Remember when two weeks ago the China Beige Book warned that "It’s A Lot More Negative Than People Think" in the world's second biggest economy? Well after months of complacency about the Chinese economy and financial risks emanating from its $35 trillion financial sector, overnight the world got a rude awakening when China export figures tumbled, signalling a deeper slowdown than many anticipated just as the Fed prepares to raise interest rates.
As reported last night, the market was caught by surprise after China exports dropped the most in seven months as imports dropped suggesting the latest Chinese credit impulse has again faded; here is the breakdown of the latest disappointing trade data out of the world's former, and now massively levered, growth dynamo:
- China Yuan Exports -5.6% YoY (exp. +2.5%)
- China Yuan Imports +2.2% YoY (exp. +5.5%)
- China Trade Balance 278.35bn (exp. 364.5bn)
- China USD Exports -10.0% (exp. -3.3%)
- China USD Imports -1.9% (exp. +0.6%)
- China USD Trade balance 41.99bn (exp. 53.00bn)
In Dollar terms that is the biggest drop in exports since February. Imports also slid to +2.2% yoy from +10.8%. As DB notes, "while the trade data has a tendency to be quite volatile, the data will pose downside risks to the Q3 GDP print next week and will also likely put the focus back on the currency."
The market reaction was swift and unpleasant, as stocks fell around the world, while government bonds climbed. The key carry currency USDJPY plunged on the China news...
... as China's currency continues to weaken substantially, posing a renewed threat to the Chinese elephant in the room: an acceleration in capital outflows.
The MSCI All-Country World Index headed for an almost three-month low, while 10-year yields on Treasuries dropped three basis points and the yen gained. The Bloomberg Dollar Spot Index advanced to its highest level since March. The pound weakened to $1.2151, although it has since rebounded modestly, while Turkey’s lira slid to a record as renewed dollar strength risks send another shockwave among emerging markets.
PIMCO said it’s time to reduce risk, with the overseer of the world’s biggest actively managed bond fund expecting the Fed to raise interest rates two or three times by the end of 2017. “Shares are falling on a combination of the prospect of the U.S. raising interest rates and a slowdown in global demand hurting China exports,” said Andrew Sullivan, managing director of sales trading at Haitong International Securities Group Ltd. in Hong Kong.
The Stoxx Europe 600 dropped 0.9 percent in early London trading, led by declines in raw material and financial shares. BHP Billiton Plc and Rio Tinto Plc plunged more than 4 percent. Futures on the S&P 500 Index declined 0.8 percent to 2,115. Shares of Wells Fargo & Co. climbed in extended New York trading after the bank’s chief executive officer, John Stumpf, stepped down amid a public outcry over fake accounts. The Hang Seng Index slumped 1.6 percent in Hong Kong. Cathay Pacific Airways Ltd. sank to its lowest level since 2009 after scrapping its profit outlook. Thailand’s benchmark SET Index tumbled 3.2 percent, however in a surprise move it soared from overnight lows and at last check was in the green . The index had fallen every day this week after the royal palace said on Sunday that the king’s condition was unstable.
Benchmark U.S. 10-year yields slid to 1.74 percent, after climbing to the highest level since June on Wednesday. Australia’s 10-year yield dropped six basis points. China’s exports fell 10 percent in September from a year earlier, while imports declined 1.9 percent. Lackluster trade data may increase pressure on the yuan at the same time as new property curbs threaten the nation’s growth rate.
“The Chinese economy is going to be weaker,” said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. “There’s a flight to quality.”
Bulletin Headline Summary from RanSquawk:
- European equities enter the North American crossover in negative territory as disappointing Chinese trade data hampers sentiment
- The Chinese trade figures took their toll on the risk currencies, while the USD remains firm against its major counterparts
- Looking ahead, highlights include German CPI, US Weekly Jobless Claims, DoE Crude Oil Inventory Report and comments from Fed's Harker
- S&P 500 futures down 0.6% to 2119
- Stoxx 600 down 0.7% to 336
- FTSE 100 down 0.4% to 6999
- DAX down 1.1% to 10407
- German 10Yr yield down 2bps to 0.05%
- Italian 10Yr yield down 3bps to 1.39%
- Spanish 10Yr yield up 5bps to 1.11%
- S&P GSCI Index down less than 0.1% to 372.4
- MSCI Asia Pacific down 0.9% to 137
- Nikkei 225 down 0.4% to 16774
- Hang Seng down 1.6% to 23031
- Shanghai Composite up less than 0.1% to 3061
- S&P/ASX 200 down 0.7% to 5436
- US 10-yr yield down 3bps to 1.74%
- Dollar Index up 0.11% to 98.08
- WTI Crude futures down 0.4% to $49.96
- Brent Futures down 0.3% to $51.68
- Gold spot up 0.2% to $1,257
- Silver spot up 0.1% to $17.55
Top Global News
- Wells Fargo CEO Stumpf Quits in Fallout From Fake Accounts: Leaving CEO, chairman posts effective immediately; COO Tom Sloan to replace Stumpf; Stumpf Departure Doesn’t Quell Congress’ Fury: Legislators
- Fed Minutes Suggest Yellen Made the Difference in ‘Close Call’; investors will get a chance to hear directly from Yellen on Friday when she speaks at a Boston Fed conference.
