Global Stocks, Futures Jump On Barrage Of Bad Economic News; Glencore Surges, Volkswagen Slumps

Following Friday's disastrous payrolls report, which confirmed all the pre-recessionary economic data and signaled that instead of approaching "lift-off" and decoupling from the rest of the world, the US economy is following the emerging markets into a slowdown in what may be the first global, synchronized recession since 2008, the market saw its biggest intraday surge since 2011 and the sharpest short covering squeeze in history, we are happy to announce that the "market" is now solidly back in "bad news is good news" mode.

We are even happier to announce that overnight UK, Europe and the rest of the world had a boatload of bad economic news to report, after Service PMI reports around the globe confirmed that the world is rapidly relapsing into an economic slowdown... just what the USDJPY surge ordered.

It all started with the UK, where the biggest component of local GDP, Services as measured by the PMI survey, printed at the lowest level since April 2013, or 53.3, down from 55.6, far below the 54.9 expected. And to think only a few months ago some of the more naive elements were hoping for a BOE rate hike.

Then we moved to Europe, where it was from bad to worse; here are the final Service PMI highlights:

  • Italy: 53.3, down from 54.6 and below the 54.1 expected;
  • Spain: 55.1, down from 59.6, below the 58.7 expected and the worst since November 2014;
  • Germany: 54.1, down from 54.3 and below the 54.3 expected;

The only silver lining which once again quite paradoxically was the French number rising from 51.2 to 51.9 could not boost either the final Europe Service or Composite PMIs, both of which dropped and missed expectations, sliding from 54.0 to 53.7 and 53.9 to 53.6, respectively.

According to Goldman, for the area-wide level, a composite PMI reading of 53.6 is associated with growth of around +0.4/0.5%qoq, which means that the initial credit impulse from Mario Draghi's QE is now long gone, and Europe will soon be forced to contemplate even more easing.

This bevy of overnight bad news is also precisely why futures are a solid green as of this morning, up 10%, or about 0.5% from Friday's berserk top as all the pretense of a rate hike is gone, and the market is fully back to doing what it does best: price in even more (hoped for) generosity from central banks for a brief sugar fix, as Janet Yellen's plans for a rate normalization crash and burn before her eyes.

Finally, if that wasn't enough, overnight the World Bank cut its growth forecast for China and other key Emerging Market countries, and now expects China 2015 GDP to come in at 6.9% vs 7.1% forecasted in April. The Bank now sees China growing at 6.7% and 6.5% in 2016 and 2017 respectively. China will likely be a key meeting agenda this time. The World Bank has also reduced 2015 growth forecasts for Indonesia, Philippines and Thailand. Away from Asia, the World growth forecast for 2015, 2016 and 2017 have also been cut to 2.5%, 3.0% and 3.1% from the previous 2.9%, 3.2% and 3.2%, respectively.

Elsewhere, following a strategic leak over the weekend by the Telegraph that Glencore management is said to be dismissive of suggestions that the commodities giant could be taken private and is "open to takeover offers, but doesn’t think any buyers could afford the fair value" - something which any company anywhere would say, however the actual takeover offer is "oddly" missing - the stock soared as much as 70% in Hong Kong trading, and was up as much as 20% earlier, before cutting gains to up 8%, trading just above 100p on the latest short squeeze. Ironically, the "takeover" gambit leak is what companies use as a last resource defense mechanism, suggesting that unless copper prices rebound solidly in the coming weeks there will be some truly dire newsflow out of the giant commodity trader.

On the other hand, the "other" company, Germany's systemic automaker, Volkswagen, slide as much as 4% earlier after its designated Chairman Hans Dieter Poetsch warned the cheating scandal poses "an existence-threatening crisis for the company." In other words, VOW has at least a few more weeks before it too is subject to "leaks" of a possible takeover it doesn't deem would value the company fairly.

