Chinese Stocks Drop, End Worst Month Since August 2009; US Equity Futures Flat

In a repeat of Thursday's action, Chinese stocks which had opened about 1% lower, remained underwater for most of the session before attempting a feeble bounce which took the Shanghai Composite fractionally into the green, before the now traditional last hour action which this time failed to maintain the upward momentum and the last day of the month saw a surge in volume which dragged the market to its lows before closing roughly where it opened, -1.13% lower, dragged down by energy and industrial companies.

The drop took place even as 505 companies were still halted on the Shanghai and Shenzhen exchanges on Friday, or 18% of all listings. Energy and industrial stocks dropped before Saturday’s manufacturing data. PetroChina Co., the biggest oil producer, slid 5.3 percent. Air China Ltd. dropped 10 percent; as these companies were among the mostly supported by the government it appears that the Chinese plunge protection team took today off.

This caps the worst month for Chinese stocks since since August 2009, as the government struggles to rekindle investor interest amid a $3.5 trillion rout, one which has sent the Shanghai market lower by 15% - the biggest loss among 93 global benchmark gauges tracked by Bloomberg, as margin traders cashed out and new equity-account openings tumbled amid concern valuations are unsustainable.

As Bloomberg notes, "while unprecedented state intervention spurred a 18 percent rebound by the Shanghai Composite from its July 8 low, volatility returned on Monday when the gauge plunged 8.5 percent. Outstanding margin debt on mainland bourses has fallen about 40 percent since mid-June, while the number of new stock investors shrank last week to the smallest since the government started releasing figures in May. Individuals account for more than 80 percent of stock trading in China. “The support measures may have been less effective than what Beijing imagined,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore.

Worse for China, people's fascination with the equity bubble appears to be fading as demonstrating by tumbling volumes: turnover has fallen as volatility surged. The value of shares traded on the Shanghai exchange on Thursday was 53 percent below the June 8 peak, while a 100-day measure of price swings on the Shanghai Composite climbed to its highest level in six years on Friday.

And while the Chinese government continues to crack down on "malicious sellers", the latest target are local Nav Saraos, and anyone using spoofing. Spoofing, which involves placing then canceling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges, the China Securities Regulatory Commission said on its microblog.

Elsewhere, the Hang Seng China Enterprises Index of mainland shares in Hong Kong tumbled 14 percent this month, its worst loss since September 2011. The gauge lost 0.1 percent Friday, while the Hang Seng Index advanced 0.6 percent. The CSI 300 Index was little changed. The Nikkei 225 (+0.3%) pared initial losses following a bout of strong corporate earnings after the headline Japanese CPI figure grew at its slowest pace in 2-yrs. Finally, JGB's rose tracking gains in bunds amid month-end buying.

The only notable data from the European morning came in the form of Eurozone CPI (Core Y/Y 1.00% vs. Exp. 0.80%) and unemployment rate (11.10% vs. Exp. 11.00%), with the higher than expected core CPI seeing move higher in EUR , which had outperformed GBP throughout the morning, with some desks attributing the move to month end demand. Elsewhere, CHF has outperformed today after the SNB reported their earnings, which showed a record loss in H1, bringing into question the central bank's ability to continue their intervention policy.

Bunds have underperformed USTs heading into the North American crossover after the better than expected Eurozone CPI data, while USTs remain relatively flat on the day. Also of note, there is a large amount of bond redemptions in Europe presently, with Spain seeing EUR 27.6bIn redeemed yesterday and Italy set for EUR 31.4bIn worth of redemptions on Monday.

The USD trades flat on the day (USD-Index: 0%) with Asia-Pacific hours seeing NZD as the session's laggard, with the latest ANZ business confidence reading showed sentiment among large companies slumped to a 6-year low (-15.3 vs. -2.3) consequently seeing NZD/USD break below the 0.6600 handle.

No firm direction has been found (Euro Stoxx: -0.1%) in European equities today amid the light newsflow, while today's notable earnings reports have included BNP Paribas (+2.8%), Airbus (+3.3%) and Lloyds (-0.5%). Energy names were the worst performers during the European morning, weighed upon by weak energy prices, while todays large cap US earnings include Chevron, Exxon Mobil and Phillips 66 pre market, while separately Berkshire Hathaway are schedule to report aftermarket.

US equity futures are unchanged at this moment.

Commodities continue their recent downtrend today with gold is heading for its largest monthly decline since 2013 after the yellow metal fell lower overnight to continue its recent weakness, while copper remains near six year lows . The energy complex also remains near its lows with WTI on course for its largest monthly fall this year, with sentiment dampened after reports that OPEC Secretary General El¬Badri stated the cartel has no plans to cut oil output.

Key events on the US calendar today: U.S. Chicago purchasing manager, Michigan confidence, ISM Milwaukee, employment cost index due later.

