US equity futures, European stock markets and oil prices all fell on Monday as an escalating war of words between top U.S. officials and China over the origin of the coronavirus fuelled fears of a new trade war, derailing a rebound in global markets, while Buffett's admission he had liquidated all his airline stocks sent the sector tumbling.
European shares - which were closed on Friday - slumped 2.5% in mid-morning trading, catching up to the Friday drop in the US with sectors sensitive to economic growth including oil and gas, automakers and banks falling between about 4% and 5.5%. Volatility gauges for European and American blue-chip stocks shot up to a two-week high while U.S. stock futures were about 1% in the red.
Delta Air Lines, American Airlines Group and United Airlines Holdings are among the biggest pre-market decliners after Warren Buffett said over the weekend Berkshire Hathaway sold out of the four top U.S. airlines, opining that the business has “changed in a very major way.” The JETS airline ETF tumbled -10%.
In Europe, the Stoxx Europe 600 slumped, with all 19 industry sectors in the red and Ireland’s Ryanair Holdings Plc sinking as much as 11%. Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.5%, pulled down by Hong Kong where the Hang Seng returned from a two-session holiday with its biggest drop in six weeks as traders caught up after a long weekend. China and Japan were closed for their own holidays. The Chinese yuan held most of Friday’s slide in offshore trading amid concern tensions with the U.S. would increase.
Emerging-market stocks suffered the biggest decline in six weeks as an increase intension between the U.S. and China dented demand for riskier assets.
U.S. Secretary of State Mike Pompeo said on Sunday there was “a significant amount of evidence” that the novel coronavirus emerged from a laboratory in the central Chinese city of Wuhan. An editorial in China’s Global Times said he was “bluffing” and called on the United States to present its evidence.
“Concern on the potential for another flare up between the U.S. and China is dominating price action,” RBC strategist Adam Cole said in a morning note. Simon Black, head of investment management at wealth management firm Dolfin said investors were also adjusting their forecasts for the depth of the economic damage the pandemic will inflict. “It’s also the economic reality sinking in,” he said, adding that a rebound by global equities of over 20% from lows hit in March was not likely to be sustainable.
President Donald Trump also renewed criticism of China for its handling of the coronavirus outbreak is raising concern over the future of the two countries’ trade deal, another potential risk for emerging markets already facing dwindling demand for exports.
"This renews concerns on the trade war and the hegemonic dispute between the two countries, which we have been expecting to last for many months and to be a structural factor for EMs in the long run,” said Guillaume Tresca, a senior strategist at Credit Agricole SA in Paris. “Attention is now refocusing on the economic impact of the Covid crisis and the weak stance of many emerging-market countries.”
Elsewhere, companies listed on the pan-European STOXX 600 are currently expected to report a 40% decline in earnings in the second quarter. Manufacturing activity in the euro zone collapsed last month as government-imposed lockdowns to stop the spread of the new coronavirus forced factories to close and consumers to stay at home, a survey showed on Monday.
“We’ve just come off a rally of hopes, not a rally on fundamentals”, Black said, pointing to the massive monetary and fiscal stimulus pledged by governments and central banks around the world.
Recent economic data paints a dire picture of the global economy after weeks of lockdowns. In the United States, manufacturing plunged to an 11-year low last month and consumer spending collapsed. Some 30.3 million Americans have filed unemployment claims.
In FX, the US dollar rose against most major currencies amid fears that last year’s U.S.-China dispute would be reignited, this time over the origins of the pandemic that has stalled economies around the world. The euro was down 0.37% at $1.0933 and the pound retreated 0.72% to $1.2407. EM currencies weakened, while sovereign bond yields were little changed. The Russian ruble, Indonesian rupiah and South Korean won led the currency declines as haven demand bolstered the U.S. dollar. With China’s onshore markets closed for a holiday, the yuan weakened as much as 0.3% against the dollar in offshore trading, before regaining ground.
In commodities, oil prices fell again, paring last week’s gains, on worries a global oil glut may persist even as lockdowns start to ease. West Texas Intermediate crude futures fell 5.5% to $18.69 a barrel while Brent crude futures were down 2.8% at $25.70. Spot gold was up 0.4% at $1,706.78 per ounce.
