China Surge Continues, Futures Slide As Jittery Market Looks For Jackson Hole Valium

Overnight's start attraction was as usual China's stock market, where trading was generally less dramatic than Thursday's furious last hour engineered ramp, as stocks rose modestly off the open only to see a bout of buying throughout the entire afternoon session, closing 4.8% higher, and bringing the gain over the last two days to over 10%, facilitated by China repeating it will singlehandedly invest two trillion in pensions funds in stocks, but not to worry: there is no risk of loss. This happens as China dumped a boatload of US paper to push the CNY higher the most since March, strengthening from 6.4053 to 6.3986, even as Chinese industrial profits tumbled 2.9% from last year: this in a country that still represents its GDP is rising by 7%. Expect much more Yuan devaluation in the coming weeks.

Here is a quick summary of the last week seen through the perspective of Chinese stocks.

  • Aug 20: -3.4%
  • Aug 21: -4.3%
  • Aug 24: -8.5%
  • Aug 25: -7.6%
  • Aug 26: -1.3%
  • Aug 27: 5.3%
  • Aug 28: 4.8%

And if BofA Chief equity strategist David Cui, is right, it's not over: overnight the China expert said A shares will "gap down" in coming quarters as valuations not cheap enough for general investors to buy, adding that the Shanghai Composite has to be below 2,000 for people to find some attractive valuations. In other words, the bubble has to fully burst before fundamentals kick in again.

So strap on, traders: it will continue to be a bumpy ride.

Speaking of bumpy rides, keep an eye on the USDJPY which after roaring above 121 during yesterday's furious last hour ramp to undo the gamma exposure highlighted by us and which sent the market in a tailspin between 2 and 3pm, is back under and has dragged the E-mini lower by some 15 points this morning. Keep an eye for the daily BOJ interventions, as the USDJPY ramps higher for no reason dragging the S&P alongside with it.

Perhaps all the jittery market needs is some soothing words from today's Jackson Hole symposium, although with Yellen absent, and the headliner Stan Fischer speaking tomorrow, it is most likely we will get nothing but more confusion from a Fed that now clearly has no idea what it is doing.

A quick look around the globe: Asian equities traded in the green following the positive close on Wall Street. Nikkei 225 (+3.0%) outperformed to trade back above 19,000 amid reports the GPIF is close to reaching its equity target allocation as it now holds an allocation of 23% vs. 25% target. Shanghai Composite (4.8%) extended on yesterday's gains amid recent speculation of government intervention, while the Hang Seng (-1.0%) fell into the red shortly before the close.10yr JGBs (+3 ticks) traded mildly higher despite the gains seen in equities with the BoJ in the market for JPY 400bIn of 5yr-10yr government bonds.

European equities initially opened in the green, however have drifted lower throughout the session (Euro Stoxx: -0.7%) as some of the moves from earlier in the week are reversed, with losses contained as a result of outperformance in the energy sector , bolstered by the aforementioned strength in WTI and Brent seen yesterday. Bunds trade in modest positive territory in line with weak equities, while T-Notes also reside in modest positive territory ahead of the key risk events of the day in the form of US personal income, PCE deflator and final reading of University of Michigan Sentiment as well as comments from SNB's Jordan and Fed's Kocherlakota.

EUR has been the notable outperformer so far today, strengthening against both GBP and the USD to pare back of some its recent losses. The strength in EUR comes despite German regional CPIs coming in generally below previous, with some desks attributing this strength to the usual month end buying in EUR/GBP. Other notable data saw UK GDP print in line with Exp. however components such as exports printed higher than expected and as such granted GBP some reprieve amid softness seen through the rest of the session, with GBP/USD trading around its 200DMA at 1.5375. While USD has trended lower today after seeing strength in recent days, weighed on by EUR strength to see the USD-index lower by 0.2%. Of note, heading into the North America crossover EUR/GBP and GBP/USD saw a paring of their initial moves as EUR/GBP found resistance at its 200DMA at 0.7358 and GBP/USD bounced off its 200DMA to the downside at 1.5369.

Elsewhere, commodity currencies have come off their best levels and seen some weakness throughout the European session in line with commodities, which trade in the red today to pare some of the overnight gains which saw WTI extend on its gains to briefly trade back above the USD 43/bbl level and post its largest intra-day gain in over 6 years.

The energy complex heads into the North American crossover relatively flat after trading in choppy fashion throughout the European morning after coming off their highs , with some participants booking profits after WTI extended on its gains overnight to briefly trade back above the USD 43/bbl level to post its largest intra-day gain in over 6 years. The metals complex has also seen fairly choppy price action, with gold modestly in the green however prices are still on course for its worst week in over 1-month as the recovery in USD weighed on prices during the week.

