Dollar Tumbles, Euro Soars After Obamacare Repeal Dies; China Intervenes To Halt Rout

Bulletin headline summary from RanSquawk

  • The USD-index dropped to 10 month lows amid fading hopes of US reforms after Obamacare repeal effectively died last night.
  • Soft CPI from the UK and NZ weigh on both currencies
  • Looking ahead, highlights include BoE's Carney and the API Crude report

The Dollar Index sank to its lowest level since September, a fresh 10-month low, after two more Republican defections on Monday night doomed the proposed GOP healthcare plan in the Senate. And while Treasuries rose on concerns about inflationary pressures and the viability of the Trump stimulus agenda, S&P futures rebounded gingerly from session lows, and were up 0.01% after posting nominal declines earlier in kneejerk reaction to the Senate news.

The sliding dollar sent the Euro surging as high as 1.560, the highest since May of 2016, and sending European lower for first time in five days amid concern a stronger euro would damp exporters earnings.

“Any hopes of dollar support from a successful vote on the Senate’s health-care bill look to be vanishing,” said Rodrigo Catril, a currency strategist at National Australia Bank quoted by Bloomberg. “Near term, the dollar path of least resistance is down. We still think the data - inflation in particular - will provide the Fed with enough ammunition to hike in December and boost the dollar, but this is a fourth-quarter story.”

There were no Chinese fireworks today and no ChiNext "Black Tuesday" largely because Beijing was determined to stop the rout after what appeared to be another "national team" intervention in the last two hours of trading. Earlier in the session, Chinese stocks fell after Monday’s selloff as concern about tougher regulations still unnerved the market.

Sunac China Holdings tumbled in Hong Kong after a local media report that banks are reviewing the company’s credit risk. The Shanghai Composite had dropped as much as 0.6% at the midday break local time after falling 1.4% on Monday, its biggest one-day plunge in seven months, while the ChiNext gauge slipped 0.8% after sinking 5.1% on Monday, however the now familiar late trading levitation sent the SHCOMP up 0.4% while the ChiNext closed 0.7% higher. Meanwhile, Sunac China - which we will have more to say about later - plunged as much as 13%. The company, one of China's most aggressive acquirors, has seen its proposed plan to buy Dalian Wanda assets trigger concern among lenders and Beijing.

it was a busy overnight session in macro with the Aussie soaring to the highest since May 2015 after upbeat RBA minutes flagged improved 2Q growth alongside expectations of increased fiscal spending while suggesting growth is picking up and the estimated nominal neutral cash rate at 3.5%. The announcement caught AUD shorts wrongfooted and started a major squeeze while sending Australian 3-month bank bills sharply lower in heavy selling while 3-year yield rose as much as eight bps to 2.11%. To stabilize the financial system ahead of a surge in liquidity demands, the PBOC injected net 170 billion yuan of liquidity which some however said would not be enough and as a result interbank rates jumped the most in one month; the Yuan gained against dollar while the Shanghai Composite 0.6% lower. Dalian iron ore jumped 4.8% with futures hitting the highest level since May on strong demand from Chinese steel mills.

Tempered expectations for Trump's spending plans weighed on European bond yields which edged lower, tracking U.S. equivalents, after the collapse of the second healthcare bill. U.S. 10-year bond yields fell after the news, while German 10-year yields dipped 2 basis points to 0.57 percent when European trading started on Tuesday. In European stocks, the Stoxx Europe 600 Index fell following a grim earnings report from Ericsson AB, which led the decline.

Elsehwhere, the pound tumbled by 100 pips to just above 1.30 after UK CPI disappointed to the downside, sliding to 2.6%, from 2.9%, missing expectation, potentially putting the BOE's rate hike expectations on hold.

Meanwhile, in the US, S&P futures were little changed ahead of earnings reports by Bank of America and Goldman Sachs. IBM reports after the close.

In commodity markets, oil prices steadied as expectations of firm demand, particularly from China, was met ample supply despite Ecuador announcing it would exit the OPEC production cut deal. Brent crude futures eased 0.1 percent to $48.35 a barrel while U.S. crude oil fell 0.2 percent to $45.93. The ongoing dollar weakness sent gold higher for another day, with the yellow metal trading as high as $1,238 overnight.

