After 5 straight weeks of market gains (as a result of 5 straight week of Fed balance sheet growth) which pushed the S&P to new all time highs, traders are puzzled by this odd, non-green color permeating US equity futures and global markets.
There were two catalysts for today's early market pullback: lack of "optimism" on the trade front after Trump refuted China on Friday, saying he had not agreed to roll back tariffs, and a sudden explosion in violence during the 24th straight week of protests in Hong Kong, where police shot and critically wounded a protester, another person was set on fire which pushed Asian stocks to their worst day since August, and sent the Hang Seng tumbling 2.6% for its worst day since August.
The MSCI world equity index slipped 0.2%, with Hong Kong leading losses across Asia. There, MSCI's widest index of Asia-Pacific shares outside Japan fell 1.2% from six-month highs to set a course for its worst day since late August. Overall, Asian stocks slid for a second day, led by technology firms, as investors assessed China’s disinflation risk after Beijing reported the worst PPI in three years coupled with the highest headline CPI in seven years, and the new wave of violent protests in Hong Kong.
Most markets in the region were down, with Hong Kong leading declines and Australia advancing. The Topix edged up 0.1% for a five-day rising streak, as telecommunication companies offered strong support. China's Shanghai Composite Index fell 1.8%, with Industrial & Commercial Bank of China and PetroChina among the biggest drags. Hong Kong’s Hang Seng Index suffered its worst day since August, after two protesters were shot by police and a man was set on fire during an argument. India’s Sensex slipped 0.1%, as Reliance Industries and Tata Consultancy Services weighed on the gauge.
Trader nerves spread to Europe, where the broad Euro STOXX 600 fell 0.2% with banks and miners leading the Stoxx 600 Index lower. Wall Street futures also pointed to a lower open.
Markets risk being hit by any further escalation of the violence in Hong Kong, where protesters are angry about what they see as police brutality and meddling by Beijing in the freedoms guaranteed to the former British colony.
“At some stage I think it will be likely that there will be a more fully-fledged crackdown,” said Stéphane Barbier de la Serre, a strategist at Makor Capital Markets. “And if you see a crackdown, you could see markets collapsing. For these reasons markets are complacent.”
The unrest in Hong Kong reminded investors of lingering geopolitical risks as U.S.-China trade talks drag on. Data over the weekend showed Chinese factory-gate prices dropping for a fourth month, heightening concern about the effect of the trade war on the world’s second-biggest economy. Still, Alibaba’s sales event kicked off with a bang, helping investors gauge how willing Chinese consumers are to spend as economic growth threatens to slip below 6%.
“Looking further ahead this week, we can expect to see further fallout” amid trade balance, manufacturing and industrial-production data for some of the world’s biggest economies, said Siobhan Redford, a Johannesburg-based economist at FirstRand Bank Ltd. “If these figures reflect further deterioration in economic activity, we can expect markets to continue to trade weaker.”
The violence in Hong Kong sent investors running for assets perceived as safe havens and away from riskier currencies. The Japanese yen, which strengthens in times of global political or economic turmoil, strengthened 0.3% against the dollar. China’s yuan, in contrast, weakened 0.4% to 7.01 per dollar in offshore trade. Gold rose 0.4%, rebounding from a three-month low touched on Friday to reach $1,463.49 per ounce.
In Europe, Spanish government bond yields held their ground after a weekend election delivered a deeply riven parliament and set the stage for difficult talks to form a new ruling coalition. The far-right surged in the poll, the fourth in as many years. Spain’s 10-year bond yield was flat at 0.40% after the country returned to the polls yesterday for the second time this year after April’s inconclusive result that left the parties unable to form a new government. It seems forming a government will continue to be equally tough as the results produced were even more fragmented with Socialists still the largest minority in the parliament. The fragmented results point to weeks of negotiations for party leader Pedro Sanchez if he is to form a government. Most other major bond yields across the euro zone were little changed on Monday, holding below highs reached on Friday as investors showed scant appetite for risk in the wake of the Hong Kong violence. Veterans’ Day in the U.S. means no Treasuries trading.
