Global Stocks, US Equity Futures Slide Following China Crash

It all started in China, where as we noted previously, the Shanghai Composite plunged by 8.5% in closing hour, suffering its biggest one day drop since February 2007 and the second biggest in history. The Hang Seng, while spared the worst of the drubbing, was also down 3.1%. There were numerous theories about the risk off catalyst, including fears the PPT was gradually being withdrawn, a decline in industrial profits, as well as an influx in IPOs which drained liquidity from the market. At the same time, Nikkei 225 (-0.95%) and ASX 200 (-0.16%) traded in negative territory underpinned by softness in commodity prices.

Heading to Europe, while the release of better than expected German IFO data saw stocks in Europe come off the worst levels of the session, the major indices remain broadly lower. The initial weakness in stocks saw the DAX break below the 50% Fibonacci retracement of the July low to high, before bouncing back above the level following IFO release. However the recovery was short-lived, as EUR remained bid and in turn prevented a pick in sentiment as European exporters remained firmly in the red. Elsewhere, the cautious sentiment saw Bunds trade higher, albeit marginally, while EU peripheral bond yield spreads widened as a result.

Of note, Phillips (+3.74%) traded sharply higher following earnings, while UBS (-1.5%) failed to sustain initial bid tone as combination of profit taking and general risk averse tone saw shares fall. In terms of notable US based equity stories, Teva (TEVA) announced that it will acquire Allergan Generics (AGN) for USD 40.5bIn and have withdrawn offer to acquire Mylan (MYL).

Finally, while the US session has seen some support in the stock of Allergan which is up 13% on news of its divestment of generic drugs to Teva, futures have been slowly taking on water and were down over 10 points, at their lowest level of the session, as of this writing.

Despite the risk averse sentiment, EUR traded bid, in part due to technical factors but also due to short-position squaring given the currency's funding currency status. The upside traction by the pair resulted in the USD index trading lower by -0.74%, while EUR/CHF remained bid, highlighting that fact that there is scope for recovery in riskier assets. The Yen has also been stronger on comments by the BOJ's Nakaso that Japan inflation will hit 2% by the first half of 2016, further pushing back on hopes of a boost to Japan's QE (this however may now be driven more by the unpopularity of the Abe regime, which has seen its disapproval rating soar above 50% for the first time, which has led analysts to comment that ongoing disappointment with Abenomics may lead to more QEasing).

WTI crude futures remained under pressure, amid the ongoing concerns over the slowdown in China, with prices breaking below the USD 48/bbl mark to remain near 6-year lows. Of note, analysts at Goldman Sachs lowered their H2 2015 US natural gas price forecast to USD 2.75/mmBtu and lowered their 2016 forecast to USD 3.00/mmBtu.

On today's US event docket, we have capital goods orders at 8:30 am for June as well as the Dallas Fed manufacturing activity index two hours later.

In summary: European shares remain lower, though off intraday lows, with the financial services and media sectors underperforming and utilities, basic resources outperforming. German IFO above expectations. Shanghai Composite falls most since 2007. The French and German markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with corn, nickel underperforming and silver outperforming. U.S. Dallas Fed index, durable goods orders, capital goods orders due later.