Market Snapshot

  • S&P 500 futures up 0.01% to 2,458
  • STOXX Europe 600 down 0.3% to 385.64
  • MXAP up 0.1% to 157.81
  • MXAPJ up 0.2% to 520.60
  • Nikkei down 0.6% to 19,999.91
  • Topix down 0.3% to 1,620.48
  • Hang Seng Index up 0.2% to 26,524.94
  • Shanghai Composite up 0.4% to 3,187.57
  • Sensex down 0.6% to 31,868.93
  • Australia S&P/ASX 200 down 1.2% to 5,687.39
  • Kospi up 0.04% to 2,426.04
  • German 10Y yield fell 1.4 bps to 0.567%
  • Euro up 0.4% to 1.1527 per US$
  • Brent Futures up 0.2% to $48.53/bbl
  • Italian 10Y yield fell 5.2 bps to 1.942%
  • Spanish 10Y yield fell 3.7 bps to 1.555%
  • Brent Futures up 0.2% to $48.53/bbl
  • Gold spot up 0.2% to $1,236.46
  • U.S. Dollar Index down 0.3% to 94.84

Top overnight news:

  • U.K. inflation unexpectedly slowed in June, giving respite to Bank of England policy makers concerned that price growth was getting out of hand
  • Citigroup Inc. has chosen Frankfurt as its newest trading hub in the European Union and plans to present that option to its board of directors this week for approval, according to a person with knowledge of the decision
  • Policy makers from Stockholm to Bucharest are now waiting for their colleagues at the European Central Bank to kick off unwinding the record stimulus that was unleashed in the aftermath of the global financial crisis. This Thursday, they’ll be watching for any new signals from President Mario Draghi, who hinted last month that the end of the road was approaching
  • Senate Majority Leader McConnell abandons broad Obamacare replacement vote to seek straight repeal; Trump urges GOP to work on new plan, start from ’clean slate’
  • RBA minutes say growth likely increased in 2Q; stronger labor market removes ’some of the downside risk’ to wage growth forecast; estimates neutral nominal cash rate of around 3.5%
  • CBRC told some Chinese lenders to lower returns on wealth products
  • China should achieve ’clean floating’ yuan exchange rate: Financial News
  • New Zealand 2Q CPI 0.0% vs 0.2% estimate, y/y 1.7% vs 1.9% estimate
  • Wells Fargo Buys Rest of $10 Billion ‘Active Quant’ Firm Golden
  • BNP Paribas Fined $246 Million Over Currency Manipulation
  • Fed’s Long-Run Miss of Inflation Goal Undermines Rate Hike Case
  • Medtronic Computer Crash to Crimp Quarterly Sales, CFO Says

Asian equity markets traded higher as investors await quarterly results this week. ASX 200 (-1.1 %) traded negative with the financial and utilities sectors weighing on the index, whilst Nikkei 225 (-0.6%) was also in the red amid a stronger JPY, following safe-haven flows into the Japanese currency after news that two US Republican Senators are to vote against the Senate Healthcare bill. Elsewhere, Shanghai Comp. (+0.4%) and Hang Seng (+0.2%) jumped following the latest PBOC intervention helped by a CNY 170bIn liquidity injection by the PBoC. Finally, 10yr JGBs traded higher amid caution in the region, with flattening seen in the belly of the curve.

Top Asian News

  • BOJ ETF Buying Is Said to Raise Concern Among Some Officials
  • China Is Said to Tell Banks to Cut Yields on Wealth Products
  • China Liquidity Tightens as Tax Demands Outweigh Fund Injections
  • Chinasoft Rises After Announcing Cloud Partnership with Huawei
  • Asia’s Biggest Buyout Prompts Concerns on GLP’s Credit Score
  • S&P Says Wider Indonesia Budget Gap Isn’t Material Policy Easing
  • Alphadyne Hires Ayad Butt as Portfolio Manager in Singapore

European bourses were marginally affected by the data, with the FTSE benefiting of the lower chance for an august move. Ericson is the clear under-performing stock amid reporting poor results, with the majority of indices being dictated by earnings. Gilts saw the most influential reaction to the UK data, as the UK paper traded up around 70 ticks following the result, the lOy did slow however, around the 126.80 level (July's High). Periphery bonds trade higher, led by Greece which trade at record levels, set to hit the market this week.