A closer look at regional markets takes us first to Asia where equity markets tracked Friday's positive close on Wall Street after NFP missed expectations and pushed back forecasts of a Fed rate lift-off and perhaps even more QE or NIRP. Hang Seng (+1.6%) was led by gains in casino names as last week's reports that China would support Macau continued to bolster stocks, while Macau China visitor arrivals for early October rose by 21.6% Y/Y. ASX 200 (+2%) outperformed amid strength in commodity names, while Nikkei 225 (+1.6%) was bolstered by broad sector-based gains with the Asia-Pac region further underpinned by reports that the TPP deal is close to completion. Markets in mainland China remained closed due to Golden Week holiday.

The Trans-Pacific Partnership Trade deal between 12 countries around the pacific including US, which would open up trade barriers, is said to be a step closer after officials agreed to compromise on time frame for pharmaceutical companies' monopolies on new drugs.

In Europe, equities have kicked off the week in the green (Euro Stoxx: +2.6%), following on from sentiment in the US on Friday and Asia from overnight. The US nonfarm payroll report from Friday suggests that US rates could remain lower for longer and as such has led to strength in global equities, despite initial weakness due to the downbeat view of the US economy, while strength in the commodity sector has seen energy names outperform. On a company specific basis, Glencore (+6.0%) lead Europe higher after talk that the Singapore Sovereign Wealth fund and Mitsui are interested in Co.'s agriculture business. Elsewhere K+S (-20.5%) weighs on gains after suggestions that Potash have withdrawn their interest in the Co., while Volkswagen (-3.0%) continues to underperform in the aftermath of the emissions scandal.

Fixed income markets have moved in tandem with market sentiment, with Bunds weaker this morning amid strength in equities, while Portugal 10yr bond yields have hit a 5 month low amid talk of post vote PS/PAF deal after the incumbent received the most votes in the Portuguese election, but not enough to form an outright majority. The US comes to market this week with 3s, 10s and 30s for a total offering size of USD 58Bn, which is unchanged from last month's auction size.

In Commodities, WTI crude futures rose overnight as the greenback fell, while gold traded relatively flat to hold onto the majority of Friday's gains where it saw its biggest intraday climb since January after the miss on US non-farm payrolls pushed back expectations of the timing for the Fed rate lift-off. Elsewhere, palladium has held onto its emission scandal inspired gains and copper prices continued to gain as sentiment for riskier assets was bolstered by the prospects of lower rates for longer.

In FX, the USD underperformed overnight (USD-Index: -0.3%) in the wake of the aforementioned nonfarm payroll report on Friday, while GBP has also seen weakness on the back of the lowest services and composite PMIs since April 2013 (Services 53.3 vs. Exp. 56.0). However EUR has been relatively unmoved by generally lower than expected services and composite PMIs from Europe (Eurozone services PMI 53.7 vs. Exp 54). NZD has been the notable outperformer in the Asia-Pacific region, with NZD/USD breaking above its 50 DMA at 0.6456 as well as the 65.0000 handle, bolstered by weakness in commodities and selling in AUD/NZD through 0.9000. This comes ahead of the Fonterra GlobalDairyTrade auction later today, while other highlights include US services PMI and ISM Non-Manf. Composite.

Finally, the ongoing situation in Syria has seen Russia continue airstrikes in the country, with the Turkish foreign minister accusing Russia of violating Turkish airspace.

On the US economic calendar we get Service PMI data at 9:45 am as well the non-mfg ISM 15 minutes later. The first is expected to print at 55.7, up from the preliminary print of 55.6, while the ISM index is expected to slide from decline to 58.