Market Wrap

  • S&P 500 futures down 0.3% to 2071.2
  • Stoxx 600 down 1.2% to 389.8
  • US 10Yr yield down 2bps to 2.24%
  • German 10Yr yield down 2bps to 0.67%
  • MSCI Asia Pacific down 1.3% to 140.8
  • Gold spot little changed at $1099.6/oz
  • All 19 Stoxx 600 sectors fall; utilities, basic resources outperform, financial services, media underperform; 12.8% of Stoxx 600 members gain, 86.2% decline
  • Eurostoxx 50 -1.3%, FTSE 100 -0.2%, CAC 40 -1.4%, DAX -1.3%, IBEX -0.8%, FTSEMIB -1.3%, SMI -0.9%
  • Asian stocks fall with the ASX outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 1.3% to 140.8
  • Nikkei 225 down 0.9%, Hang Seng down 3.1%, Kospi down 0.3%, Shanghai Composite down 8.5%, ASX up 0.4%, Sensex down 2%
  • Teva to Buy Allergan’s Generic-Drug Unit for $40.5 Billion
  • Pearson Nears Business-Publishing Exit With Economist Sale Talks
  • Euro up 0.79% to $1.1071
  • Dollar Index down 0.62% to 96.64
  • Italian 10Yr yield down 0bps to 1.87%
  • Spanish 10Yr yield down 0bps to 1.9%
  • French 10Yr yield down 2bps to 0.95%
  • S&P GSCI Index down 0.7% to 384
  • Brent Futures down 1% to $54.1/bbl, WTI Futures down 0.7% to $47.8/bbl
  • LME 3m Copper down 0.7% to $5225/MT
  • LME 3m Nickel down 2.2% to $11050/MT
  • Wheat futures down 0.8% to 507.8 USd/bu

Bulletin headline summary from RanSquawk and Bloomberg

  • The sell-off by Asian equity indices continued today, with Shanghai Composite closing down 8.5% at 3,726 (the largest one day fall since June 2007) and Hang Seng down 3.1 %
  • Ongoing concerns over the slowdown in China weighs on sentiment, with stocks lower despite encouraging earnings reports by UBS and Phillips
  • The focus going forward will be on the latest Durables Goods Orders release, as well as earnings by Baidu and Norforlk Southern
  • Treasuries gain as Shanghai Composite plunges 8.5%, biggest drop in eight years, leading global rout in stocks; copper extended its decline from the lowest close in six years and industrial metals fell.
  • The tumble shattered the sense of calm that had fallen over China’s mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows
  • PetroChina Co., long considered a target of state-linked market support funds, slid by a record 9.6%
  • Greece is set to begin talks with creditors on a new bailout agreement as capital controls and the shutdown of its financial markets enter a fifth week
  • Germany’s Ifo institute business climate index climbed to 108, the first increase in three months, from a revised 107.5 in June; median est. in Bloomberg survey was for decline to 107.2
  • The Japanese economy likely contracted last quarter, dragged down by weak consumer spending and a slump in exports, according to a top forecaster
  • The slump in gold that took prices to a five-year low may have further to run after hedge funds swung into a net-short position for the first time
  • Sovereign 10Y bond yields lower. Asian stocks plunge, European stocks; U.S.equity- index futures decline. Crude oil and copper fall, gold steady

US Event Calendar

  • 8:30am: Durable Goods Orders, June, est. 3.3% (prior -1.8%, revised -2.2%)
    • Durables Ex Transportation, June, est. 0.5% (prior 0.5%, revised 0%)
    • Cap Goods Orders Nondef Ex Air, June, est. 0.5% (prior 0.4%, revised -0.4%)
    • Cap Goods Ship Nondef Ex Air, June, est. 0.5% (prior 0.3%, revised -0.1%)
  • 10:30am: Dallas Fed Manf. Activity, July, est. -3.5 (prior -7)

DB's Jim Reid completes the overnight event summary

It’s going to be raining data and earnings this week with also an FOMC meeting which may give us a few clues as to September's more important meeting. However it’s unlikely they'll change their tune too much but it will be interesting to see if the recent slump in commodities and its impact on inflation attract much comment? As for the data, look out for Q2 US GDP on Thursday (expectations in the week ahead at the end) where we'll see three years of back revisions attached and the BEA's attempt at fixing what has been thought to be faulty seasonals which has been especially brutal on Q1's in recent years. So we may see recent history being rewritten.