Then there were fears that optimism over a China deal had gone too far. after a bout of optimism last week over prospects for Washington and Beijing to reach an initial deal that would quell the worst of the 18-month old dispute, doubts over prospects for a resolution gnawed again after President Donald Trump said on Saturday that talks with China had moved more slowly than he would have liked. Trump said reports that the United States was willing to lift tariffs were incorrect, adding that Beijing wanted a deal more than he did.
Still, some market players said Trump’s comments fitted an established pattern of optimistic rhetoric from the U.S. president being followed by a more skeptical tone. A deal was still likely, they said.
“It’s the usual two steps forward and one step backwards,” said Adam Cole, head of FX strategy at RBC Capital Markets. "We are probably still moving in the direction (of a deal), and that’s the way the market is priced on balance ... the direction is still a positive one."
In central bank news, BoJ Summary of Opinions from October meeting stated Japan's economy is likely to continue on an expanding trend as the impact of the slowdown in overseas economies on domestic demand is expected to be limited. BoJ added the rate of change in CPI Y/Y is likely to increase gradually toward 2% but added it is expected to take time for the inflation rate to accelerate, while it noted there has been no further increase in the possibility that momentum towards achieving the price stability target will be lost.
In geopolitical developments, National Security Advisor O’Brien said the US is ready to economically punish Turkey unless it gives up its Russian-made S-400 defence missile systems. Elsewhere, President Trump tweeted it would be a very positive step if Iran is able to turn over kidnapped former FBI Agent Robert Levinson to the US, but also suggested Iran is enriching uranium which would be a very bad step. Finally, Bolivia President Morales resigned after the country’s armed forces chief called on him to quit.
The uncertainty over trade weighed on commodities markets commodities. Oil lost 1% on Monday, with concerns over trade looming and worries on oversupply weighed on the market. Brent crude was down 54 cents, or 0.9%, at $61.97.
Tencent, DXC Technology, and UGI are among companies reporting earnings
- S&P 500 futures down 0.3% to 3,081.50
- STOXX Europe 600 down 0.2% to 404.62
- MXAP down 0.7% to 165.16
- MXAPJ down 1.2% to 528.27
- Nikkei down 0.3% to 23,331.84
- Topix up 0.07% to 1,704.03
- Hang Seng Index down 2.6% to 26,926.55
- Shanghai Composite down 1.8% to 2,909.98
- Sensex down 0.2% to 40,254.24
- Australia S&P/ASX 200 up 0.7% to 6,772.53
- Kospi down 0.6% to 2,124.09
- German 10Y yield fell 0.5 bps to -0.268%
- Euro up 0.1% to $1.1031
- Italian 10Y yield rose 2.7 bps to 0.847%
- Spanish 10Y yield rose 1.3 bps to 0.401%
- Brent futures down 1.2% to $61.78/bbl
- Gold spot up 0.5% to $1,465.86
- U.S. Dollar Index down 0.1% to 98.27
Top Overnight News from Bloomberg
- President Donald Trump said trade talks with China are moving along “very nicely,” and said the leaders in Beijing wanted a deal “much more than I do.”
