For the past two weeks, the thinking probably went that if only the biggest short squeeze in history and the most "whiplashy" move since 2009 sends stocks high enough, the global economy will forget it is grinding toward recession with each passing day (and that the Fed are just looking for a 2-handle on the S&P and a 1-handle on the VIX before resuming with the rate hike rhetoric). Unfortunately, that's not how it worked out, and overnight we got abysmal economic data first from China, whose imports imploded, then the UK, which posted its first deflation CPI print since April, and finally from Germany, where the ZEW expectation surve tumbled from 12.1 to barely positive, printing at just 1.9 far below the 6.5 expected.
As we reported overnight, while Chinese exports declined a better than expected 1.1% in September, ostensibly to validate the government's decision to devalue the Yuan, it was the crash in imports, which plunged by 17.7% (and down a whopping 20.4% in dollar terms, 50% worse than August), falling or 10 consecutive months, or the longest negative streak in 6 years, that has spooked markets, and ended any temporary goodwill China's economy may have had when it closed its market for a week at the end of September, which in turn pushed the country out of the market's subconsciousness, and precipitated the start of the torrid rally in global stocks. As it turned out, nothing had changed, and in fact the Chinese economy was getting even worse.
The commentary was uniformly negative, via BBG:
Nie Wen, Shanghai-based economist at Huabao Trust:
- Many Chinese manufacturers purchase raw material and re-process them before selling them overseas, so low imports growth may mean weak export outlook as well
- Sept. imports data show manufacturing sectors continue to deteriorate while industrial demand is weak, which puts 3Q GDP at risk to fall below 7%
Xu Gao, Beijing-based chief economist at Everbright Securities:
- Sept. imports data reflects weak domestic demand
- Local stock market uncertainties may also lower the confidence in private sectors
- Exports sectors are unlikely to boost growth in China now when global demand hasn’t recovered as earlier expected
- Sees 3Q GDP growth at 6.8% vs 7.0% in 2Q
The confirmation that China's slump is going nowhere fast, in turn ended the recent rally in EM currencies, and saw both the benchmark EM FX, the Ringit and Rypiah sliding, however it was the confirmation that China's woes are spreading to Germany, where the Volkswagen scandal is also ravaging the domestic economy, not to mention the refugee crisis, that sent the German ZEW index of expectations plunging from 12.1 to just 1.9.
But while any other country would use this latest slide in the economy (German government GDP forecasts were also cut from 1.8% to 1.7% overnight) to demand even more money printing, the stern Teutonic mentality would not all this and as German Finance Minister Wolfgang Schaeuble said on Tuesday he was not happy about the low interest rate environment, which he said made life difficult, especially regarding pension provisions. "I'm unhappy about the low interest rate," he said at an engineering conference in Berlin.
"It’s difficult if a normalization of monetary policy is a big risk,” German Finance Minister Wolfgang Schaeuble says. "That almost leads to the conclusion that we’re in a situation like a drug addict.”
It only took you 7 years to figure this out?
And then the cherry on top came from the UK, a country whose Goldman banker-controlled central bank was recently making very loud noises about hiking rates, to announce it just had its first negative CPI print since April as the global exporting of deflation by China and Japan and all of NIRPy Europe of course goes into second gear.
Looking at the market, Asian stocks traded lower following weakness across the commodities complex and discouraging Chinese trade data. Nikkei 225 (-1.1%) and ASX 200 (-1.11%) were led lower by energy names following the around-4% decline in WTI, while mixed Chinese trade figures added to the subdued tone as a narrower than expected decline in exports and the largest trade surplus on record, were offset by a collapse in imports. This saw indecisive trade the in the Shanghai Comp. (+0.2%) where weakness can also be attributed to profit taking following yesterday's firm gains. Finally, JGBs traded higher as the weakness in Asian bourses
supported fixed income, while the BoJ also entered the market to buy JPY 470 bn of government bonds.
The release of yet another disappointing macroeconomic data out of China, this time in the form of trade balance which showed that China's imports slid for the 11th straight month, prompted flows away from riskier assets and instead supported Bunds. At the same time, worse than expected ZEW survey expectations (1.9 vs. Exp. 6.5), with economists noting that Volkswagen scandal has dampened the outlook for the German economy, further buoyed flight to quality trade.
Financials underperformed on the sector breakdown, with UBS (-1.30%) and Credit Suisse (-1.40%) shares coming under selling pressure in reaction to source reports suggesting that Switzerland is to put 5% leverage ratio on large Swiss banks. On the other hand, SABMiller shares surged after it was reported pre-market that the key terms of a possible deal with AB InBev have been agreed upon.
