Global stocks and US equity futures eased further on Thursday as the latest dismal Chinese data missed across the board and showed further economic slowdown, with investment growth printing weakest since 1998...
... adding to worries about the global growth fallout from the U.S.-China trade war. U.S. futures were down 0.14%, following a record-high close on the S&P 500 on Wednesday. Futures bounced briefly after news that China customs have lifted restrictions on US poultry meat imports, with China's Global Times acknowledging saying the move comes "amid the continuation of tradetalks, paving the way for hundreds of millions of dollars worth US meat export to China"; the US exported $390MM worth of poultry to China in 2014 before the ban. Yes, million, not billion.
With earnings season ending, Cisco Systems tumbled in early trading after its quarterly sales forecast fell far short of projections, while WalMart surged after the company raised its full year outlook. Altice Europe NV beat earnings estimates, while Burberry Group Plc climbed after reporting six-month earnings that exceeded expectations.
The MSCI All-Country World index was down 0.14% after start of trading in Europe. European shares initially fell, but later rebounded after data showing the German economy just barely missed a recession, rising 0.1% in the third quarter, avoiding a contraction thanks to consumer spending, and beating expectations of a second consecutive contraction.
While a recession was averted, the news was hardly good as Germany grew at just half the pact of the overall eurozone as growth across the entire continent grinds to a halt.
“Obviously it’s better than expected, but actually I would argue is that it’s a hollow victory because in effect it makes a fiscal response less likely,” said Michael Hewson, chief markets analyst at CMC Markets in London. “I think if they’d gone into a technical recession, the pressure to loosen the purse strings so to speak would have been much much greater.”
In Asia, stocks fell after very poor economic data in China and Japan showed the trade war between Beijing and Washington was hitting growth in some of the world’s biggest economies. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, while Japan’s Nikkei index fell further, dropping 0.8%. Asian stocks slid for a second day, led by material producers, as China’s economy slowed further in October, with factory output, retail sales and investment all below estimates. Most markets in the region were down, with Japan leading declines. The Topix fell 0.9%, dragged down by Sony and Toyota Motor, as Japan’s economy slowed sharply in the third quarter amid shrinking exports. Q3 GDP in Japan printed at just 0.1% - the same as Germany - and missing estimates of 0.2%.
The Shanghai Composite Index reversed earlier losses to close 0.2% higher, supported by Jiangsu Hengrui Medicine and Kweichow Moutai. Shanghai blue chips were supported by expectations that the gloomy figures would add to the case for stimulus. Hong Kong’s Hang Seng Index retreated as violent protests disrupted public transport for a fourth day in the city. India’s Sensex climbed as positive earnings continued to fuel optimism among investors Australia’s S&P/ASX200 wiped earlier gains to close 0.5% higher.
As reported last night, China’s factory output growth slowed significantly more than expected in October, as weakness in global and domestic demand and the drawn-out Sino-U.S. trade war weighed on broad segments of the world’s second-largest economy.
Fixed asset investment, a key driver of economic growth, rose just 5.2% from January to October, against expected growth of 5.4% and the weakest pace since Reuters record began in 1996. China’s industrial production growth slowed sharply in October, with the 4.7% year-on-year rise well below forecasts for 5.4%. Investment growth hit a record low and retail sales also missed expectations.
China and the United States are holding in-depth discussions on a “phase one” trade agreement, and cancelling tariffs is an important condition to reach such a deal, the Chinese commerce ministry said on Thursday, indicating it now believes it has leverage over the impeachment-scarred Trump, and something which the US president will likely balk at. Specifically, China's MOFCOM said cancelling tariffs is an important condition for achieving a trade deal between US and China; degree of tariff cancellation should entirely reflect importance of a Phase One agreement, sides remain in discussion an a Phase One agreement.
The weak figures also came as market confidence about a resolution being reached weakens, with a new Reuters poll showing most economists do not expect Washington and Beijing to strike a permanent truce over the coming year. Trump offered no update on the progress of negotiations in a policy speech on Tuesday. The Wall Street Journal reported on Wednesday that talks had snagged on farm purchases.