Bulletin Headline Summary from Bloomberg and RanSquawk:

  • EUR has seen strength this morning along with weakness in Bunds after Eurozone CPI Core printed higher than expected
  • Commodities continue their downward trend as WTI heads into the NYMEX pit open down around USD 1.00, while gold is down over USD 7.00
  • Looking ahead, today's data includes Chicago PM! and University of Michigan Sentiment as well as earnings from Chevron, Exxon Mobil and Phillips 66
  • Treasuries decline, 5/30 spread on track to flatten for a fourth week after auctions and 2Q GDP estimate that bolstered view Fed may begin raising rates in Sept.
  • China’s stocks fell, capping the benchmark index’s biggest monthly drop since August 2009, as the government struggles to rekindle investor interest amid a $3.5t rout
  • Greek PM Tsipras staved off an immediate challenge to his premiership, though failure to appease his party’s hard-left fringe brought early elections into view
  • Euro-area consumer prices rose an annual 0.2%, same pace as in June and in line with median forecast in Bloomberg survey; core inflation unexpectedly accelerated to 1%, fastest in 15 months
  • Deutsche Bank is seeking to recover internal electronic chat transcripts that were left out of disclosures to regulators during a probe into interest-rate rigging, according to people briefed on the matter
  • Swiss National Bank had a loss of CHF50.1b in the six months through the end of June, which is a record, according to SNB spokesman Walter Meier
  • Obama said opponents of the nuclear accord with Iran are “putting the squeeze on Congress” as the administration works to keep supporters in line
  • Assailants scribbled “revenge” and other Jewish nationalist slogans on two West Bank homes before setting them on fire early Friday, killing a Palestinian infant and critically wounding four family members, Israel’s army said
  • The State Department is set Friday to post online its next batch of e-mails that Hillary Clinton sent and received on a personal account while she was secretary of state
  • Sovereign 10Y bond yields mostly higher. Asian stocks mostly higher; European stocks, U.S. equity- index futures lower. Crude oil, copper and gold lower

US Event Calendar

  • 8:30am: Employment Cost Index, 2Q, est. 0.6% (prior 0.7%)
  • 9:00am: ISM Milwaukee, July, est. 50 (prior 46.55)
  • 9:45am: Chicago Purchasing Manager, July, est. 50.8 (prior 49.4)
  • 10:00am: U. of Mich. Sentiment, July F, est. 94 (prior 93.3)
    • U. of Mich. Current Conditions, July F (prior 106)
    • U. of Mich. Expectations, July F (prior 85.2)
    • U. of Mich. 1 Yr Inflation, July F (prior 2.8%)
    • U. of Mich. 5-10 Yr Inflation, July F (prior 2.7%)

DB's Jim Reid completes the market warp as customary:

Another month ticks by with July drawing to a close today. With the Fed potentially in play in September I suspect August will be busier than normal. As we approached month-end, there were a number of factors having an influence on markets yesterday. Macro-wise the main focus was on the US data flow where we saw an above market Core PCE print, slightly below market Q2 GDP reading and a host of various historical revisions including downward revisions to prior year growth. Greece also rumbled away in the background, firstly in an FT article which suggested that the IMF is unwilling to provide a third bailout package to Greece unless more debt relief is provided, and then late last night and post market close when the Syriza Central Committee voted for an emergency September congress. Added to all this was a relatively mixed day for corporate earnings. The end result was a flat day for the S&P 500, paring an early loss as the session wore on, while the Treasury curve saw reasonable flattening, reflecting perhaps the view of a slower trend rate of growth after the various historical revisions (which we’ll touch on shortly). 2y Treasuries weakened with yields moving 2.4bps higher to 0.729%, while 10y (-2.7bps) and 30y (-5.5bps) yields fell to 2.260% and 2.943% respectively. The Greenback caught a reasonable bid on the back of the PCE print with the Dollar index closing +0.60% and higher for its third consecutive daily gain. Gold (-0.74%) continued to march lower however and is on track for its worst month since June 2013 while oil markets were relatively well behaved with Brent finishing down 0.13%.

Digging into the data first of all. The advance estimate for Q2 GDP came in at 2.3% saar which was slightly below market expectations of 2.5%, although driven by a strong contribution from personal consumption (2.9% saar vs. 2.7% expected). At the same time, Q1 GDP was revised up to 0.6% from -0.2% previously. There was much focus on the historical annual revisions also. 2014 real GDP growth was revised up 0.1% to 2.5% however the 2012 and 2013 readings were revised down 0.3% and 0.6% to 1.3% and 2.6% respectively. On the inflation front, the Q2 Core PCE report came in above consensus at 1.8% saar qoq (vs. 1.6% expected) while the Q1 reading was revised up to 1.0% from 0.8%.

Taking into account the historical revisions to growth now in the US, DB’s Joe Lavorgna notes that the implied annualized growth in productivity from 2012 to present is now 0.3% compared to 0.5% previously. Joe estimates potential GDP growth at just 1%. He notes that if the US sustains GDP gains in the low 2s, the unemployment rate will continue to fall. However weaker productivity readings will further the argument for the doves that the neutral fed funds rate is lower and so the Fed will not need to tighten very much. This will ultimately depend on inflation pressure however, especially in the context of a lower potential growth rate than what was previously assumed meaning there could be a smaller output gap. So an interesting set of revisions with notable implications for trend growth. We still struggle to see how the Fed can be too aggressive in this cycle and expect a very low terminal funds rate.