In commodities, WTI crude futures remained near yesterday's lows where it fell around 4% after OPEC downgraded its demand forecast and several large banks remained bearish on prices. Additionally, in what has become a schizophrenic tradition, the IEA's monthly oil report predicted that the oil surplus in 2016 will persist as demand growth slows, while the Ex-IEA chiuef Tanaka said that oil will price below $100 until at least 2020, contradicting what OPEC said just a day earlier, and ending any hopes for a continuation of the oil rally.
Gold prices retreated from near 3-month highs overnight amid profit taking alongside widespread weakness across the commodities complex. Elsewhere, copper and iron ore prices were also pressured following weak trade figures from China which showed imports slumped about 20%.
In FX, despite benefiting from the aforementioned M&A related flow, GBP's strength gradually waned and GBP/USD printed fresh session low following the release of softer than expected UK inflation data (CPI Y/Y -0.10% vs. Exp. 0.00%), which according to the ONS was pushed lower by clothing, fuel and gas.
Elsewhere, disappointing trade balance data from China weighed on commodity sensitive currencies, with the likes of CAD, AUD and NZD all weaker heading into the North American crossover. Of note, the BoJ released their minutes overnight, however failed to provide any new insights.
Overnight, Fed's Lockhard (Voter, Neutral) reiterated that interest rates will be lifted in 2015, while going forward, market participants will get to digest the release of the latest US Fed discount rate minutes, comments from Fed's Bullard and Dudley.
There is nothing on the economic calendar today, while on the earnings front we get JNJ - which just announced a $10 billion buyback - reporting premarket, while Intel reports after the bell, as does, surprisingly, JPM in a change from its usual reporting time first thing in the morning.
Bulletin Headline Summary from Bloomberg and RanSquawk
- Flight to quality trade dominated the price action in Europe, following disappointing Chinese trade balance release and also worse than expected German ZEW survey
- Despite benefiting from the aforementioned M&A related flow, GBP's strength gradually waned and GBP/USD printed fresh session low following the release of softer than expected inflation data, which according to the ONS was pushed lower by clothing, fuel and gas
- Going forward, market participants will get to digest the release of the latest US Fed discount rate minutes, comments from Fed's Bullard and Dudley, as well as earnings by J&J, JP Morgan and Intel
- Treasuries rally overnight after China’s import data missed estimates, sending world equity markets lower; U.S. economic data releases this week include CPI, PPI and retail sales.
- Switzerland’s finance ministry will require the country’s biggest banks to have capital equal to about 5% of total assets after UBS Group AG and Credit Suisse Group AG sought to win easier terms, according to people briefed on the deliberations
- Britain’s inflation rate turned negative for only the second time since 1960 in September, reflecting a weak price backdrop that the Bank of England has warned will persist into 2016
- Anheuser-Busch InBev NV agreed to buy SABMiller Plc for almost 69 billion pounds ($106 billion) to clinch a record industry deal after several rejections, creating a brewer that will account for a third of all beer sales globally
- The $12.9 trillion U.S. government bond market -- long considered the deepest and most liquid in the world -- is now plagued by more bouts of turbulence than at any time since at least the 1970s
- Global oil markets will remain oversupplied next year as demand growth slows and Iranian exports are poised to recover with the lifting of sanctions, the IEA said
- Since mid-August, investors have poured a record $4.5 billion into the Next Funds Nikkei 225 Leveraged Index ETF, a security designed to rise or fall twice as fast as its namesake equity gauge; the Nikkei 225 Stock Average’s loss over that period comes out to ~21%
- $26.55b IG priced last week, $400m high yield. BofAML Corporate Master Index OAS narrows 1bp to +173, YTD low 129. High Yield Master II OAS narrows 13bp to +613, YTD low 438
- Sovereign 10Y bond yields slightly lower. Asian and European stocks fall, U.S. equity-index futures decline. Crude oil, copper and gold drop
US Event Calendar
- TBA: Monthly Budget Statement, Sept., est. $93b (prior $105.8b)
- Central Banks
- 8:00am: Fed’s Bullard speaks in Washington
- 4:50pm: Reserve Bank of New Zealand’s Wheeler speaks in Auckland
DB's Jim Reid completes the overnight event summary
It’s straight to China this morning where the latest September trade data is out and it’s made for fairly mixed reading. Bettering expectations, exports were down -1.1% mom in Yuan terms last month, following consensus estimates for a drop of -7.4% and which comes on the back of declines of -6.1% and -8.9% in the two months previously. Imports, however, have slowed considerably (-17.7% mom vs. -16.5% expected), the steepest drop since May. That’s seen China’s trade surplus increase to Rmb378bn (vs. Rmb292bn expected), from Rmb368bn in August. In USD terms it’s largely the same story, with exports (-3.7% mom vs. -6.0%) down but ahead of expectations, and imports (-20.4% mom vs. -16.0% expected) falling sharply and more than expected.