Worries about spiraling violence as anti-government protests intensify in Hong Kong have also soured investor sentiment. Protesters paralyzed parts of Hong Kong for a fourth day, forcing school closures and blocking highways and other transport links in a marked escalation of unrest in the financial hub. Hong Kong’s Hang Seng fell 0.8% to a fresh one-month low.
In FX, safe havens such as the yen and Swiss franc gained as did the dollar whilethe euro brushed off news that Germany had avoided a recession, while implied pound volatility surged ahead of the U.K.’s December election. The yen was quoted at 108.70 per dollar, close to a one-week high. The Swiss franc traded at 0.9875 versus the greenback, near the highest in more than a week. The pound edged up then reversed gains, as traders are starting to brace for larger swings over the one month into the election result. The Australian dollar dropped as the nation’s employment unexpectedly contracted putting pressure on the Reserve Bank of Australia to lower rates. The data “puts the market back on the scent of a possible December RBA rate cut, which is why we have seen such a strong reaction in the Australian currency,” says Ray Attrill, head of foreign-exchange strategy at National Australia Bank.
In rates, 10-year Treasury yields fell for a second day, dropping to 1.8410% compared with its U.S. close of 1.869% on Wednesday, and 1.973% one week ago.
“Increasing signs of unrest in Hong Kong and Latin America coupled with the uncertainty around the trade talks is keeping the risk-off sentiment well and alive in FX markets,” said Lee Hardman, a London-based currency strategist at MUFG.
In commodities, oil rose after industry data showed a surprise drop in US crude inventories, while comments from an OPEC official about lower-than-expected U.S. shale production growth in 2020 also provided some support. Brent crude futures rose 0.74% to $62.83 a barrel while WTI crude gained 0.77% to $57.56 per barrel. The yield on
Expected data include PPI and jobless claims. Walmart, Canopy Growth, Aurora Cannabis, and Nvidia are among companies reporting earnings.
- S&P 500 futures little changed at 3,096.00
- STOXX Europe 600 down 0.08% to 405.53
- MXAP down 0.5% to 163.53
- MXAPJ down 0.3% to 522.40
- Nikkei down 0.8% to 23,141.55
- Topix down 0.9% to 1,684.40
- Hang Seng Index down 0.9% to 26,323.69
- Shanghai Composite up 0.2% to 2,909.87
- Sensex up 0.4% to 40,286.06
- Australia S&P/ASX 200 up 0.6% to 6,735.05
- Kospi up 0.8% to 2,139.23
- German 10Y yield fell 2.8 bps to -0.328%
- Euro down 0.05% to $1.1001
- Italian 10Y yield rose 2.7 bps to 0.898%
- Spanish 10Y yield fell 2.4 bps to 0.426%
- Brent futures up 0.9% to $62.91/bbl
- Gold spot up 0.4% to $1,469.19
- U.S. Dollar Index little changed at 98.34
Top Overnight News
- China’s economy slowed further in October, signaling policy makers’ piecemeal stimulus is failing to boost output and investment amid ongoing trade tensions with the U.S. and subdued domestic demand
- “We should hold steady for a while and watch how things unfold before taking any more action,” Fed Bank of Philadelphia President Patrick Harker said. “I held this same view regarding the last two cuts. I would have preferred to hold firm”
- Japan’s economy slowed in the third quarter as overall exports fell amid trade tensions and a shopping splurge before a sales tax increase ran down stockpiles of goods
- Hong Kong said all schools would be suspended through Sunday amid a fourth day of chaos that has seen the city’s subway operator partially suspend service and protesters continue to block roads
- A previously unknown account of President Donald Trump stressing his desire for Ukraine to investigate a political rival marked the opening hearing of House Democrats’ impeachment inquiry, as Republicans gave speeches dismissing the testimony as irrelevant
- Oil rose for a second day after an industry report pointed to a drop in U.S. inventories and OPEC said it sees potential for a “sharp” cut in crude production next year from countries outside the group
- Level of tariffs removal should reflect importance of the phase- one deal, China’s Ministry of Commerce spokesman Gao Feng says at a regular briefing
- Germany dodged a much-anticipated recession, unexpectedly eking out modest growth thanks to domestic demand. The surprise expansion doesn’t change the fact that the economy is going through a torrid period that’s turned it from the euro area’s traditional growth engine into a source of weakness