- EBay to Raise More Than $1b Selling Stake in MercadoLibre: Parent offering up to 5.5m, underwriters Morgan Stanley, JPMorgan have option 825k extra MercadoLibre shares.
- Trump to Intensify Attacks on Clinton Over Bill’s Accusers: Advisers think tactic will make Hillary Clinton appear toxic, depress turnout among young women.
- U.S. to Double Shale Gas Exports on Cheniere’s Train 2: Co. cleared by U.S. regulators to start loading tankers with LNG from second plant at Sabine Pass, La.
- Janus-Henderson Sees U.S. Fund Growth Outstripping Others: Cos. expect largest growth in their combined funds management business to come from U.S. after 2 firms join together to oversee >$300b.
- Tesla Dominates U.S. Luxury Sedan Sales: U.S. sales of Model S jumped 59% y/y in 3Q, according to internal numbers.
- Sprint “Hail Mary” Financing Buys More Time for Turnaround: Softbanks CEO Son, his team have won raves from Wall Street by mortgaging Sprint’s most valuable assets to buy time to pay off creditors.
- SunEdison Receives Subpoena as Part of SEC Investigation: bankrupt clean-energy co. received notice Oct. 5 of “non- public, fact-finding investigation.”
- Apple CEO Tim Cook Visits Nintendo Headquarters in Kyoto: Cook spent about an hour meeting with Nintendo President Tatsumi Kimishima, Super Mario co-creator Shigeru Miyamoto.
- Hurricane Nicole Extremely Dangerous, Heads for Bermuda: NHC: Maximum winds at 130mph.
Looking at regional markets, we start as traditional in Asia where stocks traded mostly lower following a subdued after weak Chinese trade data dampened sentiment, while relatively uneventful FOMC minutes provided little insight into the Fed's thinking. ASX 200 (-0.7%) was dragged by commodity names after oil prices retreated below USD 50.00/bbl following a lack of developments at producer talks in Istanbul and a build in API crude inventories. Nikkei 225 (-0.4%) failed to hold on to early gains alongside swings in USD/JPY, while discouraging Chinese data in which trade balance fell to a 6-month low and exports unexpectedly contracted pressured the Hang Seng (-1.6%) and Shanghai Comp (+0.1%), although the latter narrowly remained afloat following recent announcements to support investment growth in the mainland. The poor trade figures also weighed on US equity futures which saw E-mini S&P retreat below a key 2120.00 support level while Dow futures dropped over 100 points.
Top Asian News
- China Cooling Property Market Is New Economic Growth Threat: High-profile tightening reverses two years of easing cycle.
- TSMC Profit Rises to Record on Orders for Apple Processors: 3Q net income NT$96.8b beats est. of NT$95.3b.
- Cathay Pacific Falls to 7-Year Low After Profit Outlook Scrapped: Jefferies expects Cathay to report losses in 2H and 2017.
- Samsung Stock Meltdown Attracts Investors on Survival Bets: Shares of Samsung trading near cheapest level since Feb.
- Showa Shell, Idemitsu to Delay Merger, Nikkei Says: Both parties still agree that early merger is necessary.
- Fast Retailing Forecasts FY Net Income Up 108.1%, Missing Est.: Sees net income of 100b yen for current fiscal year vs 104.7b yen analyst est.
In Europe, the re-emergence of Chinese concerns took the limelight from last night's uninspiring FOMC minutes as soft Chinese data dictated price action this morning with weak imports and exports painting the picture that global demand remains sluggish. In reaction to this, US equity futures extended on losses with European equities following suit as Chinese exposed sectors, mainly material names dampened sentiment. As such, FTSE 100 has continued to pull away from its recent intra-day record highs seen earlier this week, while Tesco shares have also been weighing on the index after pulling Unilever products in a dispute over pricing. Government bond yields slipped amid the aforementioned Chinese trade figures with bonds paring the large declines seen from yesterday's session. Additionally, ECB sources resurfaced with reports indicating that the central bank could potentially make technical changes to QE including a temporary deviation from the capital key.
