In a continuation of the selloff that started overnight, US equity futures and world stocks are plunging on Monday on signs that a second wave of the pandemic is emerging in parts of the United States and China, dousing investor hopes of a quick economic rebound that had powered the Nasdaq to record levels last week. Beijing closed the city’s largest fruit and vegetable supply center and locked down nearby housing districts after dozens of people associated with the market tested positive for the virus. A record number of new infections and hospitalizations were reported in more U.S. states, including Florida and Texas over the weekend.
After dropping as much as 1,000 points, Dow futures were down about 600 points at last check, with S&P futures dropping as much as 3.4% in early London trading in what some have dubbed "Meltdown Monday", although S&P 500 futures managed to trim their losses in half, last down about 1.6%.
Travel stocks which were hit hard as passenger numbers dwindled due to travel restrictions, slumped on Monday with retail favorites such as United Airlines Holdings Inc, American Airlines Group, Carnival Corp, Norwegian Cruise Line Holdings Ltd and Royal Caribbean Cruises Ltd down between 5.1% and 7.4% in premarket trading. Stocks from economically-sensitive sectors including financials and energy also lost ground. U.S. lenders Bank of America, Citigroup and Morgan Stanley dropped 3.1% to 4%. Oil majors Exxon Mobil and Chevron shed 2.8% and 1.5% respectively. The VIX index jumped to its highest level since April 22 at 44.44 points.
In Europe, cash equities steadied after an opening slump of as much as 3%, with miners, travel and tech stocks weighing, while rising health-care shares blunted the retreat across markets. BP Plc slumped as the British oil major predicted the pandemic will hurt long-term energy demand. Travel and Leisures stocks were hit hard: travel operator TUI and caterer Sodexo led declines in Europe’s travel and leisure stocks after analyst downgrades and amid signs of a second coronavirus wave eroding hopes for a quick recovery for the tourism, leisure and travel industries. Europe’s Stoxx 600 Travel & Leisure Index down 2.6% at 9:42 a.m. in London, the region’s second-worst performing sector on Monday. Airlines also declined, led by flagship carriers Lufthansa (-3.8%), which was downgraded to sell at Redburn, and Air France-KLM‘s 2.9% slide after being cut to sell at Redburn.
Asian stocks also fell, led by industrials and IT. All markets in the region were down, with South Korea's Kospi Index dropping 4.8% and Singapore's Straits Times Index falling 2.7%. The Topix declined 2.5%, with W-Scope and Casa falling the most. The Shanghai Composite Index retreated 1%, with China Shenhua and Jiangsu Luokai Mechanical & Electrical posting the biggest slides. Emerging-market stocks headed for their biggest drop in more than three weeks.
After a fierce rally sent global equities close to their pre-pandemic levels, sentiment in markets is starting to sour. In China, a string of top-tier data all missed expectations, and while consumer spending and investment continued to improve in May, there are few signs of a broad-based rebound needed to spur a V-shaped recovery.
"Any further sell off from here will likely see some larger unwinds of the more price and momentum driven investment styles,” said James Athey, a money manger at Aberdeen Standard Investments. "People will then start openly asking the question again, ‘Was that just a huge bear market rally?’"
In rates, US Treasury yelds are richer by 1bp to 5bp across the curve, 10-year by 3.6bp at 0.666%, with long-end-led gains flattening 2s10s by ~2bp, 5s30s by ~3bp. Bunds are cheaper by 2bp vs Treasuries while Spain notably outperforms after Fitch affirmed its sovereign rating at A- with a stable outlook Friday. During the Asia session, gains were pared after a block sale of 10-year futures near the highs.
In FX, the dollar rose versus most Group-of-10 peers. Risk aversion saw commodity currencies like the Australian dollar lead losses versus the greenback, after a jump in new coronavirus cases in Beijing, Tokyo and more than 20 U.S. states raised fears of a resurgence of the pandemic. All developing-nation currencies, except for Taiwan’s dollar, were weaker in early as the dollar climbed and U.S. stock index futures fell. Implied currency volatility climbed for a third day while spreads on dollar bonds widened as investors shunned riskier assets
Elsewhere, bitcoin dropped below $9,000 for the first time since May. Commodities also retreated, with gold, oil and copper all lower.