Expected data include factory orders and durable goods orders. Ferrari, Tyson, and AIG are among companies reporting earnings
- S&P 500 futures down 1% to 2,794.00
- STOXX Europe 600 down 2.5% to 329.09
- MXAP down 1.6% to 142.99
- MXAPJ down 2.6% to 459.62
- Nikkei down 2.8% to 19,619.35
- Topix down 2.2% to 1,431.26
- Hang Seng Index down 4.2% to 23,613.80
- Shanghai Composite up 1.3% to 2,860.08
- Sensex down 5.6% to 31,835.04
- Australia S&P/ASX 200 up 1.4% to 5,319.85
- Kospi down 2.7% to 1,895.37
- German 10Y yield rose 1.7 bps to -0.569%
- Euro down 0.4% to $1.0938
- Italian 10Y yield rose 0.6 bps to 1.589%
- Spanish 10Y yield rose 6.1 bps to 0.784%
- Brent futures down 2.7% to $25.72/bbl
- Gold spot up 0.3% to $1,705.39
- U.S. Dollar Index up 0.3% to 99.35
Top Overnight News from Bloomberg
- A recovery from Europe’s factory shutdowns will be “frustratingly slow,” IHS Markit said in its monthly report. Markit’s index showed confidence dropped to a record low in April, and job cuts were the sharpest since 2009. The headline measure of euro-area activity fell to 33.4 -- the lowest since the series began in 1997 -- from 44.5 in March
- The trade agreement President Donald Trump signed with China less than four months ago is falling short on a number of fronts, including Beijing’s promises of large agriculture and energy purchases. But the Trump administration so far has been hesitant to ramp up the pressure or back away from the deal altogether, even as the rhetoric on both sides heats up
- Congress turns its attention this week to negotiations over another round of economic stimulus, with battle lines drawn over more than $1 trillion in additional spending floated by Democrats amid objections from Republicans and demands from President Donald Trump
- Germany needs several more weeks to decide on a cash-for- clunkers program to counter a slump in car sales, according to Finance Minister Olaf Scholz
- German’s top court will decide on Tuesday whether the nation can continue to participate in the ECB’s Public Sector Purchase Program, under which the central bank buys bonds of euro zone governments
- Factory output across several Asian countries slumped to record lows in April, signaling a deeper contraction in the world’s manufacturing hub even as China begins restarting some operations
- Japanese Prime Minister Shinzo Abe said he has decided to extend a nationwide state of emergency until May 31 to combat the spread of the coronavirus, in comments aired live by national broadcaster NHK
- Researchers continue to debate how fast a coronavirus vaccine may be available as states and nations look for a fast track to recovery from the pandemic’s economic toll, with January or even the fall now on the timetable
Asian equity markets began the week mostly lower amid several holiday closures in the region and cautiousness ahead of this week’s risk events, with sentiment also dragged by a flare up at the inter-Korean border and as US-China trade tensions simmered with President Trump stating that tariffs would be the ultimate punishment for China and warned to end the trade deal if China doesn't buy US goods. ASX 200 (+1.4%) was choppy with notable weakness in energy as crude prices resumed the rout brought on by oversupply concerns and with banking names initially pressured after Westpac reported a 62% drop in H1 net, although the big 4 bank eventually reversed its losses which helped the turnaround in the largest weighted financials sector and the index as a whole. KOSPI (-2.6%) gapped lower by over 2% at the open on geopolitical concerns after South Korea and North Korea exchanged gunfire at the demilitarized zone for the first time since 2014 which comes a day after North Korea Leader Kim made his first public appearance since rumours circulated that he may have died or was incapacitated, although the index is off its lows as reports also noted there were no casualties from the incident which could have been accidental. Hang Seng (-4.2%) slumped as it played catch up from the extended weekend and ahead of today’s GDP which could show the largest contraction on record with Financial Services Secretary Chan suggesting GDP data could be worse than the GFC and Asian Financial Crisis which saw economic contractions of 7.8% and 8.3% respectively. The lack of participants added to the uninspired mood for Hong Kong and the region, with markets in mainland China to reopen on Wednesday due to Labor Day holidays and with Japanese participants returning on Thursday after Golden Week. Finally, Indian markets were the worst performers with the NIFTY and SENSEX both collapsing by as much as 5% after the government extended the nationwide lockdown for two weeks but will permit "considerable relaxations" in certain districts.