- German Chancellor Angela Merkel’s government struck a compromise deal on a basic pension, a key issue for the Social Democrats that was threatening the stability of the ruling coalition
- Bank of Japan board members focused on how the bank could signal a greater willingness to act rather than on taking concrete measures when they met in October, according to a roundup of opinions from the meeting released Monday
- A Hong Kong protester was in critical condition after being shot by a police officer, as the financial hub reeled from citywide efforts to disrupt the work week amid worsening political unrest. China says only patriots can lead Hong Kong as tensions rise
- Spain’s Socialists won the greatest number of seats in Sunday’s election, but the results are so fragmented that party leader Pedro Sanchez is going to struggle even more than before to form a government
- Bolivian leader Evo Morales, South America’s longest-serving president and a towering figure for the region’s left-wing movements, resigned after election irregularities triggered weeks of violent clashes and intervention from the armed forces
- Any attempt to limit U.S. investors’ portfolio inflows into China would risk reprisals and have “enormous unintended consequences,” according to Craig Phillips, a former top aide to Treasury Secretary Steven Mnuchin
- Boris Johnson’s Conservative Party attacked the opposition Labour Party’s spending plans as they sought to switch the focus of their election campaign to one of their perceived strong suits: the economy
- Germany’s recent glimmer of hope after a year of industrial doldrums risks coming too late to prevent wider weakness from taking hold
- China’s credit growth slowed more than expected to the weakest pace since at least 2017 in October, amid declining bond sales and a long public holiday
Asian equity markets traded mostly negative with sentiment clouded by uncertainty brought on by the temperamental trade headlines including comments from US President Trump who was optimistic on trade talks but clarified that he has not yet agreed to rollback tariffs on China. ASX 200 (+0.7%) and Nikkei 225 (-0.3%) were mixed in which strength in defensive stocks and resilience in the financials sector underpinned Australia, while the mood in Tokyo deteriorated on flows into its currency and as participants digested weaker than expected Machine Orders, as well as a slew of corporate earnings. Hang Seng (-2.6%) and Shanghai Comp. (-1.8%) were the laggards amid the ongoing US-China trade uncertainty, continued PBoC liquidity inaction and mixed Chinese inflation data. Hong Kong markets also took the brunt of further unrest in the city in which police were reported to have fired live rounds at protesters, which overshadowed the euphoria from a potential record-breaking Singles’ Day where sales in the first 90 minutes alone already reached halfway of the USD 31bln record set for the whole day last year. Finally, 10yr JGBs were lifted and reclaimed the 153.00 level with prices supported by the predominantly negative performance across stocks and with the BoJ in the market for a respectable JPY 1.16tln of JGBs in up to 10yr maturities.
Top Asian News
- Australia Braces as Bushfire Warning Reaches ‘Catastrophic’
- One of China’s Biggest Defaulters Proposes Debt Recast Plan
- China’s Credit Growth Decelerates on Seasonal Dip, Bond Sales
A choppy start to the week for European stocks thus far [Eurostoxx 50 -0.4%], with the region now off lows after being initially dented from the overnight performance in Asia, which was weighed on by mixed trade signals and further unrest in Hong Kong. Sectors are mostly lower with some buoyancy seen in defensives whilst cyclicals are in the red. Materials lead the pack to the downside amid a sentiment-driven slump in copper prices, in-turn providing some reprieve to industrial names. FTSE 100 modestly lags peers (cash fell below its 200 DMA at 7296) as the index bears the brunt of downside in heavyweight materials and energy stocks in lockstep with the respective complexes, whilst UK financials are hit on Moody’s downgrade of the UK’s outlook; some heavyweight UK losers include Glencore (-3.5%), Antofagasta (-3.5%), Standard Chartered (-2.5%), HSBC (-2.5%) and BP (-1.3%). Further for the banking index, Spanish banks are also under pressured in the aftermath of the Spanish election deadlock, which sees BBVA (-1.0%) and Santander (-1.8%) on the backfoot amid political uncertainty. Elsewhere, European luxury names fail to benefit from record China Singles Day sales (Alibaba -0.6% pre-market) amid the escalating situation in Hong Kong as region saw its 24th week of unrest and as a police officer shot a protestor with a live round – Burberry (-2.8%), LVMH (-0.3%), Pandora (-3.5%), Swatch (-1.8%) and Richemont (-1.8%) are all near the foot of their respective bourses. Finally, in terms of individual movers – Greggs (+15.0%) rose to the top of the pan-European index after the Co. once again upgraded outlook, whilst Novartis (+1.0%) after Co’s Sandoz unit announced an agreement for Aspen’s Japanese operations and assets, with expectations for the amount of deferred consideration not to exceed EUR 100mln.