Expected data include the Empire State manufacturing survey and the latest TIC data.
- S&P 500 futures down 2.1% to 2,970.50
- STOXX Europe 600 down 1.6% to 348.56
- MXAP down 2.4% to 153.32
- MXAPJ down 2.2% to 494.07
- Nikkei down 3.5% to 21,530.95
- Topix down 2.5% to 1,530.78
- Hang Seng Index down 2.2% to 23,776.95
- Shanghai Composite down 1% to 2,890.03
- Sensex down 1.6% to 33,257.89
- Australia S&P/ASX 200 down 2.2% to 5,719.80
- Kospi down 4.8% to 2,030.82
- German 10Y yield fell 1.5 bps to -0.454%
- Euro down 0.01% to $1.1255
- Italian 10Y yield fell 5.2 bps to 1.318%
- Spanish 10Y yield fell 2.2 bps to 0.572%
- Brent futures down 0.8% to $38.42/bbl
- Gold spot down 0.5% to $1,722.53
- U.S. Dollar Index down 0.2% to 97.16
Top Overnight News from Bloomberg
- Beijing shuttered the city’s largest fruit and vegetable supply center and locked down nearby housing districts as dozens of people associated with the wholesale market tested positive
- The fragile recovery in China’s economy is pointing to a long road back for the rest of the world too
- The European Union fired a warning shot at China over its global trade ambitions with an unprecedented tariff decision to counter Chinese subsidies to exporters
- British Prime Minister Boris Johnson will step back into the Brexit fray on Monday as he holds talks with the European Union’s top officials, with both sides looking to reset negotiations that have drifted into stalemate
Asian equity markets traded negative and US equity futures also began the week on the backfoot in which the E-Mini S&P gapped below its 200DMA (3011.20) and the key 3000 focal point, with investor sentiment weighed by coronavirus second wave fears after several US states recently suffered a record number of additional cases including 2 of the 4 largest populated states - California and Florida. ASX 200 (-2.1%) and Nikkei 225 (-3.5%) declined at the open amid the downbeat tone although losses in Australia were briefly reversed amid resilience in tech and with authorities planning to fast track infrastructure projects valued over AUD 72bln to speed up the recovery, while exporter sentiment in Tokyo was dragged by unfavourable currency effects. Hang Seng (-2.1%) and Shanghai Comp. (-1.0%) were subdued after an outbreak prompted a lockdown of some areas in Beijing and following disappointing activity data in which Chinese Industrial Production and Retail Sales both missed expectations, but with pressure in the mainland cushioned after the PBoC conducted a CNY 200bln MLF operation. Finally, 10yr JGBs were relatively flat with prices only marginally benefitting from the weakness in stocks as participants also digested the inline-to-soft enhanced liquidity auction results for longer-dated JGBs and with the BoJ kicking off its 2-day policy meeting.