Top Asian News
- Mainland Chinese Buyers Disappear From Hong Kong Real Estate
- Japan Moves to Extend State of Emergency Until May 31
- Time Runs Out on Shaky Hong Kong Businesses as Court Reopens
European equities opened with significant losses [Euro Stoxx 50 -3.3%], as the region catches up to Friday’s developments, namely on the US-China trade front, after its Labor Day holiday. US equity futures also post losses of ~1%, with the contracts pressured by a potential rollback in the US-China Phase One trade deal should China not adhere to purchases. UK’s FTSE 100 (-0.2%) index outperforms the region having had its Friday session whilst some downside could be cushioned by a softer Sterling. Sectors are lower across the board – with IT and Consumer Discretionary the laggards, albeit most of this overall downside would be on account of a chunk of Europe catching up to Friday’s trade. In terms of individual movers, BT (-1.4%) opened softer (but nursed some losses) amid reports Telefonica (+3.4%) is said to be in discussions with Liberty Global to combine their UK assets, O2 and Virgin Media, in a joint venture to challenge BT and Sky in the UK – Telefonica states that the Cos are in a negotiating phase and the group is currently not able to guarantee either the terms or probability of its success. Sources added that Liberty Global also reportedly approached Vodafone (-1.1%) regarding a merger, but talks are not currently active. Meanwhile, Fincantieri (+15.8%) was halted limit up after receiving a US Navy contract valued at USD 5.5bln. SocGen (-6.2%) shares see extra pressure as it expects to have provisions of EUR 3.5-5bln this year amid losses caused by the pandemic. CEO also sees CET1 ratio to drop to between 11-15%. Similarly, Thyssenkrupp (-14.5%) plumbs the depths as the Co. anticipates a cash-squeeze despite the lift unit sale. Elsewhere, Roche (+0.3%) remains resilient to the losses in the region after the group was awarded emergency approval in the US for a COVID-19 antibody test and expects production to hit high double-digit millions by June and 100mln later in the year. Finally, Royal Mail (+6.2%) is buoyed by reports that Czech billionaire Kretinsky reportedly bought a 5.35% stake in the Co., sparking speculation he could launch a takeover bid.
Top European News
- ThyssenKrupp Sinks as Unit Bidders Said to Seek More Investors
- Liberty, Telefonica in Talks to Build $30 Billion U.K. Arm
- European Stocks Slump on New U.S.-China Tensions, Manufacturing
- Germany’s New Cases, Number Of Deaths at Lowest in Five Weeks
In FX, the Greenback is back on a firmer footing after succumbing to somewhat more than the usual month end selling and remaining under pressure on Friday when US President Trump upped the ante against China via recriminations over the source of COVID-19 and the threat of retaliation. However, risk aversion has spread to the extent that the Buck has resumed a degree of safe-haven premium vs currency counterparts bar the Yen, with the DXY retaining a firmer grasp of the 99.000 handle within a 99.239-477 range.
- JPY - As noted above, the Yen is resisting the broad trend of underperformance relative to the recovering Dollar, albeit in holiday-thinned trade due to Japan’s Greenery Day amidst the longer Golden Week vacation, as Usd/Jpy meanders in a tight band below 107.00.
- GBP/EUR/CHF/NZD/CAD/AUD - Sterling has lost more of its seasonal bid, as the sell in May trend looks set to continue for a second day with Cable teetering above 1.2400 and Eur/Gbp testing resistance/psychological offers around 0.8800 ahead of the 50 DMA (0.8825) even though the Euro is struggling to keep hold of the 1.0900 handle vs the Greenback in wake of weak Eurozone manufacturing PMIs, ECB SPF downgrades and a worse than forecast Sentix survey. Technically, Eur/Usd is currently close to a Fib retracement at 1.0938 and supported ahead of the big figure that also coincides with the 30 DMA. Elsewhere, the Franc remains well shy of recent highs near 0.9600 circa 0.9650, but on the rebound in Eur/Chf cross terms around 1.0550 following mixed Swiss inputs from yet another big rise in bank sight deposits and better than expected, albeit still sub-50 manufacturing PMI. Meanwhile, the Kiwi, Aussie and Loonie are all nursing losses after conceding ground to their US rival with Nzd/Usd hovering just under 0.6050, Aud/Usd straddling 0.6400 and Usd/Cad pivoting 1.4100 amidst renewed declines in oil prices. The Kiwi has not gleaned much from S&P reaffirming NZ’s AA rating and positive outlook or more moves towards lifting lockdown, awaiting Q1 jobs data, while the Aussie appears hesitant ahead of the RBA, retail sales and the SOMP.
