June FOMC Meeting Minutes
- 14:00: June FOMC Meeting Minutes
- 16:00: Fed’s Williams Speaks at Central Bank Research Association Mtg
DB's Jim Reid concludes the overnight wrap
Don't tell my boss but I'm going to sneak out today for an hour or so to watch sports day at school. Maisie has missed the last 2 because of 14 months in a wheelchair and crutches for several months before that. She missed the previous one to that because of covid shutting it down. So I'm there to mop up my wife’s tears as Maisie does the sprint race.
To stop me from crying, please consider voting for myself, my team or anyone in the wider DB Research group in the Institutional Investor (II) Annual Fixed Income Survey that starts later today. We are very keen to do well, and a good showing will ensure we can continue to maintain and expand the products. People who have voted before will likely get an email later today saying that the survey is live. I will be blatantly asking for votes every day for the next 3 weeks of the survey so apologies in advance but to get a head start the categories you can vote for me are in this link here. If you value the research, this is the one way you can express that. Many thanks for your help.
Markets have unsurprisingly voted to do nothing much over the last 24 hours, with much lower volumes than usual thanks to the US Independence Day holiday. Indeed, even where markets were open, it was hard to generate much of a story, since Europe’s STOXX 600 (+0.07%) and yields on 10yr bunds (+1.8bps) barely moved in either direction. Overall, it’s fair to say it was one of the quietest days we’ve covered for some time, with most of the major asset classes moving sideways.
Activity is picking up a bit in Asia though with Chinese markets under pressure as another round of economic data indicated that the world’s second biggest economy continued to struggle in June (more on this below). As I check my screens, the Hang Seng (-1.22%) is the biggest underperformer across the region followed by the CSI (-0.52%), the Shanghai Composite (-0.47%), the Nikkei (-0.36%) and the KOSPI (-0.35%). US stock futures tied to the S&P 500 (-0.08%) and NASDAQ 100 (-0.15%) are slightly lower after being closed yesterday. Yields on 10yr USTs (-1.18bps) have moved lower, trading at 3.84% with the 2yr yield declining by -3.56bps to 4.90%, a slight steepening after the relentless flattening of late.
Coming back to China, the Caixin services PMI declined more than expected to 53.9 (consensus 56.2), the weakest since January, versus the prior month’s reading of 57.1. This will add to the pressure of more stimulus. The composite PMI declined from 55.6 to 52.5. Elsewhere, the final estimate of the Japan Jibun Bank services PMI came in at 54.0 in June, easing from the previous month’s record level of 55.9.
Data releases will now dominate over the next couple of days, with the jobs report on Friday, as well as tomorrow’s ISM services index and the weekly jobless claims. The remainder of the services (and composite) PMIs around the world today will also be important
Back to a sophorific European session yesterday and Real Estate (+2.66%) was one of the few bright spots in the STOXX 600, but some of the more cyclical sectors struggled, including industrials (-0.45%) and financials (-0.40%). Elsewhere, many of the individual country indices lost ground as well, including the FTSE 100 (-0.10%), the CAC 40 (-0.23%) and the DAX (-0.26%).
For bonds there was a slightly more interesting story, with yields rising before pulling back a bit in the European afternoon. By the end of the session, that meant yields on 10yr bunds (+1.8bps) and OATs (+2.3bps) had both risen, whilst BTPs (+6.1bps) saw a larger gain in yields that was in line with the broader risk-off tone. The main exception to this pattern came from the UK, where gilts rallied across the curve, with yields on 10yr gilts closing -2.4bps lower at 4.41%. That said, even as gilts rallied a bit, the recent selloff has continued to transmit to the real economy. For instance, data from Moneyfacts yesterday showed that the average 5yr fixed mortgage rate had now surpassed 6%, which is the first time that’s happened since very briefly in the aftermath of the mini-budget last year. Before that we’d have to go back to pre-GFC days.
When it came to commodities, a bit more was going on yesterday relative to the other asset classes. One example was oil, which posted decent gains after the previous day’s news that Saudi Arabia would extend its supply cut and Russia would also be reducing output. That meant Brent Crude oil prices (+2.14%) hit a 2-week high of $76.25/bbl by the close. Natural gas prices in Europe (+4.36%) were another that increased in light of ongoing supply issues. And for the first time since the SVB turmoil, we also saw gold (+0.20%) advance for a 4th day running.
There was very little data to speak of yesterday, although the German trade surplus for May came in at €14.4bn (vs. €17.3bn expected). That was driven by a rise in imports of +1.7% (vs. unch expected), whereas exports saw a modest fall of -0.1% (vs. +0.4% expected).
To the day ahead now, and data releases include the global services and composite PMIs for June, Euro Area PPI for May, and the final reading of US factory orders for May. From central banks, we’ll get the Fed’s minutes from the June meeting and the ECB’s Consumer Expectations Survey. Speakers include the Fed’s Williams, as well as the ECB’s Nagel, Visco, Villeroy and De Cos.