Top Asian News
- Beijing Outbreak Grows to Nearly 100 Cases in Test For China
- China’s Recovery Continues But Wary Consumers Show Vulnerability
- Turkey Showcases Air Power in Region With Major Attack in Iraq
- Warburg Pincus-Backed Group Is Said to Near 58.com Buyout Deal
Europe kicks the week off with sizeable losses [Euro Stoxx 50 -1.2%], albeit well off worst levels, as the region conformed to the global risk aversion amid growing fears of a second wave – with Beijing now seemingly the epicenter of a second outbreak, whilst several US states including Alaska, Arizona, Arkansas, California, Florida, North Carolina, Oklahoma and South Carolina all experienced a record increase in coronavirus cases during the past 3 days. Bourse have drifted off worst levels as the session is underway, potentially due to short covering, but nonetheless remain in firm negative territory. Sectors are predominantly in the red and post an anti-cyclical performance, with energy recouping some losses but still retaining its spot as the laggard whilst healthcare names fare the best, marginally into positive territory. The detailed breakdown pains a similar picture, with Travel & Leisure one of the worst performers amid fears of further sectoral disruption. In terms of individual movers and shakers – BP (-3.5%) shares are pressured (alongside lower oil prices) as it anticipates Q2 charges of USD 13-17.5bln. Additionally, the group are cutting their long-term price assumptions as part of a review of development plans. Meanwhile, Commerzbank (-1.0%) reportedly rejected Cerberus’ demands for two seats on the supervisory board, according to sources; subsequently, Cerberus reportedly said they expected this to happen and will announce next steps in due course. On the flip side, AstraZeneca (+1.0%) are buoyed amid comments from Italy’s Health Minister who stated that Italy, Germany, France & Netherlands have signed a contract for 400mln doses of a COVID-19 vaccine – Co. CEO said the group will know by the end of Summer if a working vaccine is viable.
Top European News
- Johnson Returns to Brexit in Bid to Reboot Faltering Talks
- Johnson Tells Brits to ‘Shop With Confidence’ as Shops Open
- Immofinanz Seeks to Increase Capital by ~25% with Shares, Notes
- Danske Reallocates Roles and Cuts Jobs in Work-From-Home Push
In FX, the Dollar has retained some safe-haven allure alongside Gold and the Yen as 2nd wave coronavirus concerns spark another bout of broad risk aversion, with the DXY holding above 97.000 and well off mtd lows just under 96.000. However, the Greenback is still tussling with bullion and the Jpy given new outbreaks of COVID-19 across several US states and eight seeing a record rise in the number of cases over the last 3 days. Hence, Xau/Usd looks underpinned around the 10 DMA (Usd 1715/oz) and Usd/Jpy appears capped ahead of 107.60, albeit also mindful of decent option expiry interest between 107.20-15 (1.1 bn).
- NOK/AUD/CAD - Another downturn in crude prices and a further deterioration in Norway’s trade balance has undermined the Crown, while the Aussie is weaker in wake of Chinese ip and retail sales missing consensus to offset latest fiscal initiatives to support the economy via infrastructure spending. Meanwhile, the Loonie is also tracking oil down ahead of Canadian manufacturing sales, with Eur/Nok elevated within a 11.0187-10.8561 range, Aud/Usd pivoting 0.6800 and Usd/Cad firmly above 1.3600. Ahead, a big week for the Aussie kicks off with RBA minutes tomorrow and culminates in jobs data and retail sales on Thursday and Friday respectively.
- NZD/SEK - Also on the back foot, but the Kiwi benefiting to a degree from favourable Aud/Nzd cross flows towards the bottom of 1.0644-1.0583 parameters and the Swedish Krona holding up better than its Scandinavian counterpart by the same token, as Nzd/Usd sits more comfortably on the 0.6400 handle and Eur/Sek in a tighter 10.5835-5070 band.
- CHF/EUR/GBP - All pretty flat with the Franc near the middle of 0.9500-50 extremes vs the Buck and even tighter against the Euro between 1.0730-1.0695 after more deflationary Swiss data (import/producer prices) and latest sight deposits showing a big rise in domestic bank accounts in the run up to Thursday’s SNB policy review. Elsewhere, Eur/Usd seems constrained by 1.1225/30 bids and 1.1270 offers, 1.1270 with 1.5 bn option expiries at 1.1260 also keeping the headline pair in check, while Cable has reclaimed 1.2500+ status and Eur/Gbp is back under 0.9000 amidst reports of demand for Sterling via the cross before attention turns to UK PM Johnson’s Brexit call with EC President von der Leyen at 13.30BST.
- EM - Widespread declines on the lack of risk appetite, but especially for the Rub, Mxn, and Zar, while the Try is under pressure following Turkey’s airstrikes on PKK targets in Northern Iraq.
