US futures are trading flat and European shares fell as the looming China tariff deadline was one day closer and still without resolution, while traders awaited the Fed's policy announcement today at 2pm. The MSCI world equity index eked out a small gain after Asian shares advanced earlier.
Market sentiment was dented on Tuesday evening and the Yuan slumped after Trump Trade Adviser Peter Navarro said he "got no indication" that the U.S. would postpone new tariffs on Chinese goods that are due to take effect on Dec. 15. Navarro’s comments conflicted with reports from the WSJ and Bloomberg that cited people familiar with the trade talks as saying Chinese officials expect President Donald Trump to delay the hike to allow more time for the reaching of an interim deal.
Amid the last minute verbal brinkmanship, China's nationalist tabloid Global Times, tweeted that "The US' brinksmanship in using tariffs as leverage to force #China into giving more ground in #tradetalks will not succeed; Instead, it could prompt a new round of tit-for-tat tariff fights, darkening an already pressured global economy and sparking global stock selloff." However, it failed to impact risk assets.
The US' brinksmanship in using tariffs as leverage to force #China into giving more ground in #tradetalks will not succeed; Instead, it could prompt a new round of tit-for-tat tariff fights, darkening an already pressured global economy and sparking global stock selloff: experts pic.twitter.com/YPZVETGRvp— The Business Source (@GlobalTimesBiz) December 11, 2019
The White House’s top economic and trade advisers are expected to meet in coming days with Trump over the decision, as the U.S. President now has only days to decide whether to impose tariffs on nearly $160 billion in Chinese goods.
Investors said an initial trade deal was still likely, since it would benefit both Washington and Beijing. “We still believe that the phase-one deal is something that is convenient for both the presidents on the political and economic side,” Alessia Berardi, senior economist at Amundi. “If the tariffs will be implemented it will be a disaster in the short term.”
Amid the uncertainty over trade - the overriding focus for investors through the year - the European Stoxx 600 index fell, then recovered modestly, dragged down by real estate shares, while Asia stocks were mostly higher after White House adviser Peter Navarro said he had no indication that President Donald Trump will do “anything other than have a great deal or put the tariffs on.”
Earlier in the session, Asian stocks advanced, led by utility companies, as investors looked for signals of a possible initial trade deal between China and the U.S. Markets in the region were mixed, with Hong Kong leading gains and Japan retreating. MSCI’s index of Asia-Pacific ex-Japan had earlier risen 0.5%. Hong Kong’s Hang Seng and Australia’s S&P/ASX 200 led gains with 0.7% rises. The Topix slid for a second day, dragged down by Keyence and Hitachi. The Shanghai Composite Index closed higher for a fifth day of gains, with large banks and insurers among the biggest boosts. China’s top leadership may set the target for economic growth at about 6% for 2020 as they meet this week for their annual policy conclave. India’s Sensex edged up, supported by Housing Development Finance and Kotak Mahindra Bank, as a credit crisis appears to be easing for some borrowers. Indian bonds declined as S&P Global Ratings warned it may lower the nation’s sovereign ratings if economic growth doesn’t recover.
In the Middle East, Saudi Aramco shares surged by a 10% limit above their IPO price in their first day of trading. That gave the extremely illiquid state-controlled oil company a market value of about $1.88 trillion, making it the world’s most valuable listed company.
In addition to trade, investors will be focused on meetings by major central banks starting with the Fed which at its policy meeting later today is widely expected to hold rates steady, with investors watching for changes to its view on the economy and its 2% growth forecast for next year. The Fed’s statement is due at 2pm ET. A surprise when U.S. inflation data are released at 830am would further reduce chances for rate cuts next year.
Then on Thursday, the ECB will hold its first meeting and news conference with Christine Lagarde. “Everything is positioned for the two major central banks to stay accommodative,” Berardi said.
"The markets have become numb to the noise” on trade, Allianz portfolio manager Burns McKinney told Bloomberg TV. "The FOMC meeting, the election in the U.K. and then later this week the December 15 deadline are all factors that I think the markets have generally not priced in any bad news."
The British pound, a high-flier of late, dropped from a seven-month peak after an opinion poll projected a narrower-than-expected victory for the Conservative party in the British election on Thursday. The election is set to decide how the UK will leave the European Union, if at all. The pound fell as low as $1.3107 after a YouGov poll showed the ruling Conservatives heading towards a slimmer majority than was forecast a fortnight ago. YouGov’s research director said the results showed a hung parliament was possible.