Today we get data on the July PCE deflator and along with real personal spending and the University of Michigan consumer sentiment print. With the Jackson Hole symposium underway, Bloomberg TV is scheduled to hold sideline talks with Bullard, Kocherlakota, Mester and Lockhart before the main event tomorrow when Fischer will address the audience. So plenty of Fedspeak to end a fascinating week and momentum ignition triggers.


Bulletin headline summary from Bloomberg and RanSquawk

  • EUR has been the notable outperformer so far today, strengthening against both GBP and the USD to pare back of some its recent losses
  • WTI heads into the NYMEX pit open relatively flat as participants book profits after yesterday saw the largest intra-day gains since 2009
  • Today's highlights include US personal income, PCE deflator and final reading of University of Michigan Sentiment as well as comments from SNB's Jordan and Fed's Kocherlakota
  • Treasuries gain, paring weekly losses in week that has seen 10Y yields trade in 30bps range amid volatile equities and commodities, China growth concern.
  • The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says BofAML
  • Profits at China’s industrial companies fell 2.9% y/y in July
  • BoJ’s key inflation gauge slumped to zero for the third time this year, as tumbling energy prices counter Governor Haruhiko Kuroda’s effort to reflate the world’s third- biggest economy
  • Alexis Tsipras’s lead over Greek opposition parties narrowed ahead of an early election next month, a poll showed Friday, as a vote-weary public has soured over unkept promises to end an age of austerity
  • Democrat Tom Carper became the 30th U.S. senator to support the nuclear agreement with Iran, the Delaware News Journal reported, leaving Obama just four votes short of preventing Congress from blocking the deal.
  • Macedonia appealed for more financial aid from the EU to help it deal with the effect of the migrant crisis as what it has received so far has been “peanuts,” Foreign Affairs Minister Nikola Poposki said
  • No IG or HY deals priced this week. BofAML Corporate Master Index tightens to +170 from +172, widest since Sept 2012; YTD low 129.High Yield Master II OAS tightens 11bps to +591; reached +614 Tuesday, widest since July 2012; YTD low 438
  • Sovereign 10Y bond yields mostly lower. Asian stocks gain, European stocks and U.S. equity-index futures mostly lower. Crude oil and gold little changed, copper falls

US Event Calendar

  • 8:30am: Personal Income, July, est. 0.4% (prior 0.4%)
    • Personal Spending, July, est. 0.4% (prior 0.2%)
    • Real Personal Spending, July, est. 0.3% (prior 0%)
    • PCE Deflator m/m, July, est. 0.1% (prior 0.2%)
    • PCE Deflator y/y, July, est. 0.3% (prior 0.3%)
    • PCE Core m/m, July, est. 0.1% (prior 0.1%)
    • PCE Core y/y, July, est. 1.3% (prior 1.3%)
  • 10:00am: U. of Mich. Sentiment, Aug. F, est. 93 (prior 92.9)
    • U. of Mich. Current Conditions, Aug F (prior 107.1)
    • U. of Mich. Expectations, Aug. F (prior 83.8)

Kansas City Fed Symposium continues in Jackson Hole, Wyoming

  • 7:30am: Fed’s Bullard on Bloomberg TV
  • 9:15am: Fed’s Kocherlakota, Mester on Bloomberg TV
  • 12:25pm: Swiss National Bank’s Jordan speaks in Jackson Hole
  • 2:15pm: Fed’s Lockhart on Bloomberg TV
  • 4:15pm: Reserve Bank of India’s Rajan on Bloomberg TV
  • 10:25pm: Bank of England’s Carney speaks in Jackson Hole

DB's Jim Reid completes the overnight recap

Markets have continued to rally in Asia this morning. In China the Shanghai Comp is +1.93% as we head into the midday break, seemingly also buoyed by the news late in the Asia session yesterday of some state intervention in the equity market. Without meaning to tempt fate, if the index manages to stay in positive territory for the entire duration of the session (which it so far has done this morning), it’ll be the first time the index has managed to do so since August 10th. Elsewhere the Shenzhen (+1.87%) and CSI 300 (+1.52%) are also both up, while it’s been a decent morning also for the Nikkei (+2.69%), Hang Seng (+0.50%), Kospi (+1.29%) and ASX (+0.28%). EM FX markets are generally off to better starts this morning, while WTI has risen another 1% in early trading following the huge moves yesterday, which we’ll touch on shortly.