In commodities, WTI and Brent front-month futures bear the brunt of the overall risk aversion coupled with demand woes emanating from the resurgence in COVID-19 cases in the US and in Beijing. WTI has since reclaimed the 35/bbl handle (vs. 36.12/bbl high) as has Brent for the USD 38/bbl figure (vs. 38.80 high); as newsflow slows and prices grind higher ahead of US’ entrance. The week could prove to be a volatile period, barring COVID-headlines, the monthly OPEC and IEA oil market reports are due later this week, whilst the JMMC meeting will be underway on the 18th June. The committee will review secondary source data alongside current market fundamentals before proposing policy recommendations. Sources last week said that OPEC+ is to move cautiously to rebalance the market amid easing lockdowns, while anticipated Shale resumptions could also weigh on eastern producers’ minds. Participants may give less credence to the oil market reports as the prospect of rising cases could prove the reports stale. Moving to metals where, spot gold trades lacklustre around USD 1720/oz (vs. 1735 high), as the yellow metal decouples from its safe-haven properties amid early USD strength, although as the Dollar recedes, gold is seemingly weighed on by investors potentially on the sidelines as they observe the state of play. Copper prices have been moving broadly with the risk aversion. Reports noted that CME May copper volumes slid 40%, whilst LME volumes fell 26% as funds fled from high volatility amid the pandemic. Meanwhile, Dalian iron ore futures remained steady despite the second wave-woes amid falling stockpiles of the raw material.
US Event Calendar
- 8:30am: Empire Manufacturing, est. -30, prior -48.5
- 4pm: Net Long-term TIC Flows, prior $112.6b deficit
DB's Jim Reid concludes the overnight wrap
Patient zero in the U.K. was not in my household after all as my wife tested negative for Covid antibodies over the weekend. It must have been the worst flu ever over Xmas then.
New virus cases continue to bubble up in certain parts of the world and we again include our full Covid case and fatality tables in the full report - including the four most troublesome US states at the moment. There were Sunday headlines of China seeing the largest increase in new cases since April and a very localised lockdown around a market in Beijing. However at 57 new cases reported in a country of 1.4 billion people we have to put this into some perspective. This rounded up the 1-day new case growth to 0.1% after 62 days of 0.0% growth. A further 49 cases have been reported overnight with Beijing shutting down housing districts in and around the market in focus.
Meanwhile, the US is still struggling to reduce daily new case growth below 1% as all of Western Europe have. The most problematic states continue to be California, Texas, Florida and Arizona. Over the weekend these 4 states were responsible for over 16,500 new cases, or roughly 37% of the total new cases in the US. The first three are the largest states in the US so it is a worry that cases continue to rise nearly 3 months into the pandemic. Weekend reporting issues might be an issue but the 7 day average rise in daily cases in California and Texas is 2.2% currently, the same as a week ago in California and down slightly in Texas from 2.4%. Arizona and Florida are more worrisome. Arizonian cases rose by 4.5% in the last week on average, up from 4.1% the week prior, while Florida saw cases rose by 2.3% on average up from 1.8% in the period before. Rtlive’s estimates of effective transmission rates, Rt, show Arizona at the highest currently in the US at 1.18. California is now estimated at 1.0 after being slightly under a few days back, indicating that efforts to reopen may be raising the risk of transmission. Overall 16 of the 50 states are now estimated to have an Rt value over 1, while only 9 states have the entire confidence interval of their Rt values under 1.
At DB, we’ve had a lot of internal debate about whether the piecemeal, lack of centrally planned US approach to fighting this virus will eventually be worse for growth than the more synchronised and more thorough lockdown approach of Europe. My personal view is that whilst the latter looks very effective on paper, the fact that more of the US economy has remained open for longer means they’ll probably see a better short to medium term growth outlook. It’s hotly debated here though. The other thing to comment on around the four highest virus growth US states is that death rates still remain relatively low in them as you’ll see in our tables. Overall, it’s possible that globally we are now shielding the vulnerable better and that even if we do see a second wave it might not be as deadly as the first. Anyway, expect the market to be obsessing about these states this week.