- U.K. retail sales unexpectedly fell in October, leaving growth over the last three months at its weakest for 1 1/2 years
Asian equity markets traded somewhat mixed after a tentative lead from Wall St peers due to ongoing trade uncertainty and as the region digested several substandard tier-1 data releases. ASX 200 (+0.6%) was positive as tech and consumer staples led the early broad gains across Australia’s sectors and with abysmal jobs data supporting prospects the RBA may need to ease further. Nikkei 225 (-0.8%) succumbed to softer than expected Q3 GDP which disappointed hopes of front-loading ahead of the sales tax hike and raised questions regarding the Q4 outlook, although there were some success stories with Yahoo Japan the biggest gainer on news of a potential merger with Line Corp which also provided a tailwind for their respective parents SoftBank and Naver. Hang Seng (-0.9%) was the laggard and Shanghai Comp. (+0.2%) was indecisive amid the ongoing precarious US-China trade climate as President Trump commented that a deal is moving along very rapidly, although other reports suggested trade talks may have hit a snag over agricultural purchases. Furthermore, sentiment was also dragged by weaker than expected Chinese Industrial Production and Retail Sales data, as well as a decline in profits by index heavyweight Tencent and continued unrest in Hong Kong where protesters persisted with their new strategy of weekday disruptions. Finally, 10yr JGBs were higher and broke through resistance at 153.00, with prices underpinned by the cautious sentiment, weaker than expected Q3 economic growth and firmer demand at the 5yr auction.
Top Asian News
- Hong Kong Money Markets Show Investor Calm Is Cracking
- Hong Kong SFC Bans Ex-Deutsche Securities Staff for Life
- India Is Said to Mull Cutting Indian Oil Stake to Below 51%
- Philippines Takes ‘Prudent Pause’ on Key Rate as Growth Rebounds
Negative news regarding US/China trade talks, which have reportedly “hit a snag” over agricultural purchases and Chinese resistance to US demands for strong enforcement mechanisms, coupled with a disappointing data in the form of weak Chinese Industrial Production and Japanese GDP, saw major European bourses (Euro Stoxx 50 unch.) trade cautiously on Thursday morning. An upside surprise for German Q3 GDP numbers, which saw the country narrowly avoid a technical recession, was unable materially lift the DAX, which is weighed on by underperformance in a number of its heavyweights; Daimler (-3.0%) is lower on the news a shift into electric vehicles will negatively impact 2020 and 2021 earnings. Additionally, Merck (-1.6%) shares are under pressure despite upgrades to EBITDA and revenue guidance as the Co.’s Performance Materials unit saw adjusted EBITDA drop by 12.7% YY, while the Co. also warned that the economic environment could result in a moderate decline in semiconductors. Similarly, RWE (-3.3%) shares are also lower despite upgrades to EBITDA and revenue guidance after the Co. posted substantial losses for its generation’s unit. Later in the morning, European bourses received a short-lived lift on the news that Chinese customs have lifted restrictions on US poultry meat imports, albeit the move was fleeting. In terms of the sectors; defensives are amongst the outperformers, with Health Care (unch.), Utilities (-0.2%) and Consumer Staples (unch.). Tech (-0.5%) is also outperforming the market; Wirecard (+0.9%) is on the front foot following the news that the payments Co. has secured YeePay as a partner for global online bookings, with potential transaction volume from this is in excess of EUR 17bln per annum. In terms of other notable movers; Altice (+1.0%) and Henkel (-2.0%) are higher after earnings; the former reported strong EBITDA and revenue results while the latter confirmed its FY19 outlook. K+S (-2.1%) earnings were weaker as the Co. cut its 2019 potash production target by 200k tons and, subsequently, cut its FY19 EBITDA target. Ryanair (-1.0%) shares were pressured after the airline was downgraded to underweight at Exane BP. Finally, Bouygues (+1.4%) was bid after positive comments from its CEO, who said competition remains intense in the French telecom market, but less so than last year.
