Bloody Start To Friday The 13th For Global Markets

Global stocks have started Friday the 13th on the wrong foot, with not only Hong Kong GDP unexpectedly tumbling by 0.4%, the worst print in years while retail sales fell for a thirteenth straight month in March, the longest stretch since 1999 as the Chinese hard landing spreads to the wealthy enclave, but also following a predicted collapse in Chinese new loan creation, which will reverberate not only in China but around the globe in the coming weeks. The latest overnight drop in the Yuan hinted that should the recent USD strength continue, China will have no choice but to repeat its devaluation from last summer and winter. 

As a result of renewed Chinese concerns and, following devastating retail earnings, rising fears about a US recession as the US consumer has not been so weak in years, European shares have given up all their gains for the week on Friday and emerging-market equities headed for a fourth-straight weekly loss as flagging corporate earnings eroded investor confidence. Oil retreated from a six-month high and iron ore fell to a two-month low. Even Germany’s strongest GDP print in two years (0.7%, up from 0.3%, and 2.7% annualized) wasn’t sufficient to boost the euro, while bonds rose.

As shown in the chart below, global stocks have not only hit the latest double top, but are now set to catch down to declining global growth.

 

The big event today (and the week), and coming on the back of what’s been a relatively quiet week for data, will be the US retail sales numbers for April due out at 8:30am. The interest in the number will have increased following some of the terrible retailer earnings reports in recent days. Macy’s, Walt Disney and Kohls are a selection of these while last night after the close Nordstrom added to the pain for the sector after missing earnings and revenue expectations and lowering its profit guidance for the full year, sending the share price down some 17% in extended trading. Expectations are for a bounce back in the April data this afternoon, boosted by a rebound in vehicle sales and a slight increase in gas prices. The current consensus forecast for the headline is +0.8% mom. The retail control element (which is the core of the report) is worth keeping an eye on though. DB's brand new permabear Joe LaVorgna expects this to rise by just +0.2% and if so, will mean the reading is up only +2.1% annualized through April which would be the weakest start to the year since the first four months of 2013.

As Bloomberg notes, markets failed to sustain gains made in the first half of the week amid signs of lackluster economic growth in Europe and Asia and a pull-back in industrial metals. U.S. retail data is due on Friday after cuts in forecasts by Macy’s Inc. and Nordstrom Inc. renewed concern that consumer demand is flagging in the world’s largest economy.

"People just don’t seem to believe in growth for the equity market and prefer staying on the sidelines,” said Chris Beauchamp, a London-based market analyst at IG Plc. “Investors are nervous ahead of retail sales, which has been an underlying theme this week.”

The Stoxx Europe 600 Index dropped 0.7 percent 10:31 a.m. in London, heading for a weekly decline of 0.2 percent. Shares have been falling since Wednesday as earnings reports failed to inspire investor confidence, undermining earlier gains. S&P 500 futures slid 0.3 percent, indicating U.S. equities will open lower after closing little changed in Thursday’s whipsaw session. The MSCI Emerging Markets Index fell 1.1 percent, erasing this week’s gain to leave it down 0.9 percent. The Shanghai Composite Index slid 2.6 percent in its fourth weekly drop and longest run of declines not seen since May 2014. The Hang Seng China Enterprises Index fell 1.3 percent and is down 10 percent from the April high, entering a correction.

WTI trades near $46, halting 3 days of gains that incl. 6-mo. high yday with pressure from stronger dollar.  Brent, as is traditionally the case, mirrors WTI retreat, unable to hold earlier move higher on Nigerian force majeure and Glencore manipulation.

Nordstrom slid as much as 16 percent in late trading after cutting its annual forecast, adding to evidence that the department-store industry is in a deep slump. Nvidia Corp. rose 5.7 percent in Europe after the biggest maker of graphics chips used in high-end gaming computers predicted sales that may top analysts’ estimates. Eutelsat Communications SA led media companies lower, plummeting 30 percent as brokers downgraded the satellite operator after it cut its results forecasts for this year and next. Total SA and Royal Dutch Shell Plc led energy producers lower.