The worsening virus newsflow has seen most Asian markets start the week on the back foot. The Nikkei (-0.98%), Hang Seng (-0.62%), Kospi (-0.58%) and ASX (-0.73%) are all down as we go to print. Moves for Chinese bourses have been more muted following the data (more on the shortly). In FX, the Japanese yen is up +0.21% amidst the risk off. Meanwhile, yields on 10y USTs are down -4bps to 0.665% and futures on the S&P 500 are down -1.22%. Elsewhere, WTI oil is down -2.84% to $35.23.
In terms of that data, China’s activity data for May did suggest an improving growth outlook albeit slightly disappointing relative to expectations. Industrial production rose to +4.4% yoy (vs. +5.0% yoy expected and +3.9% yoy last month) while retail sales rose to -2.8% yoy (vs. -2.3% yoy expected and -7.5% yoy last month) and YtD fixed asset investments ex rural printed at -6.3% yoy (vs. -6.0% yoy expected). Finally the surveyed jobless rate in May came in line with expectations at 5.9%.
In other weekend news, US infectious disease expert Anthony Fauci suggested that bans on travel to the US may remain until a vaccine arrives. Elsewhere, Italian news daily La Repubblica noted over the weekend that the Italian government may request up to EUR 36bn in credit lines linked to the ESM by the end of July. The report added that PM Conte has received preliminary approval from Foreign Minister Luigi Di Maio of the Five Star movement, which has been against tapping the fund and said that Italy would aim to request an ESM loan along with other EU members including Spain and Portugal.
In terms of this week, central banks will feature highly on the agenda, with decisions from the Bank of Japan (tomorrow), the Bank of England (Thursday) and a number of others, while Fed Chair Powell will also be testifying before Congress (tomorrow and Wednesday). Elsewhere, European politics will be in focus, with a European Council meeting taking place on Friday where the recovery fund will be discussed, as well as talks between Prime Minister Johnson and EU leaders on today about their future relationship. Meanwhile we’ll get an increasing number of hard data releases for May, offering further insight into how different economies have fared as various lockdown measures have been eased.
Starting with central banks while the BoJ (tomorrow) is likely to see no policy change, the Bank of England (Thursday) are expected by DB to ramp up QE by a further £125bn with more QE likely over the course of the year. Their decision comes against the backdrop of Friday’s data showing UK GDP contracting by -20.4% in April, following its -5.8% decline in March, and with the country still only slowly easing lockdown restrictions.
Another central bank highlight will be Fed Chair Powell’s appearances before the Senate Banking Committee tomorrow and the House Financial Services Committee on Wednesday. He’ll be delivering a testimony as part of the semiannual Monetary Policy Report that’s submitted to Congress. It’ll be interesting to hear what he has to say on the outlook and how he sees the recovery progressing given his remarks in the most recent press conference that “we’re not thinking about thinking about raising rates”. So close to last week’s FOMC there is unlikely to be much new news but his tone will be closely watched as many in the market have criticised his downbeat nature at last week’s press conference. Rightly or wrongly, markets like a bit of sparkle from their central bank leaders and didn’t feel they got enough last week. Finally, central banks elsewhere will also be making a number of decisions next week, including in Switzerland, Norway, Indonesia, Russia and Brazil.
At the end of the week, the European Council summit on Friday will be of particular importance, with EU leaders due to discuss the recovery fund to deal with covid-19, along with the EU’s new long-term budget. Last month, Commission President von der Leyen presented a proposal for a €750bn recovery fund, which would include a mixture of grants and loans to member states. As part of this, the Commission would borrow from markets on behalf of the EU. However, the plans would require unanimity among the member states, and there are differences of views between them, not least on the extent to which the fund should be balanced between grants and loans. However, talks on the issue are expected to keep going into July, when Germany will take over the rotating EU Presidency.