Top European News
- Germany Dodges Recession With Unexpected Third-Quarter Growth
- U.K. Retail Sales Unexpectedly Fall as Brexit Fears Take Toll
- German Property Deals Boom as Investors Look Past Economic Gloom
- RWE’s Slow Renewables Growth Overshadows Trading Strength
In FX, the Aussie has tumbled to the bottom of the G10 table after a raft of sub-forecast data overnight, kicking off with Japanese Q3 GDP and extending through Australia’s October jobs report to Chinese IP and Retail Sales. Naturally, the big disappointment and shock was a decline in payrolls that was mostly down to a fall in permanent positions and contributed to an uptick in the unemployment rate, albeit in line with expectations. Aud/Usd recoiled from just over 0.6840 to sub-0.6800, while Aud/Nzd retreated further from pre-RBNZ peaks through 1.0650 and towards 1.0625 as the Kiwi holds up better vs a still rangebound Greenback (DXY meandering between 98.427-282) and within sight of the 0.6400 handle awaiting NZ manufacturing PMI and more from Governor Orr on the surprise decision to keep rates on hold this month. Note, Bascand underlined switch to wait-and-see mode last night, though left the door open to another OCR cut next February, if warranted.
- JPY/CHF/GBP/EUR/CAD - All narrowly mixed vs the US Dollar, with the Yen and Franc maintaining an underlying bid and safe-haven premium even though China may have alleviated some trade jitters amidst reports of an ag snag by lifting its ban on US poultry. Usd/Jpy remains below a key Fib and pivoting chart support ahead of 108.50, while Aud/Jpy has retreated to around 73.80 amidst the all round Aussie underperformance noted above, but could pare some losses and revisit 74.00 given a hefty 1.6 bn option expiries in the cross at that strike. Meanwhile, Usd/Chf is back under 0.9900 and Eur/Chf near the base of a 1.0903-1.0864 band ahead of a speech by SNB’s Maechler that may well be used as another opportunity to espouse the mantra of sub-zero rates and proactive currency intervention to ensure that the Franc does not appreciate to excessive levels. Elsewhere, Sterling only saw a shallow and brief set-back when UK retail sales fell well short of consensus, with Cable back above 1.2850 and flirting with the 10 DMA, while Eur/Gbp is retesting 0.8555 stops, as Eur/Usd relinquishes 1.1000+ status recovered in wake of German Q3 GDP data beating forecasts that would have consigned the economy to a technical recession if confirmed. Note, however, the single currency is still finding support close to a 1.0993 Fib, while the Loonie is straddling 1.3250 again and eyeing Canadian new house prices to provide independent direction and a distraction to US claims and PPI.
- SEK/NOK - Although Statistics Sweden has issued another warning about the reliability and sample size of the figures used to formulate monthly employment reports, the Swedish Krona appears to be taking the data at face value, as Eur/Sek probes below 10.6900 vs almost 10.7300 at one stage and compared to Eur/Nok that is elevated above 10.1000 and has been as high as 10.1300+.
- EM - Some positive platitudes and constructive discussions, but no resolutions from the talks between Turkish and US Presidents has left the Lira under pressure and only a little off worst levels vs the Buck near 5.7800 in contrast to the Rand that has recouped losses on the back of significantly better that anticipated SA mining production and irrespective of persistent output disruption at Eskom. Indeed, Usd/Zar has pulled back sharply from 15.0000+ peaks to sub-14.8300 before bouncing.