- SCANDI/EM - The aforementioned downturn in crude is weighing on the Norwegian Crown alongside the ongoing PMI manufacturing contraction, though not as pronounced as in Sweden where the Krona is also unwinding more post-Riksbank gains. However, the Rand has derived some comfort from SA’s PMI beating consensus and deflecting attention away from bleak economic projections out of the Treasury Director, while the Lira is trying to pare losses off another multi-month low on the back of firmer than anticipated Turkish CPI in contrast to a deeper sub-50 manufacturing PMI.
In commodities, WTI and Brent front-month futures remain subdued but trade just off recent lows of USD 18.05/bbl and USD 25.50/bbl respectively. Desks note that the sentiment surrounding the complex is showing signs of improvement, with economies gradually reopening alongside a phase of lower global supply. “A combination of demand edging higher as we move through the remainder of the year, while supply is expected to slip, will likely push the global oil market into deficit over the second half of this year, allowing it to draw down the significant stock builds from the first half of this year.”, ING writes. That being said, markets have begun to factor in a potential escalation in US-China tensions – with President Trump floating an end to the trade pact should China not purchase US goods – which could weigh on sentiment as well as hit demand. WTI June lost further ground after hovering around USD 18.50/bbl and briefly breached support at USD 18.10/bbl, Brent July trades on either side of USD 26/bbl for a large part of the morning and holds onto losses of over 2%. Elsewhere, spot gold sees an underlying bid as losses across equities prompts inflows into the yellow metal – trading towards the top of its current USD 1693-1707/oz band. Copper prices meanwhile resumed its decline amid the broader risk-aversion and some producers are poised to resume operations.
US Event Calendar
- 10am: Factory Orders, est. -9.35%, prior 0.0%; Factory Orders Ex Trans, prior -0.9%
- 10am: Durable Goods Orders, est. -14.4%, prior -14.4%; Durables Ex Transportation, est. -0.2%, prior -0.2%
- 10am: Cap Goods Orders Nondef Ex Air, est. 0.1%, prior 0.1%; Cap Goods Ship Nondef Ex Air, prior -0.2%
DB's Jim Reid concludes the overnight wrap
So far in this lockdown I’ve only been out for local walks. However, on Friday afternoon I had to cycle to the post office to send something special delivery. While I queued outside I saw my first-ever social distancing fight. A van overtook two cyclists and then screeched to a halt in front of them and the two parties exchanged very loud and angry words about an earlier commotion. After a minute, the van driver got out and went up to one of the cyclists and for all the world it looked like he was going to hit him. However, he suddenly stopped about 2 meters away as if there was a force field there (May the fourth be with you today by the way) and continued shouting and gesturing at him. It was very odd to watch.
As we move very slowly towards the end of the most stringent lockdowns across the world markets are starting the week on the back foot after US tech gave up some ground at the back end of last week after earnings and also as tensions in the US/China relationship resurfaced as the blame game for covid-19 steps up. Given it’s a US election year this issue isn’t likely to go away, especially as Joe Biden has suggested that Mr Trump is weak on China. However, on Thursday night and Friday it became a more immediate topic as the Washington Post reported that the US had held preliminary discussions to punish China for its role in the virus outbreak that included the possibility of the US cancelling its debt obligations with China. There was an immediate denial from Larry Kudlow who confirmed that the full faith and credit of US debt obligations is ‘sacrosanct’. Nevertheless, the risk of a cold war between the two nations seems to be building.
Hinting at a more troubled world order in the future, yesterday US Secretary of State Michael Pompeo said on ABC TV that there was “enormous evidence” to suggest covid-19 began in a laboratory in Wuhan. When you think how nervous markets got about the US/China trade war then if this theme continues you can’t help thinking that the end game is far worse than it would be from a simple trade war. Very much one to watch.