Chinese equity markets are down post the data, although they have generally chopped around this morning. The Shanghai Comp (-0.30%) and CSI 300 (-0.38%) are lower, taking most Asian bourses with them. Japanese markets are on the back foot after returning from yesterday’s public holiday with the Nikkei -1.06%, while the Hang Seng (-0.49%), Kospi (-0.36%) and ASX (-0.55%) are also lower. Oil markets fell sharply following the data, but are still up nearly a percent this morning after sharp falls yesterday (see below). The Aussie Dollar has dropped half a percent, while EM currencies are generally half to a percent lower across the board in Asia this morning.
With Japan on holidays yesterday and the US Treasury market shut for Columbus Day, it was unsurprisingly pretty quiet in markets. Much of the price action in equities was relatively benign. Despite a strong showing in Asia, European equities ran out of steam and closed down a tad with the Stoxx 600 (-0.28%) bringing to an end its run of six consecutive sessions of gains. The S&P 500 (+0.13%) did nudge into positive territory in the last hour of trading, with volumes some 30% lower than the three-month average and with investors no doubt also staying on the sidelines somewhat ahead of earnings releases this week.
The Dow (+0.28%) also closed higher and has now finished in positive territory for the last seven sessions, while the VIX extended its move lower, down another 5% yesterday. The tech space was also in focus following the news of Dell’s agreed takeover of EMC Corp in the largest deal ($67bn) in the sector in history and one which is set to come with a decent slug of debt financing alongside.
US equities managed to shrug off what was a steep leg lower in the Oil complex yesterday following some production numbers out of OPEC. WTI (-5.10%) and Brent (-5.30%) both fell back below $50/bbl after OPEC’s monthly report showed that the cartel produced 31.57m barrels a day in September, the most since April 2012 and up over 100k barrels a day from August. Despite the numbers, OPEC did however revise lower its forecasts for production out of non-OPEC countries this year and next, consistent with the recent EIA report. A comment from OPEC said that the anticipated fall in excess supply in the market should result ‘in more balanced oil market fundamentals’.
In the absence of the US bond market, European yields were largely lower across the board yesterday, 10y Bunds in particular down nearly 4bps to 0.576%. Yields in Italy and Spain were down a couple of basis of points too, however it was a different story in Portugal where both bonds (10y yield +4.1bps) and equities (PSI -2.97%) were notable underperformers relative to the rest of Europe. That appears to be as a result of the news that Portugal’s opposition Socialists Party (PS) are exploring the possibility of joining forces with the radical Left Bloc and hardline Communist Party (PCP) in forming a government following the recent inconclusive election earlier this month (according to the FT). The Socialist Leader, Costa, confirmed the contact with both the Left Bloc and PCP, as did the leader of the Left Bloc who was quoted in Reuters as saying that ‘conditions have been created for a basis consensus on the Left Bloc’s terms for allowing the creation of a government’. While a scenario where by the political scene switches from a centre-right coalition to a more anti-austerity focused Government is by no means certain, it’s a situation worth keeping a close eye on.
Yesterday’s Fedspeak saw both Lockhart and Evans speaking again, largely reiterating their comments from Friday. Lockhart emphasised that October is ‘live’ and that he is comforted by the reduction in volatility in markets recently. However a large part of this is due to the Fed being priced out of the market until next Spring so the argument is a bit circular. Evans confirmed his view that in his mind liftoff in mid-2016 is more appropriate, while Fed Governor Brainard added to this more dovish stance and highlighted the clear uncertainty at present, saying that ‘I view the risks to the economic outlook as tilted to the downside’ and that ‘the downside risks make a strong case for continuing to carefully nurture the US recovery and argue against prematurely taking away the support that has been so critical to its vitality’. The view of the Fed delaying was shared by China’s Finance Minister Lou yesterday, quoted in the Chinese press as saying that the Fed ‘isn’t at the point of raising rates yet and under its global responsibilities it can’t raise rates’.
Looking ahead to what’s a busier calendar today, we’re kicking off this morning in Germany with the final September CPI print. Shortly following this we’ve got more inflation data, this time out of the UK with the September CPI print while RPI and PPI readings will also be due along with the BoE credit conditions and bank liabilities survey. Elsewhere, the October German ZEW survey will also be closely watched. Over in the US the NFIB small business optimism reading for September is the only notable release, while the only Fedspeak due is Bullard, due to speak at 1pm BST. As mentioned, one eye will be on the US earnings too with the highlights being Johnson & Johnson, JP Morgan and Intel.