Top European News
- Pound’s Plunge Squeezes U.K. Companies as Brexit Hedges End: Dilemma for merchants: pass on higher cost or hold line on prices that erode profits; London Home Presales Slump 14% as Brexit Compounds Tax Woes
- U.K. Housing Market Strengthens in Sept. as Brexit Hit Fades
- Unilever Price Increases Weigh on Demand in 3Q: Volume of 3Q goods sold declined 0.4%, surprising analysts who expected an increase.
- Brexit May Affect French Race With Juppe Demanding Hard Line: Alain Juppe, consistently ahead in polls, wants EU negotiators to take a harder line with U.K., according to an adviser.
- Sturgeon to Set Out Scottish Nationalists’ Response to Brexit: Scotland voted in June to stay in EU by 62% to 38%.
- ING Said to Add London Jobs, Cut Stock Derivatives in Revamp: Bank to move as many as 60 trading jobs to London from Amsterdam, Brussels; also to shut equity derivatives business for financial institutions in NYC, Singapore, Brussels.
- TomTom Falls After Forecast Cut; Auto Case Intact: Analysts: Personals navigation device (PND) result “is close to irrelevant” for investment case: ABN Amro.
- Nets Shares Fall; Nordea Teams Up With Danske on MobilePay: Banks to cooperate on developing payment system, which is rival to Nets.
In FX, the Bloomberg Dollar Spot index rose 0.2 percent. Odds on an increase in U.S. borrowing costs by the end of the year are around 68 percent, according to Fed funds futures, up about six percentage points from a week ago.The yen climbed 0.3 percent to 103.95 per dollar. South Korea’s won fell 1.1 percent after the country’s central bank held its key interest rate unchanged. Turkey’s lira depreciated 0.6 percent. Data released on Wednesday showed the nation’s current-account deficit in August was wider than expected, adding to a list of economic and political risks that are weighing on investor sentiment.
In commodities, oil dropped, sliding below $50 a barrel in early trading after U.S. industry data showed stockpiles grew and as differences emerge within OPEC over how members will share output cuts, although it has since managed to rebound back over the psychological level. West Texas Intermediate crude fell 0.5 percent to $49.93 a barrel. Base metals slumped amid concerns over China’s economy. Nickel sank as much as 1.9 percent on the London Metal Exchange, reversing earlier gains. While metals have advanced into a bull market this year as China’s economy stabilized, signs of an export slowdown are now clouding the outlook for global demand. Gold rose for a second day, and platinum rebounded after entering a bear market on Wednesday.
Looking at the day ahead, we’ll get the September import price index reading along with the latest weekly initial jobless claims number. Away from the data we’re due to hear from the Fed’s Harker at 12;15pm when he speaks on the economic outlook in Philadelphia. Earnings wise we’ve got 3 S&P 500 companies reporting with Delta Airlines the notable name, while Sky is due to report in Europe.
* * *
US Event Calendar
- 8:30am: Sept. Import price index
- 8:30am: Initial jobless claims
- 8:45am: Bloomberg Oct. United States Economic Survey
- 9am: DOE crude, diesel, natgas short term outlook
- 10:30am: EIA natural-gas storage change
- 11am: DOE inventories
- 12:15pm: Fed’s Harker Speaks on Economic Outlook in Philadelphia
- 9pm: Fed’s Kashkari Speaks at Town Hall in Missoula, Mont.
* * *
DB's Jim Reid concludes the overnight wrap
Perhaps yesterday was the day that Brexit finally hit home to the British public. Migration debates, a sinking pound, rising gilt yields are a side show to the real distressing story. Yes the biggest food retailer in the U.K. have seemingly removed Marmite from our shelves in response to a dispute with suppliers over who pays for the higher post Brexit costs. Many other brands have been affected with Ben and Jerry's, Magnums and PG Tips some of those that caught my eye. It feels apt that Marmite is one of those impacted as like Brexit it can split opinions. At least the UK's first post-Brexit trade deal could be with Australia who can provide us with some Vegemite to soften the blow.
Last night the blow of a hawkish set of FOMC minutes was offset by the fact that a) we knew they were going this way and b) a lot of water can still flow under the bridge before mid-December (assuming we’re ruling out a November hike given its proximity to the election). Indeed the minutes showed that the decision to stay on hold in September was a ‘close call’ while some participants believed that it would be appropriate to hike ‘relatively soon’ should the labour market continue to improve and economic activity strengthened. On the other hand ‘some others preferred to wait for more convincing evidence that inflation was moving toward the committee’s 2% objective’. It was also noted that ‘several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the committee’s past behaviour or risked eroding its credibility’.
There were some other interesting elements to the minutes however with the text revealing disparate views on the state of the labour market. The text showed that ‘participants generally expected the unemployment rate to run somewhat below their estimates of its longer-run normal rate over the next couple of years, but they offered differing views about the extent of slack that currently remained in the labour market’.