In commodities, crude markets are in the green despite the markets tentative feel, with a surprise draw in API inventory data last night helping underpin the benchmarks. Front month WTI and Brent futures advanced as high as USD 57.80/bbl and USD 63.20/bbl respectively, fresh highs for the week, although weak Japanese and Chinese data has since capped further upside. Looking ahead, official EIA inventory data will be published at 16:00 GMT. Fresh crude specific news flow has been light, although the OPEC Monthly Oil Report is due to be released at 12:10 GMT, which will be the final report before the Cartel convenes next month. In terms of metals; Copper has been on the front foot, pushing above its recent USD 2.6330/lbs to USD 2.6480/lbs intraday range, as the red metal largely shrugs off weak Chinese data. Tuesday reports of strikes in Chile appear to not have had a meaningful impact on the supply. Meanwhile, Gold is trading firmer; amid wider feelings of risk aversion, the precious metal has now reclaimed the USD 1470/oz handle.
US Event Calendar
- 8:30am: PPI Ex Food, Energy, Trade YoY, prior 1.7%; PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.0%
- 8:30am: PPI Ex Food and Energy YoY, est. 1.5%, prior 2.0%; PPI Ex Food and Energy MoM, est. 0.2%, prior -0.3%
- 8:30am: Initial Jobless Claims, est. 215,000, prior 211,000; Continuing Claims, est. 1.68m, prior 1.69m
- 9:45am: Bloomberg Consumer Comfort, prior 59.1
- 9am: Clarida Speaks at Cato Institute in Washington
- 9:10am: Fed’s Evans Speaks at Fintech Event in Philadelphia
- 10am: Powell Appears Before House Budget Committee
- 11:45am: Fed’s Daly Makes Opening Remarks at Economic Policy Conference
- 12pm: Fed’s Williams Speaks at Economic Policy Conference
- 12:20pm: Fed’s Bullard Speaks in Louisville
- 1pm: Fed’s Kaplan Speaks at Community Forum in Texas
- 9:15pm: Bank of Canada’s Poloz Speaks at San Francisco Fed Conference
DB's Jim Reid concludes the overnight wrap
Overnight we’ve seen China October economic data released which was weaker across the board with industrial production coming in at +4.7% yoy (vs. +5.4%yoy expected), retail sales printing at +7.2% yoy (vs. 7.8% yoy) and the YtD fixed asset ex rural investment sliding to the lowest since at least Feb 1998 (where we have data so likely much longer) to +5.2% yoy (vs. +5.4% yoy). The surveyed unemployment rate came in at 5.1% (vs. 5.2% previously). Following the release, China’s National Statistics Bureau spokeswoman Liu Aihua said that China’s overall economic momentum hasn’t changed while the challenges it faces shouldn’t be underestimated before adding that China faces rising cyclical issues and structural conflicts. The NBS also said downside growth pressure has continually intensified and the country should carry out policies to increase economic resilience and meet whole-year economic growth targets. Our strategists think the policy responses will be limited though as China has met their employment target for the year and are still seeing de-leveraging as a policy goal.
Elsewhere, Japan’s preliminary annualised seasonally adjusted Q3 GDP also printed below expectations at +0.2% qoq vs. (+0.9% qoq expected) with private consumption coming in at +0.4% qoq (vs. +0.6% qoq) while business spending printed in line with consensus at +0.9% qoq. However, the previous quarters GDP reading was revised upwards to +1.8% qoq from +1.3% qoq.
In other overnight news, President Trump said that “Our trade agreement with China is moving along very rapidly. We’ll see what happens but it’s moving along rapidly. China wants to make a deal, that I can tell you.” Elsewhere, the SCMP reported overnight that Senator Marco Rubio, sponsor of the Hong Kong Human Rights and Democracy Act, posted a comment on Twitter yesterday that he made “significant progress” in moving the bill toward passage shortly after a meeting with Senate Majority Leader Mitch McConnell. So one to watch.