Staying on European politics, and Brexit will return to the headlines as a high-level meeting between UK Prime Minister Johnson and the Presidents of the European Commission, Council and Parliament takes place by video conference this afternoon. The two sides have now agreed to an intensified timetable for negotiations on a free-trade agreement, with talks in each of the 5 weeks from the week commencing 29 June to the week commencing 27 July. The question will be whether today’s high-level talks can provide fresh impetus for the negotiations.
On the data front, it isn’t a particularly eventful week. The US will be releasing more hard data for May, with retail sales, industrial production and capacity utilisation figures coming out tomorrow, before housing starts and building permits for May are released on Wednesday. Our economists believe the trough of activity was in early May where their tracker showed YoY growth of -11%. It’s now around -9%. Moving across the Atlantic, here in the UK, this week sees inflation, retail sales and unemployment data released. For more on the rest of the week’s calendar see the day by day week ahead at the end.
Looking back at last week now, global equity markets in the US and Europe fell the most since the worst days of this covid-19 crisis. While Fed Chair Jerome Powell indicated midweek that the Fed would continue to use its tools to support the US recovery, the central bank’s bleak long term forecast and rising virus cases in the largest US states caused a reversal in investor risk sentiment. The S&P 500 (+1.31% Friday) nearly erased all of the previous week’s gains, falling -4.78% on the week, with the largest one-day fall coming on Thursday (-5.89%). The tech-focused NASDAQ went back to outperforming the S&P after two weeks of lagging the broader index, down “just” -2.30% over the 5 days (+1.01% Friday). For both the S&P 500 and the NASDAQ it was the worst weekly performance since the height of the crisis in the week ending 20 March. European equities fell even more on the week as the cyclical-over-growth outperformance trade of the past 1-2 weeks unwound. Banks were at the forefront of this on both sides of the Atlantic – US Bank stocks fell -11.17% while European Banks fell -9.76%. The Stoxx 600 as a whole fell -5.66% (+0.28% Friday) over the five days. The DAX was down -6.99% (-0.18% Friday), while the CAC fell -6.90% (+0.49% Friday), the IBEX retreated -7.37% (+0.20% Friday), and the FTSE MIB dropped -6.44% (+0.43% Friday). Asian indices did not fall as much, with the Nikkei down -2.44% over the week (-0.75% Friday) while the CSI 300 was largely unchanged at +0.05% (+0.18% Friday), and the Kospi fell -2.27% (-2.04% Friday).
With worries of a protracted first wave or potential second wave dampening economic activity, oil fell for the first week since late April. While OPEC+ agreed to extend production cuts at the start of the week, the global demand picture has not materially improved yet. And on a week where risk assets repriced the risks around reopening the economy, the commodity traded sharply lower. WTI futures fell -8.32% (-0.22% Friday) to $36.26/barrel and Brent crude retreated -8.44% on the week (+0.47% Friday) to $38.73/barrel.
As risk assets traded lower and volatility spiked, credit spreads both in the US and Europe widened on the week. European HY cash spreads were +44bps wider on the week (unchanged Friday), while European IG spreads were +13bps wider (+1bp Friday). US HY cash spreads were +78bps wider (-12bps Friday), while IG widened +9bps on the week (-1bp Friday).
Peripheral debt widened across the board as well, with Spanish 10yr yields +19.9bps wider to German bunds over the week, while Italian BTPs were +19.7bps wider, Greek 10yr yields widened less at +8.6bps, and Portuguese bonds widened +19.4bps. With risk assets falling sharply toward the end of the week, core sovereign bonds rallied with US 10yr Treasury yields falling -19.2bps (+3.4bps Friday) to finish at 0.703%, while 10yr Bund yields fell -16.2bps over the course of the week (-2.5bps Friday) to -0.44%. With yields lower and investors seeking havens, Gold rise +2.71% on the week (+0.18% Friday). The largest one week move for the metal since late April.
Economic data on Friday continued to show the economic hardship brought on by the coronavirus, with Euro Area industrial production falling by -17.1% in April, following its -11.9% decline in March. In the US, the University of Michigan consumer sentiment survey bounced back 6.6pts to 78.9 (vs. 75 expected), which is still near 7 year lows.