As the dust settled the market reaction was pretty muted. There was no change in the implied pricing of a Fed rate hike in December at 68%. The Greenback (Dollar index +0.28%) rose for a third consecutive day but closed a smidgen off the pre-minute highs. Treasuries took a similar course with the 10y yield edging a few basis points down from the early afternoon highs to close at 1.770% and little changed on the day. This morning we’ve seen yields fall a further 3bps with risk assets in Asia taking a bit of a hit following the China trade data. Yesterday was however a much weaker day for European bond markets though where yields were broadly 4-7bps higher. The Gilt market appeared to be at the forefront again with the 10y yield up nearly 7bps to 1.042% while Sterling (+0.67%) pared back a big part of the early advance following the Parliamentary session. More on that shortly.
In terms of equities meanwhile, the S&P 500 closed +0.11% after being up as much as +0.40%. Volumes have been a bit lower than usual this week but earnings season will start to kick into gear tomorrow when JP Morgan, Wells Fargo and Citigroup all report so activity should pick up again. Meanwhile, along with a fall for Oil (WTI -1.20%) - with questions continuing to be asked about the commitment of an OPEC production cut - earnings also dictated a much weaker European session yesterday. The Stoxx 600 closed -0.47% with the tech sector (-2.57%) driving that after Ericsson plummeted more than 20% (and the most in 9 years) after the company issued a statement reporting a huge slide in Q3 sales and profits.
Before we go any further, as we noted earlier the latest trade data is out in China this morning. It makes for slightly disappointing reading with exports unexpectedly plummeting to -10.0% yoy in September (vs. -3.3% expected) in USD terms from -2.8% in August. In CNY terms exports slid to -5.6% from +5.9% (vs. +2.5% expected). In Dollar terms that is the biggest drop in exports since February. Imports also slid to +2.2% yoy from +10.8%. While the trade data has a tendency to be quite volatile, the data will pose downside risks to the Q3 GDP print next week and will also likely put the focus back on the currency,
The biggest impact to markets this morning is actually on bourses outside of China. The Nikkei (-0.39%), Hang Seng (-1.46%), Kospi (-1.18%) and ASX (-0.85%) have all declined while the losses for the CSI 300 (-0.11%) and Shanghai Comp (-0.06%) have been a lot more modest, although markets there have chopped around all morning. The Yen has rallied close to half a percent, while the Aussie Dollar (-0.36%), Korean Won (-0.53%) and Malaysian Ringgit (-0.42%) have seen the biggest impact in the FX market.
Moving on. There wasn’t much data released yesterday with the lone print in the US being a slightly underwhelming JOLTS report. The data showed that job openings declined to 5.44m in August from 5.83m in July. Market expectations were for a 5.80m print. The job opening rate declined to 3.6% from 3.9% and while the level of job openings was actually the lowest this year, there wasn’t a great deal of reaction in markets given we have since had that September employment report.
In Europe the main highlight datawise was a slightly better than expected industrial production report for the Euro area (+1.6% mom vs. +1.5% expected). Staying with Europe, there was a bit of focus on a Reuters report yesterday suggesting that the ECB may consider technical changes to its asset-buying scheme next week. The article suggested that the ECB could consider proposals on small, temporary deviations from the capital key and buying of bonds with yields below the depo rate. That clearly fits with the mantra of the ECB allowing itself the flexibility to ensure it can continue buying €80bn worth of bonds each month even if it decides to extend the program length.
Coming back to the latest Brexit news. Yesterday following the PM’s Questions, UK lawmakers approved the motion from the opposition Labour Party which will give Parliament the right to examine the Government’s exit strategy prior to formal talks. However, PM Theresa May stopped short of allowing for a vote on the strategy which dented hopes that some in the market had of a slight softening in stance. Brexit Secretary David Davis also confirmed that he would allow Parliament to scrutinize details as long as it did not ‘thwart the process of exit’. A reminder that today the High Court will deem whether or not an Act of Parliament is needed for Article 50 to be triggered, with a loss for the government potentially leading to delays or forcing the issue in the House of Commons and House of Lords.
As we look at the day ahead now, the calendar is reasonably light over the next 24 hours. This morning in Europe the only data due out is the final September CPI report in Germany. Over in the US this afternoon we’ll get the September import price index reading along with the latest weekly initial jobless claims number. Away from the data we’re due to hear from the Fed’s Harker this evening (5.15pm BST) when he speaks on the economic outlook in Philadelphia. Earnings wise we’ve got 3 S&P 500 companies reporting with Delta Airlines the notable name, while Sky is due to report in Europe.