Top European News
- Sirius Minerals Jumps on Scaled-Back Plans to Build Potash Mine
- U.K. Avoids Recession But Ends Third Quarter on Weak Footing
- U.K. Tories Switch Focus to Economy, Attack Labour’s Spending
- Spain Is Stuck After Sanchez’s Election Gamble Backfires Badly
In FX, the Dollar has lost momentum against most major peers amidst a partial reversal in UST yields and curve re-flattening, with the DXY drifting back from Friday’s 98.408 highs into a 98.382-98.231 range. Risk sentiment has soured somewhat on several fronts, including US-China trade after President Trump clarified that no decision to lift existing tariffs as part of the Phase 1 deal has been taken, while weekend protests in HK escalated markedly and US-Turkey relations remain strained ahead of a planned meeting between Trump and Erdogan later this week.
- NZD/AUD - The Kiwi is sharply outperforming in the run up to Wednesday’s RBNZ policy meeting with the market pricing in a 25 bp rate cut, but NZIER’s shadow board going against the roughly 2/3 consensus and looking for no change, albeit noting a more diverse range of views compared to the previous OCR decision. Nzd/Usd is firmly back above 0.6350, and also benefiting from favourable cross-flows as Aud/Nzd retreats through 1.0800 and the Aussie flounders just above 0.6850 on the aforementioned less positive US-China updates.
- GBP/JPY/CHF/EUR - All clawing back losses vs the Buck, with Cable trying to regain 1.2800+ status following a raft of UK data that was mildly disappointing in headline terms, but included some encouraging elements, like flat q/q business inventories and -0.2% construction output vs -0.5% forecast for both. Meanwhile, Usd/Jpy and Usd/Chf have both pulled back from last week’s peaks to sub-109.00 and circa 0.9950, as the Yen and Franc retrieve some of their risk-related declines. Elsewhere, the Euro is testing Fib resistance at 1.1030 after some initial reticence on Spanish political grounds, but may be stymied ahead of decent option expiry interest from 1.1045-60 (1 bn).
- CAD/SEK/NOK - Relative laggards amidst weak crude prices and the broad downturn in risk appetite noted above, with the Loonie meandering between 1.3215-35 and still smarting after last Friday’s worrying Canadian jobs data, while Eur/Sek and Eur/Nok are both rebounding further towards 10.7250 and 10.1100 respectively, with the Norwegian Crown also unsettled by softer than expected core CPI.
- EM - Losses against the Dollar are commonplace, but notable for the Yuan, Lira and Rand on the no full tariff rollback news, ongoing US-Turkey angst and SA Eskom production constraints. Meanwhile, the Mexican Peso awaits ip data in the absence of any US releases to drive Usd/Mxn due to the Veterans Day vacation north of the border.
In commodities, crude markets are lower, amid a cautious macro backdrop following mixed US/China trade headlines over the weekend. Supply side factors have also likely weighed on prices; a new oil field was discovered in Iran’s South-western province of Khuzestan and is said to contain 53 billion barrels of crude, which would increase the country’s proven oil reserves by one third. Moreover, Oman’s Oil Minister said deeper cuts by OPEC+ are unlikely and the extension of the pact is likely (in fitting with recent source reports) and, finally, the Keystone pipeline returned to service over the weekend following a leak at the end of last month. As such, WTI Dec’ 19 and Brent Jan’ 19 futures are trading in the USD 56.40/bbl and USD 61.70/bbl regions, having come off substantially from Friday’s highs of USD 57.40/bbl and USD 62.60/bbl. Also making the headlines, but less pertinent for crude markets for now, Saudi Aramco released the prospectus for its upcoming IPO over the weekend. The state oil giant will sell up to 0.5% of its shares to individual retail investors and will be restricted from issuing additional shares for a year after the IPO. According to the prospectus, the offering will begin on 17th November. In terms of metals; Gold prices have edged higher, assisted by the markets cautious tone, although the precious metal remains only slightly off recent lows around the USD 1460/oz level. “Investors have been liquidating gold as risk appetite appears to be returning to the market and demand for safe-haven assets slows down” observes ING, citing evidence from ETF investors, who have sold nearly 615k oz of gold over the past two days, taking total ETF holdings in gold to a one-month low of 81.68mln Oz as of 8 November. Elsewhere, the bank adds that the physical demand for gold faces pressure due to high prices and a pause by China on gold buying for forex reserves. Meanwhile, fragile risk sentiment have seen copper prices come under pressure, also weighed by broadly mixed data out of China; CPI beat expectations, largely driven by higher food prices, but PPI disappointed and provides yet more evidence that the country’s industrial sector is in deflation.