Speaking overnight, President Trump also said tariffs would be “the ultimate punishment” and promised a “conclusive” report from the US government on the Chinese origins of the pandemic. He further said that the Phase 1 trade deal with China requires the country to purchase US goods and if they don’t, the US will terminate the agreement. Futures on the S&P 500 are down -0.61% as we type while the Hang Seng (-3.83%), Kospi (-1.61%), Taiwan’s Taiex (-2.20%) and India’s Nifty (-3.31%) are all in the red. Markets in Japan and China are closed for a holiday. In FX, the Norwegian krone is trading down -1.17% this morning while the Japanese yen is up +0.13%. Elsewhere, WTI oil prices are down -3.29% this morning.
In other weekend news, Saudi Arabia’s Tadawul index dropped -7.41% yesterday after the kingdom’s finance minister said that “painful” measures – including deep spending cuts – were needed to respond to the coronavirus crisis and crash in oil prices. On Friday, Moody’s changed the outlook on the country’s sovereign rating to negative while reaffirming the A1 rating. Elsewhere, Yohnap reported that North Korean troops fired at their South Korean counterparts in the demilitarized zone that divides the two countries for the first time in years.
Meanwhile, expect there to be some attention in markets today on Warren Buffett’s annual shareholder meeting on Saturday where he confirmed that he’d sold all of his airline stocks, saying “I don’t know if two or three years from now if as many people will fly as many passenger miles as they did last year”.
Returning to the virus, with the extra fatalities of the last few days, Covid-19 has now moved from 24th to 23rd in the worst pandemics in history measured in fatalities as a percentage of the global population (24 in total over 2000 years). Swine Flu in 2009 has now been surpassed. You can see the note here from a couple of weeks ago where we discussed the list. To reach 22 on this list fatalities would have to reach 626,100. Massive global mitigation is expected to keep Covid-19 at the lower end of our table. As we showed in the note a completely unmitigated global strategy could have put it as high as 13th on the list. We also showed what we think the global mortality rate will end up being based on various studies and discussed how the modern world has a very different tolerance for pandemics than at any time prior to the last few decades.
In terms of this week, the main symbolic highlight will be Friday’s US job numbers. We’ll also see PMIs in the early part of this week, 263 S&P 500 and Stoxx 600 companies reporting, more central bank meetings (including the BoE Thursday), and another Euro Area finance minister’s videoconference. If you want a potential black swan curveball event then the German Constitutional Court issues its final verdict on the ECB’s PSPP program tomorrow. What I know about the German constitutional legal system could be put on the back of a postage stamp and still leave some room. Nevertheless, the usual form here is a begrudging acceptance of the ECB’s involvement in financing member states and we all move on. However, one to keep a little attention on.
Ahead of payrolls Friday, DB’s US economists are forecasting an unprecedented -22m fall in nonfarm payrolls, which would by far be the biggest monthly decline in the data going back to 1939, with the previous record being ‘only’ a -1.959m decline back in September 1945 just as WWII ended. They’re also forecasting a rise in the unemployment rate to 18.0%, which would be the highest unemployment rate for the US since the same war. With the jobless numbers set to reach unprecedented levels, investors will also be paying attention to the more up-to-date weekly initial jobless claims from the US on Thursday, which will cover the week up to May 2. The previous 6 weeks have seen a total of over 30m claims, though the last 4 weeks in a row have seen a decline from the peak, offering hope that the most rapid period of job losses may have passed.
The other data that will gain attention this week are the PMI releases from around the world. Thanks to various public holidays, the releases will be more scattered this week, with PMIs from various G20 countries coming out each day. See the day-by-day calendar at the end for the full run down (along with all the other releases) but today sees the manufacturing numbers from those on Labour Day holiday on Friday.
Earnings season continues apace over the coming week, with 159 S&P 500 companies reporting and a further 104 in the STOXX 600. Highlights include AIG and Tyson Foods today, followed by Disney, Total, BNP Paribas and Fiat Chrysler tomorrow. Wednesday then sees reports from Novo Nordisk, PayPal, TMobile, General Motors, Credit Agricole, UniCredit and BMW. On Thursday, we’ll hear from Bristol Myers Squibb, Danaher, Raytheon Technologies, Linde, ArcelorMittal, AB InBev, Nintendo, Uber, IAG and Air France-KLM. Lastly on Friday, Wirecard, Siemens and Nomura will be announcing.