Market Wrap

  • S&P 500 futures down 0.3% to 2053
  • Stoxx Europe 600 down 0.7% to 330.82
  • MSCI Asia Pacific down 1.3% to 125.95
  • US 10Yr yield down 3 bps to 1.72%
  • Dollar index up 0.2% to 94.29
  • WTI oil futures down 1.0% to $46.3/bbl
  • Gold spot up 1% to $1275.82/oz

Top Global News

  • Yen drops second week as BOJ’s Kuroda reiterates easing stance
  • Abe lurches to economic left to broaden appeal before poll
  • China Inc. misses best shot to repay $430 billion as yuan drops;
  • China credit expansion moderates amid warning on debt binge
  • Treasurers worry Draghi’s bazooka may chase away their investors
  • The losing hedge this negative-rate maestro says will never work
  • Banks, bond buyers applaud as EU softens trade transparency
  • HSBC said to hire 175 compliance staff for U.K. ring- fenced bank
  • Euro-area growth revised down slightly despite German strength
  • Brazilian real’s impeachment rally seen fizzling after ouster

Looking at regional stock market, Asia equity markets traded mostly lower following the subdued US lead, while disappointing earnings in the region also weighed on sentiment. ASX 200 (-0.5%) was led lower by basic materials following weakness in the commodities complex, while Nikkei 225 (-1.4%) shrugged off opening gains as JPY strength dampened exporter sentiment. Furthermore, a slew of earnings have also provided a catalyst for price action with telecoms underperforming in Japan after KDDI missed on expectations and pessimism regarding government telecom sector adjustments. Chinese markets were mixed with the Shanghai Comp (-0.3%) fluctuated between gains and losses as Industrials benefited from recent infrastructure funding announcements, while Hong Kong lagged with the Hang Seng China Enterprise Index in correction territory after declining 10% from April highs. 10yr JGBs traded mildly positive in tandem with the downbeat tone in Japan with the BoJ also in the market for JPY 850b1n of government debt. BoJ's Governor Kuroda said BoJ easing framework is very strong, adding there is room for BoJ to ease more. Kuroda also commented time is needed for monetary policy to take effect, but added he is not saying BoJ will wait until effects can be confirmed.

European equities are softer this morning with losses relatively broad-based in a continuation of the sentiment seen yesterday on Wall Street and overnight in Asia. While underperformance has been seen in the FTSE MIB, weighed yet again by the weakness in financials. So far newsflow has remained particularly light this morning as participants await key US data releases in the form of retail sales and PPI. The risk averse tone in the region has filtered into flight to quality flow supporting Bunds which have made a break above 164.00. Alongside this, gains in German paper has been exacerbated by the softening of yields with notable bull flattening across the curve.

In FX, we have seen a fresh charge on the USD to push the weighted index into the mid 94.00s, led by EUR/USD which has been hit down from circa 1.1375 levels first thing in Europe to lows just under 1.1330 for now. The move was sparked by better than expected German GDP which printed +0.7% in Q1, sharply higher than the 0.3% in Q4, and above the 0.6% expected. The yen strengthened 0.3 percent to 108.71 per dollar, paring its weekly decline to 1.5 percent. The Bloomberg Dollar Spot Index added 0.2 percent, poised for a second weekly gain. Regional Federal Reserve chiefs for Boston and Kansas City argued at separate events Thursday that the U.S. central bank risks stoking an asset bubble by delaying raising interest rates for too long. The odds of a hike by year-end climbed to 53 percent from 48 percent on Wednesday, Fed Funds futures show. Oil has been relatively stable, but USD/CAD bulls maintaining pressure on near term resistance ahead of 1.2900. Stocks on the red however, so this bolsters the heavy tone in all risk currencies. SGD rallied sharply in EM on intervention talk. All eyes on US retail sales later on, with the market quick to slip into consolidation mode after the early London action.