Markets in China are trading flat this morning despite the weaker economic data while the Hang Seng (-0.80%) and Nikkei (-0.69%) are down and the Kospi (+0.26%) is up. The Hang Seng has continued to be weighed down by ongoing protest with WTD decline standing at -4.7% - the highest since the week of August 7. Elsewhere, futures on the S&P 500 are down -0.08% while 10y USTs yields are -1.6bps lower this morning.
Risk assets started off weak yesterday but progressively rallied as the day progressed with the US ending up in positive territory turning the day around even if the trade news has been more uncertain this week. The initial culprit for the risk off appeared to be the overnight WSJ article we highlighted this time yesterday which suggested that tariffs remained a “stumbling block” in the US and China coming “to a limited trade deal”. The article went on to say that “the logjam centers on whether the US has agreed to remove existing tariffs in the so-called “phase one” deal that the two countries have been working toward—or whether the U.S. would only cancel tariffs set to take effect December 15th”. The S&P 500 managed to rally back to positive territory after opening down -0.43%, but then there was then a second bout of risk aversion later in the session. Reports suggested that agriculture purchases are the main stumbling block, sending the index back down -0.33% from the highs, since most have assumed that the agriculture issue is one of the least-difficult to resolve. The potential for auto tariffs continues to lingers as well, at the USTR has reportedly sent its report on negotiations with Europe and Japan to the White House, which could allow the President to implement tariffs if he chooses. We expected to hear something last night at the latest (likely a postponement) but he is not required to decide firmly either way on any specific timeline.
Ultimately, the S&P 500 ended +0.07%, while the NASDAQ finished -0.05%. The Dow gained +0.33%, almost entirely attributable to the +7.26% rally for Disney after its new streaming service gained an amazing 10 million subscribers in its first day available in the US and Canada. Those moves came after the STOXX 600 finished -0.26% however there were bigger selloffs for the likes of the IBEX (-1.21%) and the FTSE MIB (-0.86%).
Conversely, bonds were well bid with the bulk of the move lower for yields coming during the European session. In the end 10y Bund yields closed back down at -0.300% (-4.8bps) having spent four whole days above the dizzying heights of -0.30%. Last night 10y Treasuries ended -5.0bps lower at 1.884% while the 2s10s curve flattened -2.4bps to 24.6bps. If anything, the US October CPI report helped to fuel the rally for bonds with the unrounded core number of 0.1572% comparing to the consensus of 0.2%. That saw the annual rate dip down one-tenth to 2.3% yoy. The various short term annualised rates are still strong though and therefore unlikely to change the narrative much for the Fed.
Later on, Powell’s speech in front of the Joint Economic Committee was light on new information. The prepared remarks were released early with little in the way of new changes from the last FOMC meeting. The baseline outlook was characterised as “favourable” but that “noteworthy risks remain”. The text also showed “we see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook”. In the Q&A, Powell said that the risk of lower inflation is greater than the risk of higher inflation, which was interpreted dovishly. He also confirmed that he expects to finish the Fed’s policy review in the middle of next year.
As for the remaining data yesterday, in Germany there was no change to the final October CPI revisions of 0.1% mom and 0.9% yoy. In the UK the inflation data was a shade softer than expected with the headline reading of -0.2% mom comparing to expectations of -0.1% mom. Measures for RPI and PPI were also softer than expected. The only other data was the September industrial production print for the Euro Area where there was upside relative to the consensus (+0.1% mom vs. -0.2% expected).
To the day ahead now, which for data releases includes Q3 employment data in France, the preliminary Q3 GDP print in Germany and for the Euro Area, final October CPI in France and October retail sales in the UK this morning. This afternoon we have October PPI in the US and the latest weekly initial jobless claims print. Away from the data we’ve got scheduled speeches due from the ECB’s Guindos, Lane, Villeory and Knot as well as the Fed’s Quarles, Clarida, Evans, Daly, Bullard and Kaplan. If that wasn’t enough, Powell will also appear before the House Budget Committee however that will likely be a copy and paste of yesterday’s meeting.