Sterling later recovered some of its losses after dropping 1% from its high on Tuesday, when investors were more confident of a Conservative victory that they expect will end uncertainty over Britain’s exit from the EU. It was last trading flat at $1.3151.
Elsewhere, the Bloomberg Dollar Spot Index edged higher, rising for the first time in three days, ahead of the Federal Reserve’s policy decision. The krona rose versus all major peers and reached a seven-month high against the euro after Sweden’s November inflation print beat estimates and all but guaranteed that the Riksbank will make history next week, as policy makers look set to end half a decade of negative interest rates. The euro was last down 0.8% against the crown at 10.454, leaving the Swedish currency at its strongest since late April.
The yuan weakened after Navarro said he “got no indication” that the U.S. would postpone new tariffs on Chinese goods that are due to take effect on Dec. 15. The Chinese currency declined as much as 0.17% in the offshore market on Wednesday and weakened up to 0.10% onshore. Stephen Chiu, Asia FX and rates strategist at Bloomberg Intelligence, expects the impact of trade war developments on the yuan to diminish as investors get used to twists and turns around the negotiations. "Even if there is no delay in tariff increase, I don’t think the yuan will rise too much. It should be capped at 7.1 per dollar."
In commodities, Brent futures fell by 52 cents, or 0.8%, to $63.82 per barrel by late morning, after industry data showed an unexpected build-up in crude inventories in the United States.
Looking at the day ahead, the focus will clearly be on the aforementioned Fed meeting this evening. There is also important data with the November CPI report due out in the US just after lunch, while the November monthly budget statement is also scheduled for tonight. There is no data of note in Europe today. Elsewhere, OPEC is due to issue its monthly oil market report.
- S&P 500 futures down 0.1% to 3,132.75
- STOXX Europe 600 down 0.2% to 404.38
- MXAP up 0.3% to 165.50
- MXAPJ up 0.6% to 527.88
- Nikkei down 0.08% to 23,391.86
- Topix down 0.3% to 1,714.95
- Hang Seng Index up 0.8% to 26,645.43
- Shanghai Composite up 0.2% to 2,924.42
- Sensex up 0.2% to 40,321.80
- Australia S&P/ASX 200 up 0.7% to 6,752.64
- Kospi up 0.4% to 2,105.62
- German 10Y yield fell 1.4 bps to -0.309%
- Euro down 0.05% to $1.1086
- Brent Futures down 0.4% to $64.06/bbl
- Gold spot up 0.2% to $1,466.61
- U.S. Dollar Index up 0.09% to 97.50
- Italian 10Y yield fell 3.2 bps to 0.897%
- Spanish 10Y yield fell 2.4 bps to 0.437%
Top Overnight News
- While Jerome Powell is expected to reinforce the signal that policy is on hold at the central bank’s meeting on Wednesday, some of his colleagues may be looking ahead to when they should hike again
- Boris Johnson and Jeremy Corbyn embark on a whistle- stop tour of key districts, after a hotly anticipated opinion poll showed the Conservative Party’s lead has narrowed ahead of Thursday’s U.K. election. The YouGov survey of more than 100,000 voters suggested Johnson would win a majority of 28 seats, down from 68 estimated two weeks earlier
- The unprecedented level of calm pervading global currencies is pushing investors to rethink their approach to the FX market. Morgan Stanley Investment Management has pared its foreign-exchange exposure, and Russell Investments Ltd. is focusing on value, and is forsaking major currencies in favor of those from developing economies
- Those close to EU chiefs privately acknowledge that a strong Johnson victory on Dec. 12 will mean the U.K.’s long-drawn-out departure from the European Union will finally happen, according to more than half a dozen EU officials speaking on condition of anonymity because the issue is delicate
- The Tories will win 339 of the 650 seats in the House of Commons, Labour 231, the Scottish National Party 41, and the Liberal Democrats 15, according to a YouGov forecast on Tuesday
- Chinese officials expect President Donald Trump to delay a threatened tariff increase set for Sunday, giving more time to negotiate an interim trade deal. However, late Tuesday, White House Trade Adviser Peter Navarro said he had no evidence that tariffs set to take effect on Dec. 15 won’t take effect
- Bank of Japan officials see a sizable impact from stimulus measures launched by Prime Minister Shinzo Abe last week, raising the likelihood that the central bank will upgrade its economic forecasts for the first time in a year next month, according to people familiar with the matter
- House Democrats embraced the U.S.-Mexico-Canada trade agreement after securing key revisions and announced plans to vote on the deal next week, putting Trump closer to a political win as he heads into the 2020 election