In commodities, West Texas Intermediate crude was down 1.1 percent at $46.20 a barrel, after ending Thursday at a six-month high. Producers in Canada plan to resume operations at some oil-sands sites after wildfires took production offline, while Nigeria said militant attacks have cut output by as much as 600,000 barrels a day. China’s steel reinforcement-bar futures plunged by a record 13 percent this week, after price surges over the last two months prompted authorities to clamp down on speculation in the commodities market. Iron ore futures sank to the lowest level since March 4 in Singapore.

“The steel market took a hit as blast furnace operation rates, inventories, have all been climbing so the previous concerns over a shortage have abated,” Xu Tao, Wang Nan and Li Xiaodong, analysts at Zheshang Futures Co., said in a report Friday. Natural gas in the U.K. for next-month delivery is headed for its second straight weekly gain as its use in power output rises. Coal-fired electricity generation in Great Britain is at its lowest in at least six years amid closures of the emissions-heavy plants. Gold gained 0.8 percent, trimming this week’s loss to 1.2 percent.

Looking ahead to today’s calendar in the US, we get the latest "must beat" retail sales numbers we’ll get the April PPI data, business inventories for March and the first take of the University of Michigan consumer sentiment reading for May. As well as the data, the Fed’s Williams will be due to speak late tonight (11.25pm) while we’ll also hear from the BoE’s Haldane and Weale today.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • A cautious start to the morning with EU equities softer as participants look ahead to key US data releases.
  • USD-index rallies to the detriment of its major counterparts in what has been a rather quiet morning in terms of fundamental drivers.
  • Looking ahead, highlights include US retail sales and PPI, ECB's Constancio, BoE's Weale and Fed's Williams.
  • Treasuries higher overnight as global equities and oil sell off, precious metals rally; U.S. stock index futures drop amid weak corporate earnings and subdued economic data.
  • Federal Reserve Chair Janet Yellen didn’t rule out using negative rates in a future crisis but emphasized that they would be adopted as a last resort
  • Jeffrey Gundlach said there’s a 50% chance the Federal Reserve will raise interest rates this year
  • Mizuho Financial Group Inc., Japan’s second-biggest lender by assets, forecast net income will decline 11 percent to a four-year low as the central bank’s negative-interest rate policy squeezes loan profitability
  • China’s broadest measure of new credit rose less than expected last month, suggesting that the central bank is starting to temper a flood of borrowing amid warnings from officials about potential side effects of the debt binge
  • Hong Kong’s economy unexpectedly contracted 0.4% q/q in the first three months of the year as falling retail sales and a weakening property market weigh on the city
  • The world’s biggest oil companies are borrowing record amounts of money to cope with a slump in crude prices. Exxon Mobil, Royal Dutch Shell, Chevron, Total, BP and Eni have together sold the equivalent of $37 billion of bonds this year
  • Even as Mario Draghi’s pledge to buy corporate bonds drives borrowing costs toward record lows, some treasurers are sounding the alarm that it may ultimately cause harm
  • The euro-area economy grew slightly less than initially estimated in 1Q, though momentum was still the fastest in a year. Led by a better-than-forecast performance by Germany, its largest economy, the euro region expanded 0.5% in the 1Q
  • Italy’s economy expanded in the first quarter, while still leaving growth well below the euro-area average as government debt hit a record-high €2.23 trillion ($2.53 trillion) in March
  • Sovereign 10Y yields little changed; European and Asian equities drop; U.S. equity- index futures lower. WTI crude oil drops, precious metals rally