US Event Calendar
- Nothing Major Scheduled
DB's Jim Reid concludes the overnight wrap
Happy Monday. My weekend revolved around two TV highlights. Firstly, watching the film “Yesterday”, which is about a guy who after an accident enters a parallel universe where The Beatles didn’t exist. He then performs all their songs and becomes the most successful star on the planet. To be fair after you’ve watched Peppa Pig, Paw Patrol and Hey Duggee all day due to the lurgy knocking out your family, then that’s quite high brow. Then secondly watching Liverpool go 9 points clear of arch rivals Manchester City yesterday, after beating them 3-1. This is one universe I’m happy to stay in for now.
In terms of capturing the pulse in this universe, this morning we are launching a new market related survey for EMR readers. If there is sufficient interest the plan is to do this monthly and share the results within a few days. We will be asking consistent questions to build up a time series and introduce topical questions to capture the immediate mood. We would be grateful if as many of you as possible could click on the survey link and respond. Feel free to skip any questions you don’t want to answer. It’s as easy to do on a mobile devise or on a PC and should only take a few minutes. At this stage we expect to keep it open until Wednesday with the results published here on Thursday. Please give us suggestions as to how to improve this and on any alternative questions. The link is here and can only be used once so use your votes carefully.
The big story last week was the sell off in bonds, which we’ll dig into later. We’ll be interested from our survey where you think bond yields are going over the next 12 months. This week isn’t packed with key events - there’s a US holiday today (bonds closed, equities open) - but there are a few important highlights. As our US economists point out, President Trump's appearance at the New York Economic Club tomorrow could be the main event not just because of the trade war discussions but because it occurs the day before the expiration of the 180-day delay to the results of the Section 232 auto investigation. So all eyes on this speech and subsequent deadline but the consensus has moved towards the belief that Trump won’t impose auto tariffs. It will be an important deadline to get past for markets though with a big focus on whether Mr Trump postpones making a decision or actively decides against action.
Staying with the US, Fed Chair Powell’s testimony to Congress’ Joint Economic Committee on Wednesday and a repeat to the House Budget Committee on Thursday will be highlights but with the Fed setting the bar high for rate moves in either direction at the recent FOMC, it’s hard to image that he can give a great deal of new information to markets. Nevertheless, it will give us all something to fixate towards. In terms of US data, CPI (Wednesday) and Retail Sales (Friday) will be the most watched with the latter probably the more important at the moment given the hope the economy is starting to bottom.
China’s monthly data dump on Thursday will be key as ever with German Q3 GDP release (Thursday) interesting as it could show the economy falling into a technical recession. Before that the German ZEW survey for November is out tomorrow, which will give a better real-time guide toward economic momentum. Last month the current situation reading fell to -25.3, its lowest level since April 2010, so that’ll be worth keeping an eye out to see if there are signs of stabilisation or whether the figures continue to deteriorate.
Earnings season is winding down now, with just 15 S&P 500 releases coming out this week. Just under 80% have beaten on earnings and just under 60% on sales. So a decent season. Releases this week include Vodafone, Enel, Linde and Experian tomorrow. On Wednesday, there’s Tencent, Cisco Systems and ABN AMRO Bank. And on Thursday, we have Walmart and Nvidia.
This morning in Asia stocks are mostly trading lower after significant Hong Kong police clashes with protesters today. The Hang Seng (-2.26%) is leading the declines while the Shanghai Comp (-1.29%), Nikkei ( -0.21%) and Kospi (-0.44%) are also all lower. Elsewhere, futures on the S&P 500 are trading down -0.27%. Over the weekend, we saw China’s October CPI and PPI data with CPI printing at +3.8% yoy (vs. +3.4% expected) while PPI printed at -1.6% yoy (vs. -1.5% yoy expected).