- New Zealand’s government will increase spending on infrastructure in an effort to boost economic growth, resulting in a budget deficit this year and smaller surpluses thereafter
- Oil retreated from its highest close in almost three months after an industry report showed American crude inventories expanded last week, adding to concerns over weakening demand
- House Democrats delivered two tightly crafted articles of impeachment against Trump on Tuesday that urged his removal as president for abusing the power of his office and keeping Congress from exercising its duty as a check on the executive branch
A non-committal tone persisted across Asia-Pac equity markets following conflicting US-China tariff reports and as this week’s risk events drew closer beginning with the FOMC meeting due later today. The latest trade headlines have been varied as initial reports suggested that US and Chinese officials are planning for a delay of December 15th tariffs as they negotiate on agricultural purchases, although President Trump was said to remain undecided and both NEC Director Kudlow and White House Trade Advisor Navarro have leaned back from the notion of a tariff postponement. This has resulted to mixed trade for ASX 200 (+0.7%) and Nikkei 225 (U/C) with Australia lifted by outperformance in the defensive sectors and price action in Tokyo kept to within a tight range as sentiment among large firms deteriorated to a 3-year low, while Hang Seng (+0.7%) and Shanghai Comp. (+0.2%) were predominantly indecisive on the differing trade signals, with stronger than expected Chinese financing and lending data doing little to spur upside as participants also contemplated over continued PBoC liquidity inaction and regional growth downgrades from ADB which forecasts growth for the world’s 2nd largest economy to slip below 6% next year. Finally, 10yr JGBs saw a resumption of the recent declines following similar pressure in T-notes, while demand was also subdued by a lack of BoJ buying with the central bank only in the market today for treasury discount bills.
Top Asian News
- BOJ Is Said to Expect Sizable Impact From Abe’s Economic Package
- China’s Experimental Cancer Cure Offers Hope and Hidden Dangers
- Jitters Over China’s Local Defaults Start to Spread Offshore
- Investors Seen Flocking to TSMC Over Samsung for Reliable Payout
A choppy session for European equities thus far [Eurostoxx 50 -0.2%] following on from a lacklustre APAC session heading into key macro risk events. Broad-based losses are seen across the board, albeit the FTSE 100 (-0.2%) is largely moving in tandem with the Pound ahead of tomorrow’s UK general election and after the latest MRP polling from YouGov. Sectors are mixed with Utilities propped up in part by Germany’s E.ON (+1.6%) and RWE (+0.7%) amid source reports that Germany will allow the companies to keep their existing carbon emissions certificates due to coal unit shutdowns. That said, the sector’s defensive nature could also be providing some support. Meanwhile, the IT sector is underperforms, potentially on trade jitters amid conflicting reports and rhetoric from both the US and China sides. In terms of individual movers – JD Sports Fashion (-8.7%) shares tumbled at the open after its top shareholder cut its stake in the company but retained his position as major shareholder. Credit Suisse (-0.5%) remains modestly pressured after it revised down its 2020 ROTE guidance to around 10% vs. Prev. 10-11%. On the flipside, Tullow Oil (+5.6%) continues to nurse its wounds following its recent 70% slump, whilst Inditex (+2.7%) is buoyed post-earnings, which showed an YY gains in net profit, net sales, EBITDA and gross profits.
Top European News
- BVB Shares Jump, Ajax Tanks Following Champions League Drama
- As Just Eat Battle Rages On, Prosus Wins Amsterdam Sideshow
- Swedish Inflation Data ‘Cements’ Bets That Rate Hike Is Coming
- Europe Readies World’s Cleanest Revamp of Economy in Green Deal
In FX, Not quite polar opposites, but contrasting fortunes for the Swedish Krona and Sterling in wake of inflation data and the final pre-UK election poll from YouGov, as the former eclipsed market expectations and matched Riksbank forecasts to effectively seal a repo rate hike next week. However, the MRP survey implies a much tighter result this Thursday than the previous findings, with a projected Tory majority of 28 seats vs 68 seats around the end of November and even that prediction subject to the usual margins of error. In response, Eur/Sek has recoiled sharply to test 10.4500 support vs highs close to 10.5400 and 10.5800+ on Tuesday, while Cable has pulled back from just over 1.3200 to circa 1.3140 after probing bids ahead of 1.3100 and Eur/Gbp bounced through 0.8450 at one stage before fading.