US Event Calendar

  • 8:30am: Retail Sales Advance, m/m, Apr, est. 0.8% (revised -0.4%)
    • Retail Sales Ex Auto, m/m, Apr, est. 0.5% (revised 0.1%)
  • 8:30am: PPI Final Demand, m/m, Apr, est. 0.3% (prior -0.1%)
    • PPI Final Demand, y/y, Apr, est. 0.2% (prior -0.1%)
    • PPI Ex Food and Energy, m/m, Apr, est. 0.1% (prior -0.1%)
    • PPI Ex Food and Energy, y/y, Apr, est. 0.9% (prior 1%)
  • 10:00am: Business Inventories, Mar, est. 0.2% (prior -0.1%)
  • 10:00am: U. of Mich. Sentiment, May prelim., est. 89.5 (prior 89)
    • U. of Mich. Current Conditions, May prelim., est. 106.0 (prior 106.7)
    • U. of Mich. Expectations, May prelim., est. 78.0 (prior 77.6)
  • 1pm: Baker Hughes rig count
  • 6:25pm: Fed’s Williams speaks

DB's Jim Reid concludes the overnight wrap

The big focus today and coming on the back of what’s been a relatively quiet week for data, will be the US retail sales numbers for April due out this afternoon. The interest in the number will have increased following some of the soft retailer quarterly reports we’ve seen in recent days. Macy’s, Walt Disney and Kohls are a selection of these while last night after the close Nordstrom added to the pain for the sector after missing earnings and revenue expectations and lowering its profit guidance for the full year, sending the share price down some 16% in extended trading. That said expectations are for a bounce back in the April data this afternoon, boosted by a rebound in vehicle sales and a slight increase in gas prices. The current consensus forecast for the headline is +0.8% mom although our US economists have a more cautious +0.3% forecast. The retail control element (which is the core of the report) is worth keeping an eye on though. Our colleagues expect this to rise by just +0.2% and if so, will mean the reading is up only +2.1% annualized through April which would be the weakest start to the year since the first four months of 2013.

All that to look forward to later, but first to the latest in Asia where markets are closing the week on a bit of a sour note, with the vast majority of bourses in the red. It’s Japan where the biggest moves lower have come, with the Nikkei currently -1.08%, not helped by a +0.2% strengthening for the Yen. The Hang Seng (-0.91%), Shanghai Comp (-0.08%), Kospi (-0.58%) and ASX (-0.54%) are also lower as we go to print. Credit markets are a touch wider while EM currencies have generally weakened. US equity index futures are also down close to half a percent this morning, despite little new newsflow overnight.

Turning back to markets yesterday, despite risk assets - certainly in the US - having a fairly directionless session, it was actually a fairly busy day at a macro level with various Fedspeakers, softer US data and Central Bank meetings for investors to digest. After ebbing and flowing the S&P 500 closed a smidgen in the red (-0.02%) at the closing bell although that was seen as something of a positive result after the mid-session wobble. The Nasdaq (-0.49%) was down more though with some of that reflecting another fall for Apple (-2.35%) after reports suggested that shipments of iPhone chips are expected to shrink. That move actually took Apple’s share price to the lowest since June 2014 and if we look back over the last month or so (since April 14th), Apple has actually declined on 16 of the 20 trading days.

Markets in Europe had been a bit weaker prior to this (Stoxx 600 -0.49%) after giving up gains into the close as energy stocks in particular went into retreat mode with violent swings in Oil. Indeed the Stoxx 600 Oil and Gas index trimmed a gain of as much as +2.3% in the last hour or so of trading as WTI, having touched $47/bbl briefly, declined nearly $1.5/bbl in a short space of time before than gaining again in the evening session, eventually closing at $46.70/bbl and +1.02% on the day. It seems that while investors continue to grapple with the supply disruptions in Canada and Nigeria, a report from the IEA yesterday suggesting the global oil stocks will see a ‘dramatic reduction’ in the second half of this year was attributed to the rally back off the lows.