We start in China this morning though and fresh off the back of the news from Friday that the State Council has published a set of policy initiatives aimed at promoting trade. In this, the Council has stated that the PBoC shall allow the RMB exchange rate to trade in a wider range. Our colleagues in China see this as a signal that the government will allow the RMB to depreciate modestly against the US Dollar and in turn have revised their CNY/USD forecast to 6.3 by year-end and 6.5 by end-2016 (from 6.2 for both). They suggest that the initiative is unlikely to generate double-digit depreciation and that the RMB is likely to remain strong relative to many major currencies. Having said that, one wonders whether it will raise questions about this being some sort of soft entry into the global currency wars. They are clearly trying to promote exports.

Looking at markets this morning, it’s a weak start to the week across most Asian bourses. In China the Shanghai Comp (-1.44%), CSI 300 (-1.52%) and Shenzhen (-0.30%) have all fallen in early trading, while elsewhere the Nikkei (-0.73%), Hang Seng (-2.10%), Kospi (-0.33%) and ASX (-0.13%) are also off to weak starts. Early data releases haven’t helped sentiment. China’s June industrial profits fell 0.3% yoy after two previous positive readings in the prior two months while in Japan PPI Services data for the same month came in below consensus (+0.4% yoy vs. +0.6% expected). Commodity markets are off to a slow start with WTI down another 0.3% and Gold off 0.1%. US Treasuries are half a basis point higher in yield and the Dollar index has fallen 0.2%.

Recapping markets on Friday, there was a similar theme which played out across equity markets as bourses weakened once again on the back of further softness in commodities and some mixed earnings reports, while a generally soft day for global data didn’t help matters. The S&P 500 (-1.07%) slumped for the fourth consecutive session with energy (-1.98%) and materials (-2.22%) weighing notably on sentiment. In Europe it was a similar story with the Stoxx 600 (-0.87%), DAX (-1.43%) and CAC (-0.58%) also down. A fresh cycle low for WTI (-0.64%) at $48.14/bl, extending the bear market run highlighted another weak day in the commodity space, while Copper (-0.18%) hit a new six-year low. Gold (+0.77%) actually sparked a late turnaround rallying into the close having traded as much as 1% down intraday, although the late bounce wasn’t enough to support a rise elsewhere.

In fact it looks like we are starting to see signs of similar Oil-related headlines to the ones which dominated markets seven to eight months ago. The FT is running with a story suggesting that the world’s biggest energy companies have delayed $200bn worth of spending on new projects following the latest selloff. Meanwhile the WSJ is suggesting that US energy companies are planning more layoffs with ConocoPhillips in particular looking to potentially cut headcount by ‘thousands’ in addition to the 1500 jobs cut so far.

One of the additional problems with the recent slump in commodity prices is the impact this is having on the related sectors in the US HY market. As the chart in this morning's EMR shows, the US HY Energy sector is back close to the wides seen at the back end of 2014, some 200bps wider than where we were when Oil peaked in May. However this time the broader commodity sector has also been hit and mining bonds are also seeing some fairly brutal moves. The US HY market is much more commodity focused than in Europe and the total return difference so far in July highlights this with the latter experiencing a healthy 1.2% lift and the former seeing a -0.6% decline. We still like European HY but the commodity weakness is bleeding into broader US HY so it’s one to watch again.

Back to markets, Friday’s soft data added to the weaker tone across risk assets. As well as the soft July flash manufacturing PMI out of China, flash PMI’s out of Europe also disappointed. The composite reading for the Euro area fell 0.5pts to 53.7 (vs. 54.0 expected) weighed down by a 0.3pt fall for the manufacturing print to 52.2 (vs. 52.5 expected) and 0.6pt fall for the services reading to 53.8 (vs. 54.2 expected). Regionally it was France who led the weakness with a 1.8pt fall in the composite to 51.5 after expectations of an unchanged reading, while Germany (-0.3pts to 53.4) also fell. DB’s Marco Stringa noted that on the upside, the flash reading suggests that outside of the core countries there were marginal improvements in the non-core countries (Spain, Italy and Ireland) led by the services index. Over in the US on Friday the flash manufacturing PMI did see a better than expected 0.2pt rise to 53.8 (vs. 53.6 expected) however new home sales data for June was a large disappointment, falling 6.8% mom (vs. +0.3% expected) during the month to an annualized rate of 482k – the lowest since November last year including downward revisions to the prior three months.