Bulletin Headline Summary From Bloomberg and RanSquawk

  • European equities have kicked off the week in the green following on from sentiment in the US on Friday and Asia from overnight
  • The USD underperformed overnight in the wake of Friday's nonfarm payroll report, while GBP has also seen weakness on the back of the lowest services and composite PM's since April 2013
  • Today's highlights include US services PM! and ISM Non-Manf. Composite as well as the Fonterra GlobalDairyTrade auction
  • Treasuries decline, paring gains sparked Friday by last week’s weaker than expected payrolls and before U.S. sells $58b in 3Y/10Y/30Y debt starting tomorrow.
  • More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world’s economic woes as outlook for inflation worldwide now approaching lows last seen during crisis
  • The euro region’s economic recovery risks faltering after growth momentum eased in September, Markit Economics said, boosting possibility of more QE from ECB
  • U.K. services growth faltered in September, highlighting the breadth of the fallout from weakness in the global economy
  • Developing East Asian economies are feeling the weight of China’s growth slowdown, with the World Bank cutting the region’s growth forecasts through 2017
  • Economists brought forward forecasts for when the Bank of Japan may next increase stimulus after economic data that pointed to the risk of the economy falling back into recession
  • Boston Fed President Eric Rosengren said the U.S. economy needs to be growing at a 2% pace in 2H to justify an interest-rate increase by December
  • As world powers are drawn deeper into Syria’s conflict, the list of reasons why the war won’t end anytime soon is only getting longer
  • With wounds only just healing after the euro area agreed to throw Greece another financial lifeline, the country’s inability to process tens of thousands of refugees turning up at its doorstep threatens to reopen them all over again
  • While there is pressure on Glencore’s balance sheet given low commodity prices, the stress doesn’t mean the company won’t survive and “the belief that Glencore is having a ‘Lehman moment’ seems unfounded’’, Paul Gait, an analyst at Sanford C. Bernstein & Co. said Monday
  • Sovereign 10Y bond yields higher. Asian and European stocks rise, U.S. equity-index futures gain. Crude oil and copper gain, gold declines

US Event Calendar

  • 9:45am: Markit US Composite PMI, Sept F (prior 55.3)
  • Markit US Services PMI, Sept F, est. 55.7 (prior 55.6)
  • 10:00am: ISM Non-Mfg Composite, Sept., est. 58 (prior 59)
  • 10:00am: Labor Mkt Conditions Index Change, Sept. (prior 2.1)

DB's Jim Reid concludes the overnight wrap

The most interesting bit of news over the weekend was that Apple have applied for a patent to produce an iRing. I may have to renew my vows as I'd love to be the first person to propose with an object that also allows you to also check the football scores. However I suspect I might go the same way as Liverpool's manager yesterday if I'd used an iRing to propose.

Hopefully Liverpool's season will now turn round as sharply as Friday's session. It had threatened to become a day where bad news = bad news but after a 57 point range in the S&P 500, bad news = good news as the S&P 500 rose +1.43% at the close after having dipped as much as 1.57% within 30mins of the open after the poor payroll report. The most interesting development saw 10yr USTs falling more than 10bps after the number before closing around 4bp lower at 1.99% the first sub-2% close since April. In Europe 10 year Bunds hit 0.50% for the first time since the end of May. In terms of Fed pricing the probability of a hike in October fell to 10% and the probability of one by December to 31%. We need to go out to at least March 2016 before the market prices a 50%+ probability of a hike.

Perhaps the huge rally from the lows reflected markets that were too bearishly positioned going into the report and perhaps the likelihood that any suggestion of a Fed rise will now almost certainly be off the table for at least 2 and a half months (and probably well into 2016). This finally gave markets a bit of room to react to the latest round of plate spinning from the Fed, actions that the BoJ and the ECB are likely to reinforce with interest soon (see below).

Our thesis continues to be that central banks are trapped into additional stimulus measures given the extraordinary measures already propping up markets (artificially in many cases). They can't afford to allow the plates to crash now having spun them so aggressively for so long. Friday's weak payroll print reinforces this view and it'll also be interesting to see the BoJ meeting this Wednesday. It might be too early for Kuroda to signal further easing but with a recent return to deflation (Headline prices ex Fresh food down 0.1% yoy in August) and the 2% target a long way off surely they have forced themselves into further action very soon. While expectations are seemingly mounting our Japan economist sees a low likelihood of any further easing on Wednesday partly because the September Tankan report was steady and the BoJ’s mostly closely watched underlying inflation trend is on the rise. That said there seems to be a small group calling for further easing on 30 October when the BoJ publishes its economic outlook as it may provide the central bank/Kuroda a more credible platform to justify a move.