Having said that, Fed Funds contracts did shift up in the aftermath (Dec15 +2bps and Dec16 +4bps) of the data yesterday along with an increase in the implied probability of a September move to 48%. Before we move on, labour market data yesterday came in the form of initial jobless claims which rose 8k last week to 267k (vs. 270k expected).

Over in Europe equity markets managed to recover from a sudden shift lower after an FT article on Greece and the IMF created some noise. The Stoxx 600 eventually recovered to finish +0.57% while the DAX (+0.40%) and CAC (+0.58%) both finished up. The same couldn’t be said in credit markets however where indices failed to recover from a move wider with Crossover and Main closing +2bps and +1bp wider respectively. The FT story suggested that the IMF’s board has been told that Athens high debt levels and poor record of implementing reforms will disqualify Greece from a third bailout from the IMF. The article then went onto say that the Fund will only decide to take part in the bailout agreement after European nations have ‘agreed on debt relief’ suggesting that the headline was somewhat overplayed. DB's George Saravelos thinks the article was slightly overplayed and that negotiations continue. Elsewhere on Greece, post the closing bell and after another long session in parliament we heard that the Syriza Central Committee backed PM Tsipras’ call for an emergency Congress in September and in turn potentially lifting the near term political pressure which would have arisen in the event of an ordinary congress being called.

Looking at the follow up in Asia this morning, bourses are generally mixed with losses being led out of China as we reach the midday break with the Shanghai Comp (-0.98%) and Shenzhen (-0.42%) both down – the latter on course for a double digit decline this week – while the Kospi (-0.10%) is also lower. Reuters meanwhile is reporting that the China Securities Regulator has suspended 24 stock trading accounts for suspected trading irregularities. Elsewhere, the Hang Seng (+0.40%) and ASX (+0.49%) are both firmer on the other hand while the Nikkei (+0.08%) is more or less unchanged. We’ve also had inflation data out of Japan this morning where the headline CPI rate ticked down one-tenth of a percent to 0.4% yoy (vs. 0.3% expected) which was the lowest monthly reading since June 2013 while the core (+0.1% yoy vs. 0.0% expected) remained unchanged and the core-core ticked up two-tenths to +0.6% yoy (vs. +0.4% expected). The jobless rate for Japan meanwhile ticked up to 3.4% from 3.3% previously. Elsewhere, S&P 500 futures are unchanged while 10y Treasuries are -0.5bps lower.

As mentioned it was a relatively mixed day on the earnings front yesterday. Facebook and Whole Foods were notable decliners having reported after the closing bell on Wednesday while Proctor & Gamble and ConocoPhillips also saw their share prices slump following the latest respective quarterly reports – the latter in particular lowering full year capex guidance and highlighting the potential for exceeding cost cutting guidance as more evidence of stress ahead for the energy space. Western Digital and Mondelez helped to offset some of the weakness however while Expedia and Amgen rose 8% and 2% respectively in post market trading with their earnings reports. At the latest count with 341 of the S&P 500 companies having reported, earnings beats have ticked down to 74% (from 76% on Wednesday) while sales beats are back down to 50%.

Looking at the remainder of the data flow in Europe yesterday, over in Germany we saw the July CPI reading print in line at +0.2% mom, although the annualized rate did tick down slightly below expectations to +0.2% yoy (from +0.3%). Over in Spain we saw the Q2 GDP reading print in line for the quarter at +1.0% qoq however there was some weakness in the CPI report where we saw a -1.0% mom fall for July, dragging the annualized rate down to 0.0% yoy (vs. +0.1% expected). Confidence indicators for the Euro area were generally encouraging however. Economic (104.0 vs. 103.2 expected), business climate (0.39 vs. 0.19 expected), industrial (-2.9 vs. -3.4 expected) and services (8.9 vs. 8.0 expected) prints all saw jumps for the month of July, taking them above expectations with the Economic sentiment reading in particular reaching a four-year high. Sovereign bond yields ticked down over the course of yesterday’s session, led by 10y Bund yields which fell 6.7bps to 0.648% and just shy of the MTD lows.

Onto the day ahead now and what’s set to be another busy one for data. We start this morning in Germany where we get the June retail sales print before we then get PPI and consumer spending data in France. The first estimate of the July inflation report for the Euro area follows this (with current expectations for no change in the headline and core at 0.2% yoy and 0.8% yoy respectively). Unemployment data for the Euro area and Italy, as well as CPI in the latter round off the data this morning. In the US this afternoon there will be much focus on the Q2 employment cost index while the Chicago PMI for July will also be closely watched. The University of Michigan consumer sentiment print and ISM Milwaukee are the other releases. Corporate earnings will continue to remain a focus with Berkshire Hathaway, Chevron and Exxon Mobil the notable highlights.