Reviewing last week now and in it we waved goodbye to April - the best month for the S&P 500 (+12.68%) since January 1987. The -2.81% fall on Friday though meant that the index closed the week down -0.21%, the smallest weekly in either direction since the first week of the year. There was a pullback in technology stocks as earnings of large-cap US companies, most notably Apple and Amazon, disappointed late in the week. Consequently the NASDAQ fell -0.34% on the week (-3.20% Friday). On the other hand, European equities rose on a shortened week, with many countries closed for Labour Day on Friday. The Stoxx 600 gained +2.37% over the five days but they’ll likely be some catch down today. Equity performance was fairly correlated on the week for those indices that were off on Friday, with the DAX up +5.08% (-2.22% Thursday), the Italian FTSE MIB gaining +4.93% (-2.09% Thursday), and the CAC rallying +4.07% (-2.12% Thursday). The FTSE, which was open on Friday, was up just +0.19% over the full week, after the -2.34% decline on Friday not helped by Shell (-14.24% on the week) cutting its dividend for the first time since 1945. Asian equity indices also saw shortened weeks outside of the Nikkei, which declined by -2.84% Friday to finish the week up +1.86%. The CSI 300 gained +3.04% on a 4 day week, while the Kospi rose +3.10% on a 3 day week. In other risk markets, oil rebounded after 3 weeks of losses. WTI futures rose +16.77% last week (+4.99% Friday) to $19.78/barrel as demand may be turning a corner at the same time that OPEC+ and non-members both enact production cuts. Brent crude rose +23.32% on the week (+4.63% Friday), just the second weekly gain in the last ten weeks.
55% of S&P 500 companies have now reported Q1 earnings. In aggregate earnings are missing by -2.5% (vs. beating by 3.4% in an average quarter) and have fallen 16.6% year-over-year. Blended EPS growth for the index looks set to contract by -13%, which would be the worst quarter since 2009. However this is driven by a large downside skew, with median company growth on track to be only modestly negative at -0.9%. Much like GDP earlier last week, these numbers are likely to be worse in Q2 because most of the shutdowns were enacted at the end of March.
With the pullback in US equities, the VIX rose +1.3pts to 37.19 last week (+3.0pts Friday). This was the first weekly rise since the SPX lows in the third week of March. Even as equity volatility increased slightly, credit spreads tightened slightly on the week – albeit complicated by the index rebalancing at the end of the month. US HY cash spreads were -33bps tighter on the week (+7bps Friday), while IG was -18bps tighter on the week (+1bp Friday). In Europe, HY cash spreads were -8bps tighter over the shortened week, while IG was -13bps tighter.
Much like equities, core sovereign bond yields in the US and Europe diverged slightly last week. US 10yr Treasury yields were up +1.1bps (-2.8bps Friday) to finish at 0.612%, 7.1bps from the March all-time lows. Meanwhile, 10yr Bund yields fell -11.3bps to -0.59%, the lowest since March 13. Gilt yields fell -4.3 bps over the 5 days (+1.8 bps Friday) to 0.248%, just 9bps from the all-time lows in early March. Euro debt diverged in a similar manner. Spanish and French sovereign debt were -11.6 and -2.0 bps tighter, respectively, to Bunds, while Italian debt traded +3.7bps wider after the decision by Fitch to downgrade the country’s credit rating to BBB- and an ECB meeting that disappointed on OMT guidance.
On the economic data front last Friday, UK mortgage approvals in March fell to their lowest level in seven years, while the final manufacturing PMI came in at 32.6, 0.3 below the flash reading. In the US, Markit Manufacturing PMIs were at 36.1 (36.7 expected), 0.8 below the flash reading of 36.9. At the same time the ISM Manufacturing PMI came in stronger than expected at 41.5 (36.0 expected), down from 49.1 last month. The ISM measures continue to see significant upside contribution from supplier delivery delays, but this is driven by supply chain disruption rather than stronger fundamentals. So difficult to read too much into this stronger reading.