The ECB are unlikely to be far behind and back on Friday, DB's Mark Wall and Marco Stringa revised their ECB call prior to the payrolls upset. They have not downgraded their euro-area growth projections and still think that the more pessimistic scenarios are overstated. However, falling commodity prices and the recent euro appreciation have put renewed downward pressure on inflation, despite the domestic demand recovery. They see headline inflation in the euro area remaining sub-target at about 1.5% in 2017 and expect a six month flexible extension of QE to be announced in December.

With fears of a possible downturn building, our Euro economics team have made their real-time economic monitoring system now available on Bloomberg to DB clients. SIREN monitors on a daily frequency both how quickly the euro-area economy is growing (Momentum) and how outcomes compare with expectations (Surprise). Both SIREN components correlate closely with but tend to lead similar market sensitive indices. Last week, SIREN Surprise rose to its highest value since mid April. However, this is not signalling a stronger euro-area economy as SIREN Momentum has weakened slightly. Hence, the positive surprise seems to be driven by excessive pessimism rather than an accelerating recovery.

Going back to Friday now and quickly reviewing the weak NFP report. The release came in at +142k vs. +201k expected whilst the August number was revised down from +173k to +136k. The weakness didn’t end there as the average hourly earnings MoM rate dropped to 0% from +0.2% expected and the labour force participation rate dropped to 62.4%, the lowest level since October 1977. Our economics team also highlighted that private sector payrolls were up only 118k in September which comes on the back of a very soft 100k gain in August. Private payrolls gains have averaged 138k over the last 3 months, which is the lowest since the 3-month period ending August 2012. Besides payrolls, on Friday also saw a weaker-than-expected US factory orders (-1.7% v -1.2% expected) for August and a pretty steep decline in the NY ISM in September to 44.5 from 51.1 in August.

Refreshing our screens this morning, investors are following the US lead on Friday with broad based gains seen across major equity bourses in Asia. The Nikkei, Hang Seng, and KOSPI are all over 1% higher as we type. The HSCEI index (+2.5%) is up for the third consecutive session. Chinese stocks have had a decent few days on the back of stimulus targeting Macau, automakers as well as real estate developers. Asia FX and the tone in EM assets in general are benefitting from the weak NFP on Friday. The 10yr UST yield continues to drift lower, down by just over 1bps to 1.98% as we type. Commodities are also seeing some respite with WTI and Brent trading higher for the second consecutive session. Asian CDS spreads are tighter across the board with the Asia IG iTraxx index 5bps tighter at 156bp as we go to print although new issue activity is still subdued.

It was interesting to see that the World Bank has reduced its growth forecast for China just ahead of the annual IMF/World Bank meeting in Peru later this week (9-11 Oct). The World Bank now expects China 2015 GDP to come in at 6.9% vs 7.1% forecasted in April. The Bank now sees China growing at 6.7% and 6.5% in 2016 and 2017 respectively. China will likely be a key meeting agenda this time. The World Bank has also reduced 2015 growth forecasts for Indonesia, Philippines and Thailand. Away from Asia, the World growth forecast for 2015, 2016 and 2017 have also been cut to 2.5%, 3.0% and 3.1% from the previous 2.9%, 3.2% and 3.2%, respectively.

Today we have the Services and Composite PMI wrap up with new data from Spain and Italy (both expected to weaken) and final numbers from France, Germany, the Eurozone (all three expected steady) and the US (expecting small upward revision for the Services PMI). We also have Eurozone retail sales (where the growth rate is expected to fall from +1.7%), the US non-manufacturing ISM (expected to fall slightly) and a Euro area finance ministers meeting.