- AUD/NZD - A similar story down under where the tables have turned somewhat on the back of a reversal in cross flows following the latest NZ Half Year Fiscal update revealing a bigger cash balance shortfall and fresh Nzd12 bn budget allocation for infrastructure. Nzd/Usd has lost momentum after a knee-jerk rally to around 0.6555 and Aud/Nzd rebounded from sub-1.0400 towards 1.0450 to help Aud/Usd maintain 0.6800+ status even though RBC joined the chorus for more RBA easing and QE.
- JPY/CAD/CHF/EUR - All narrowly mixed against the Greenback as the DXY continues to straddle the 97.500 level in relatively muted/nervy trade awaiting the FOMC, with the Yen meandering between 108.67-84 parameters, Loonie trapped in a 1.3227-39 range and Franc pivoting 0.9850. Elsewhere, the Euro is still looking heavy or toppy into 1.1100 and perhaps conscious that a hefty 1.6 bn option expiries reside from the big figure to 1.1110, not to mention the fact that tomorrow is ECB (and SNB) day.
- EM - Divergence also a theme in terms of Rand outperformance compared to Lira underperformance, as Usd/Zar pares back from almost 14.8200 in wake of in line/softer than previous SA CPI on less Eskom load-shedding before attention turns to retail sales data, but Usd/Try hovers around 5.8000 due to renewed US-Turkey sanctions and diplomatic tension rather than a slightely narrower than anticipated current account surplus.
In commodities, mixed trade in the commodities complex with WTI and Brent futures retreating from 12-week highs following last night’s weekly API figures – with crude headline printing a surprise build of 1.41mln barrels vs. expected draw of 2.8mln. Further, the internals came in mostly bearish with distillates and gasoline showing higher-than-forecast builds whilst Cushing printed a deeper-than-expected draw. Traders will be waiting for confirmation from the EIA later today. Meanwhile OPEC’s monthly report (to be released at 13:00GMT) may garner some attention given the EIA STEO left its global oil demand forecast unchanged and included a downward revision to their 2020 US oil supply growth forecast. ING is not surprised by the downward revision given the slowdown seen in US rig activity. In terms of a more macro picture, crude markets will be vulnerable to any US-China headlines amid the contradicting reports regarding tariffs due to be implemented this Sunday. Aside from that, the FOMC’s latest monetary policy decision later could provide the complex with some sentiment-driven action. Today also marked the first trading session for Saudi Aramco, whose shares opened at SAR 35.2 vs. and IPO price of SAR 32.0, hitting limit up after rising 10% and surpassing its earlier valuation of USD 1.7tln. Looking at metals, spot gold prices remain supported ahead of the aforementioned events, with the yellow metal surpassing its 21DMA (USD 1465.50/oz) with eyes on yesterday’s high at USD 1469.15/oz. Copper prices continue to rise and have topped 2.75/lb with its 100 DMA residing around 2.8060/lb. Finally, nickel prices came under pressure in early APAC trade after inventories spiked 21% YY, the largest increase since 2008, but despite this the metal reversed course with the only pertinent news being Indonesia doubling royalties for the ore to 10% - making it more expensive for buyers, thus some front-loading effects may have been priced in.
US Event Calendar
- 7am: MBA Mortgage Applications, prior -9.2%
- 8:30am: US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%; CPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%
- 8:30am: US CPI MoM, est. 0.2%, prior 0.4%; CPI YoY, est. 2.0%, prior 1.8%;
- 8:30am: Real Avg Weekly Earnings YoY, prior 0.95%; Real Avg Hourly Earning YoY, prior 1.2%
- 2pm: FOMC Rate Decision (Upper Bound), est. 1.75%, prior 1.75%
- 2pm: Monthly Budget Statement, est. $206.2b deficit, prior $100.5b deficit
DB's Jim Reid concludes the overnight wrap
Markets are focused on navigating the last couple of weeks of 2019 for now with the next hurdle being the FOMC meeting tonight although in fairness it’s probably hard to get too excited given that the Fed is firmly on hold for now with the recent data helping to underscore that position. Markets have priced that in and the view from our economists is that the meeting statement should largely mirror the communique from the last meeting.