To the macro and firstly yesterday’s data where the release that appeared to garner most attention was the initial jobless claims print in the US. Claims were reported as climbing 20k last week to 294k (vs. 270k expected) which is the highest level since February last year. Our US economists noted however that some caution is warranted though as it appears that the entire increase was attributable to the state of New York. Indeed claims in NY were up 23k last week and historical data shows that this jump could be driven by seasonal issues. There has been similar evidence of such in 2014 and 2011 and claims then reverted back to trend the following week. Despite claims being up on three consecutive weeks now, there’s still yet to be any sign of broad-based deterioration. Meanwhile, the other data in the US yesterday was the import price index which was recorded as increasing +0.3% mom (vs. +0.6% expected).

Closer to home in Europe we learned that industrial production for the Euro area was -0.8% mom in March (expectations had been for 0.0%) which has had the effect of the dragging the YoY rate down to +0.2% now (from +1.0%). French CPI meanwhile was confirmed at +0.1% mom for the month of March, with the YoY rate a lowly -0.2%.

The bigger focus however was on the Bank of England monetary policy meeting. As had been expected the Bank left rates on hold at 0.5% after a unanimous 9-0 vote (there had been some suggestion that we’d see as many as two dissenters to this). The inflation report showed that the Bank has revised down its forecasts for growth by one or two tenths in each of the next three years while the inflation forecast was little changed generally but slightly steeper in the near term. Much of the focus though was the mention of the EU UK referendum vote. The inflation report made mention to that a vote to leave ‘could lead to a materially lower path for growth and a notably higher path for inflation’. Governor Carney also warned of the possibility of ‘material effects on the exchange rate’ and even the possibly a ‘technical recession’. The Pound actually broke above $1.45 intraday yesterday but then quickly pared those gains shortly after to finish little changed on the day around $1.445. The other Central Bank meeting yesterday at the Norges Bank saw the Bank hold rates as expected too at 0.5% with the outlook not deviating all that much from expectations.

Over at the Fed meanwhile we heard from a couple of notable speakers in Rosengren and George, both of whom offered up a fairly hawkish tone. The former opined that ‘if the incoming economic data continue to be consistent with gradual improvement in labour markets and inflation getting closer to target, the Fed should be ready to normalize interest rates’. He followed this up by also saying that market pricing currently implies a too pessimistic view about the fundamental strength of the US economy. Fellow Fed official George offered a similar view in saying that rates are ‘too low for today’s economic conditions’. The probability of a rate hike next June continues to sit at a lowly 4%.

Before we look at today’s calendar, a quick note on the latest in Brazil where as widely expected and following an extended voting session, the Senate voted by 55 to 22 in favour of accepting the petition for the impeachment of President Rousseff. Rousseff has now been notified and Vice President Temer has replaced her. Our EM colleagues note that the impeachment process is not over yet and that Rousseff will be put on a trial in the Senate that could last up to 180 days. For Rousseff to be definitely impeached, at the end of the process two-thirds of the Senators (54 Senators) will have to vote in favour of impeachment. Since 55 voted in favour yesterday, the most likely scenario is that Rousseff will not return to office in their opinion.

Looking ahead to today’s calendar, this morning in Europe and shortly after we go to print we’ll get any final revisions to the April CPI data for Germany as well as the Q1 GDP report (expected to be +0.6% qoq). Payrolls data in France is next up followed later on by the Q1 GDP report for the Euro area where no change is expected from the first estimate of +0.6% qoq. It’s a busy calendar in the US this afternoon. As well as those retail sales numbers we’ll get the April PPI data, business inventories for March and the first take of the University of Michigan consumer sentiment reading for May. As well as the data, the Fed’s Williams will be due to speak late tonight (11.25pm) while we’ll also hear from the BoE’s Haldane and Weale today.

Before we wrap up, a quick mention that over the weekend China is due to release the remainder of its April indicators. Industrial production, retail sales and fixed asset investment are all due out early tomorrow morning while the latest money supply, aggregate financing and new yuan loans data is also due at some stage. So expect all this to set the early tone come Monday morning again.