Last night we also saw the Spanish election results with the country returning to the polls yesterday for the second time this year after April’s inconclusive result that left the parties unable to form a new government. It seems forming a government will continue to be equally tough as the results produced were even more fragmented with Socialists still the largest minority in the parliament.
With 99.9% of votes counted, the Socialist Party was on 120 seats (123 last time), the Conservative People’s Party on 88 (from 66) seats while Vox - Spanish nationalist party - more than doubled their seats to 52. The pro-market Liberals of Ciudadanos saw their support sharply decline from 57 to 10 seats while anti-austerity party Podemos saw a dip to 35 (from 40). With a 350 seat chamber, building a majority coalition is going to be even harder than before, especially given the fraught political atmosphere in the country.
I’m terms of U.K. election watch, the weekend polls didn’t change the story too much with the Tory lead seemingly stable at around 10%. Today’s GDP will be interesting given the negative print in Q2. Markets are expecting a decent bounce to +0.4% QoQ in Q3. There’s not been much reaction to Moody’s placing the Aa2 rating on negative outlook on Friday night. Sterling is trading up +0.16% this morning at 1.2795. It comes amid Brexit uncertainties and after both the governing Conservatives and the opposition Labour Party announced they would increase public borrowing in the years ahead. In their statement, Moody’s said that “the capability and predictability that has traditionally distinguished the UK’s institutional framework has diminished”.
Recapping last week now, the big story was the significant selloff in bonds, with 10yr Treasuries up +23.1bps over the week (+2.4bps Friday) to reach 1.942%, their highest level since 31st July and nearly 50bps above the closing low of 1.457% reached back in early September. It was a similar story elsewhere around the world. 10yr bund yields rose +11.9bps to -0.263%, while 10yr JGBs were up +12.6bps (+1.4bps Friday) to -0.050%, which is the biggest basis point increase in a single week for JGB yields since May 2013. Another theme was the steepening of yield curves, with the US 2s10s up +10.7bps (+1.7bps Friday) to its highest level since July. The last time we saw the US 2s10s steepen this much in the space of a week was back in June 2017. The rise in yields meant that a number of countries saw 10yr yields return to positive territory, with French OATs up +9.2bps (-3.5bps Friday) to reach 0.023%. Higher yields proved great news for bank stocks, with the S&P 500 Banks industry group +3.10% (+0.17% Friday) and the STOXX Banks +5.08% (-1.43% Friday) both recording strong performances last week.
The catalyst for the moves seemed to be the trade war along with hopes of a turn in the data. Increasing hopes of the agreement of a phase one deal between the US and China saw investors cut back the chances of further central bank easing. By the close on Friday, the implied probability of another rate cut at the Fed’s December meeting had fallen to 5.8%, down from 16.5% the week before. However, markets lost some ground on Friday after President Trump said of China that “They’d like to have a rollback, I haven’t agreed to anything”. Yet in spite of his statement, global equities finished the week at new highs, with the S&P 500 up +0.85% (+0.26% Friday) at a new peak, while the STOXX 600 advanced +1.50% (-0.28% Friday). Trade-sensitive equities outperformed, with the Philadelphia semiconductor index up +2.77% (+0.53% Friday) and the STOXX Automobiles and Parts index up +4.33% (-0.46% Friday).
As positive sentiment spread through markets last week it was a bad time to be in safe havens. Gold fell -3.65%(-0.65% Friday) in its worst weekly performance since November 2016, while silver was down -7.26% (-1.72% Friday), its worst week since October 2016. Meanwhile in FX, the Japanese Yen weakened -1.05% (-0.04% Friday) against the US dollar, while sterling weakened -1.33% (-0.34% Friday) to a three-week low.
The main data release on Friday was the University of Michigan’s preliminary sentiment indicator for November, which rose by two-tenths to 95.7 (vs. 95.5 expected), its highest level since July. However, the current conditions index slipped unexpectedly to 110.9 (vs. 113.5 expected). In an interesting sign of how political affiliation shapes people’s views of the economy (or perhaps it’s the other way round…) the current conditions index for Democrats stood at 96.5, but for Republicans it was at 123.2. Similar divergences can be seen on both the expectations and the consumer sentiment indicators.