The data helped support a reasonable bid for Bunds with the 10y yield moving 5.1bps lower to 0.689% while Spain (-4.7bps), Italy (-3.1bps) and Portugal (- 5.8bps) also ended lower in yield. It was a much more choppy session for US Treasuries however with the benchmark 10y eventually closing more or less unchanged (-0.5bps) at 2.263%. Some of that choppiness can be attributed to a Fed statement regarding the inadvertent release of Fed economic staff forecasts. The forecasts showed a slightly more dovish picture than those released as part of the official projections by the Fed Presidents and Governors. In particular, the staff saw the Fed Funds rate averaging 0.35% in the fourth quarter of this year, before rising to 1.26% by 2016 and 2.12% by 2017, a more gradual path of rate increases relative to policy maker’s expectations. On top of this, staff also project inflation to stay below the Fed’s 2% target through 2020. That saw some movement in Fed Funds contracts with the Dec16 and 17 contract yields falling 2.5bps and 3.5bps respectively to 1.030% and 1.665% while the Dec15 contract stayed unchanged at 0.320%.

Earnings on Friday were largely mixed for the most part but it was a revenue miss and downward revision to full year forecasts from Biogen which attracted the bulk of the headlines with the stock falling over 22%. Updating our US earnings monitor now with 185 S&P 500 companies having reported, there’s been a modest fall in the number of EPS beats to 75% (from 77% at the last read) while sales beats also ticked down a notch to 53% (from 54%). In Europe with 102 Stoxx 600 companies now having reported, 63% have reported a beat at the earnings level and 69% at the sales line (from 64% and 66% respectively).

Taking a look at this week’s calendar now. We kick off this morning in Germany where we get the German IFO survey while Euro area money supply data and UK CBI orders for July are due. After a quiet week last week in the US, durable and capital goods orders for June starts a busier week for data while the Dallas Fed manufacturing activity index is also expected. Moving to tomorrow, the advanced Q2 GDP reading for the UK is the highlight in the morning session before we get the S&P/Case Shiller house price index, flash composite and services PMI, consumer confidence and Richmond Fed manufacturing index readings out of the US in the afternoon. Tuesday of course also marks the start of the two-day FOMC meeting which will clearly be a big focus. We start in Asia on Wednesday with Japan retail sales and China consumer sentiment data. In Europe we get German and French consumer confidence data before we turn over to the UK again with consumer credit and mortgage approvals. The focus on Wednesday in the US will be the conclusion of the FOMC meeting although there is no associated post-meeting statement scheduled from Fed Chair Yellen. However will the statement give any small hints as to whether September is a realistic lift-off point? US pending home sales for June is also due Wednesday. Thursday starts in Japan again where we get industrial production data before we move to Europe where German CPI and unemployment data for July are due along with Euro area consumer and investor confidence. It’s busy again in the US with the much anticipated Q2 GDP reading (Bloomberg consensus currently at 2.5%) which includes the latest annual revisions so it will attract a lot of attention. Meanwhile personal consumption, core PCE and initial jobless claims are also due. We end the week with another bumper day for data in Japan, highlighted by the June CPI print while employment data and housing starts are also expected. Closer to home on Friday we get CPI prints for the Euro area and Italy as well as French PPI and UK consumer confidence. It’s a busy end to the week in the US with the Q2 employment cost index, ISM Milwaukee, Chicago PMI and University of Michigan consumer sentiment reading. Away from the data, the other main focus will be on results season where 168 S&P 500 companies are due to report with the highlights including Berkshire Hathaway, Exxon Mobil, Facebook, Proctor & Gamble and Pfizer. Over in Europe 192 Stoxx 600 companies are to report including Royal Dutch Shell and a number of the European banks.