We will also get the latest summary of economic projections although our colleagues also expect only very modest changes, most notably downgrades to the median views on inflation and long-run unemployment. The dot plots should also adjust 25bps lower to account for the rate cut in October and still show an upward drift over time to a neutral level that is somewhat lower. That leaves Powell’s press conference which our team believe will echo recent remarks, which indicate that the Committee sees policy in a good place barring a "material reassessment" to the outlook. In this context, the team expect the Chair's comments to reflect his implicit message from October that, while the bar to cutting rates is high, the bar for hiking is even higher.
A reminder that the meeting outcome will be at 7pm GMT/2pm EST, while prior to that we’re also expecting the November CPI report in the US where the consensus expects a +0.2% mom core reading. Back to markets where the main story yesterday was the WSJ reporting that US and China negotiators are planning for a delay of tariffs due to kick in from this Sunday. In fairness this did appear to be what markets had expected even if there were one or two doubts in recent weeks with the story also suggesting that Chinese and US officials “don’t have a hard deadline”. However to add some confusion to the picture, the White House’s Kudlow said later on that the December 15th tariffs are “still on the table” and overnight Commerce Secretary Ross has said that he has “no indication” that the President will do anything other than “have a great deal or put the tariffs on”.
The mixed messages resulted in a bit of a directionless session for US equities with the S&P 500 ebbing between gains and losses before ultimately finishing -0.11% on lower than average volumes. The NASDAQ and DOW closed -0.07% and -0.10% respectively while the VIX ended just below 16. Prior to this in Europe the STOXX 600 had closed -0.26% albeit off the lows for the session. Bond markets weren’t much more exciting with 10y Treasury yields up +2.3bps and yields in Europe up a similar amount. The exception were BTPs which ended -3.4bps lower.
The picture isn’t a whole lot clearer in Asia this morning. We’ve seen small gains for the Hang Seng (+0.33%) and Kospi (+0.34%) offset by a mixed performance for bourses in China (Shanghai Comp +0.12%), CSI 300 -0.04%) and a small loss for the Nikkei (-0.18%) We should note that after we went to print yesterday November credit data in China was broadly better than expected which combined with the recent bounce in PMIs should be supportive for the growth narrative.
Also out last night was the last YouGov MRP survey with the results showing the Conservatives to win 339 seats and therefore giving a majority of 28 seats, versus 231 for Labour. The previous iteration of the poll showed the Conservatives with a lead of 68 seats so the forecasted lead has been cut in half which makes things a little more interesting ahead of the vote tomorrow. Sterling dropped as much as -0.81% after the poll was released although has recovered slightly as we go to print to trade at $1.314.
The other news yesterday was mostly political. As expected the US, Canada and Mexico all agreed to sign the USMCA with House Ways and Means Panel Chairman Neal saying that it is likely that the pact will be voted on next week. Meanwhile in the US the Democrats announced two articles of impeachment against President Trump on abuse of power and obstruction. Both of those developments caused barely a ripple in markets.
As far as the data was concerned yesterday, the highlight in Europe was an improving ZEW survey in Germany. Indeed the December current situation component improved 4.8pts to -19.9 which bettered expectations for -22.0. That matches the September level while the expectations component improved a more notable 12.8pts to +10.7 (vs. +0.3 expected) which puts it back at the highest level since February 2018.
The hard data was a bit more mixed though with October industrial production surprising to the upside in France (+0.4% mom vs. +0.2% expected) but to the downside in Italy (-0.3% mom vs. -0.2% expected). In the UK the data also disappointed (+0.1% mom vs. +0.2% expected) while the October monthly GDP print of 0.0% was also weaker than expected (+0.1% mom expected). Adding to the pain for the UK was the much wider than expected trade deficit, albeit likely impacted by stockpiling.
Finally in the US the final Q3 readings for nonfarm productivity and unit labour costs were both revised down, to -0.2% qoq (from -0.1%) and +2.5% qoq (from +3.4%) respectively. The latter had been sending a firmer inflation message ahead so the downward revision falls closer in line with more muted inflation indicators from other leading indicators.
Finally to the day ahead, where the focus will clearly be on the aforementioned Fed meeting this evening. There is also important data with the November CPI report due out in the US just after lunch, while the November monthly budget statement is also scheduled for tonight. There is no data of note in Europe today. Elsewhere, OPEC is due to issue its monthly oil market report.