In terms of data this morning the focus has been on Japan where inflation concerns continue to linger. Headline CPI of +0.2% yoy was in line with market expectations and down from +0.4% last month, while the core (ex food) fell to 0.1ppt to 0.0% yoy (vs. -0.2% expected), although beating expectations of a drop to -0.2%. The Yen is largely unmoved on the back of the print, after briefly weakening.

Yesterday the big mover was Oil, with WTI up +10.26% to $42.56/bbl, the largest daily percentage move since March 12th 2009 and the $4 price move the largest in three years. There were similar gains for Brent too (+10.25%) to finish at $47.56/bbl, the biggest percentage move since December 2008. The bulk of the justification for the move is being attributed to a huge bout of short covering following some decent GDP numbers from the US yesterday which in turn helped contribute to an overall better tone in markets. Saying that, it appears that the Oil complex was given a subsequent lift too from headlines out of Royal Dutch Shell that they have issued a force majeure on Bonny Light exports out of Nigeria after shutting down two pipelines and in turn cutting supply from Africa’s largest oil producer.

An oil-led second wind helped the S&P 500 close up 2.46%. That came after (in what seems to have been a similar trend for most of this week) the index did its best to wipe out the bulk of the intraday move higher, at one stage declining 2% from its peak following the early bounce from the GDP numbers. Unsurprisingly, the gains were led by energy (+4.9%) and materials (+3.6%) names to help the index log its biggest two-day gain since 2009. There were similar moves higher for the DOW (+2.27%) and NASDAQ (+2.45%) also, with the latter moving back into positive territory YTD once again while the VIX (-13.9%) closed down for a third consecutive session and is now back to more or less where it closed last Friday.

It was the US dataflow which got most of the early attention yesterday afternoon. The big upward revision for Q2 GDP to 3.7% saar qoq (from 2.3% and ahead of expectations of 3.2%) has helped muddle Fed liftoff timing expectations a bit. Revisions were fairly broad-based and included decent upgrades for structures and equipment spending in particular. Notable was the upward revision to government spending (+2.6% from +0.8%) which resulted in the largest quarterly increase for the sector since Q2 2010. Meanwhile, Q2 personal consumption was revised up a tad to 3.1% (from 2.9%) and Core PCE was kept unchanged at 1.8%. It was a mixed bag of data elsewhere. Initial jobless claims declined 6k last week to 271k (vs. 274k expected) and slightly below the four-week average of 272.5k. Elsewhere, there some disappointment in the August Kansas City Fed manufacturing activity index reading which declined 2pts to -9 (vs. -4 expected), while pending home sales for July came in a tad below consensus (+0.5% mom vs. +1.0% expected).

That GDP data helped support a decent day for the Dollar with the Dollar index closing up +0.54%. It was a much more choppy session for Treasuries however with the 10y (+0.9bps) fairly unmoved at the close at 2.185% although that’s after having traded in a 7bps range over the day. All told, September Fed liftoff expectations were raised to 30% from 24% on Tuesday, although still behind the 34% we finished last Friday.

It was a decent day also for European equities yesterday, receiving an initial boost after a late surge in Chinese equity markets. The Stoxx 600 closed up 3.46% and has now rebounded over 9% off the intraday lows we saw on Monday. There were gains also for the DAX (+3.18%), CAC (+3.49%), IBEX (+3.06%) and FTSE MIB (+3.39%) while credit markets saw a decent bounce with Crossover in particular rallying 21bps.

Staying in Europe, Ukraine generated plenty of headlines yesterday after we heard that the nation had secured a restructuring deal with its Creditors, following five months of negotiations. The agreement has seen the Creditors accept a 20% haircut to the face value of around $18bn of Ukraine’s bonds and a freeze on debt repayments for four years. Speaking following the deal, IMF Chief Lagarde said that the deal would ‘help restore debt sustainability’ and ‘substantially meet the objectives set under the IMF-supported program’.

Turning to the day ahead now, it’s set to be a pretty busy day ahead for data. We kick off this morning in France with PPI data, before we get Q2 GDP out of the UK. This will be followed by various confidence indicators for the Euro area before we get the preliminary August CPI reading out of Germany. Turning to the US session this afternoon, the July PCE deflator and core readings are set to be closely watched, along with real personal spending and the University of Michigan consumer sentiment print. With the Jackson Hole symposium underway (that word again), Bloomberg TV is scheduled to hold sideline talks with Bullard, Kocherlakota, Mester and Lockhart before the main event tomorrow when Fischer will address the audience. So plenty of Fedspeak to end a fascinating week.