Top European News

  • BC Partners Is Said to Be Close to Deal for GoDaddy’s PlusServer
  • STM/Infineon M&A Has Large Cost-Cutting Potential: Natixis
  • REVISED GUIDANCE: EFSF EU3b 10Y, Min. EU500m 2/2056 Tap
  • Economic Growth, Low Rates Boost Bulgarian Bourse: Karaivanova
  • European Miners Snap Gains After Run Into Overbought Territory
  • Gecina Plans to Raise $1.2 Billion to Fund Eurosic Purchase

In currencies, markets awaited the UK, CPI, PPI and RPI figures, where the headline CPI figures missed on expected. Focus will remain on the UK as BoE's Carney is expected to speak at 14.30 London time. GBP saw volatility coming into the figure, and following the result, sterling bears continued to attack the currency. GBP/USD trades back towards 1.30, expected to be physiological support, with further support likely at 1.2980. The headline news overnight, came from the US, where reports emerged that US Republican Senators Moran and Lee are to vote against Senate Healthcare Bill, all but confirming that the bill will not succeed. The dollar weakness was clear, as the news triggered stops through last week's highs in EUR/USD, followed by a break of the 1.15 handle. The pair now trades around highs of the 2015/2016 range, with any break through 1.16, aided by more poor US data and a continued dovish tone from the Fed could see a clear change of direction.

In commodities, the commodity complex continues to be led by precious metals, albeit marginally so. The safe haven flow has been evident following the overnight reports that US Republican Senators Moran and Lee are to vote against Senate Healthcare Bill, as markets begin to prepare for an imminent winter for President Trump. Oil markets trade marginally higher, with WTI bouncing off the 46.00 area, further support from a trendline beginning on July the 10th.

Looking at the day ahead, in the US this afternoon we’ll get the June import price index print along with the NAHB housing market index reading for July. Earnings should be a decent focus for the market today too with Goldman Sachs and Bank of America the latest banks to report (both prior to the open), while Johnson & Johnson (pre-open) and IBM (post-close) are also scheduled.

US event calendar

  • 8:30am: Import Price Index MoM, est. -0.2%, prior -0.3%; Import Price Index ex Petroleum MoM, est. 0.01%, prior 0.0%
    • Import Price Index YoY, est. 1.25%, prior 2.1%
    • Export Price Index MoM, est. 0.0%, prior -0.7%; Export Price Index YoY, prior 1.4%
  • 10am: NAHB Housing Market Index, est. 67, prior 67
  • 4pm: Total Net TIC Flows, prior $65.8b; Net Long-term TIC Flows, prior $1.8b

DB's Jim Reid concludes the overnight wrap

Well that was an epic start to Game of Thrones, although the biggest shock was seeing one of the most famous pop star in the world making his acting debut in last night's show. Talking of world famous singers I  have an apology for you this morning. For the last three weeks I've had to manually override an autocorrect on my iPad that changes Sintra to Sinatra. I must have done this 30-40 times in the EMR over the last three weeks but yesterday it finally caught up with me and I failed to edit a mention of the latter to the former. This heralded a string of amusing email replies mostly about how Draghi had done it "My Way" last month. Anyway we look forward to him spreading the news later this week at the post ECB meeting press conference.

To be frank, yesterday was relatively dull and my train definitely had an air of emptiness that only arrives with the start of school holidays. Of the main DM equity markets, the S&P, Dow, Nasdaq, Stoxx 600, CAC, IBEX, FTSE MIB, PSI and SMI all finished less than +\- 0.10%. That was even after all the excitement of the huge swings in Chinese bourses 24 hours ago with the Shanghai Comp and Shenzhen in particular seeing high to low swings of 2.81% and 4.09% respectively as the market balanced that strong data versus the potential for tougher financial regulation following the PBoC meeting over the weekend.

By and large it was China-sensitive assets which were really the only markets to see any significant moves yesterday. That was most apparent in base metals with Iron Ore (+1.63%), Copper (+1.18%) and Zinc (+1.04%) all standing out. Bond markets were also a smidgen stronger on fairly limited newsflow and thin volumes as the market awaits the ECB meeting later this week. Benchmark 10y Treasury yields edged down 1.8bps to 2.315% while Bunds finished just over a basis point lower at 0.576% with the periphery down 3-5bps. Away from that Sterling (-0.33%) struggled from the get go yesterday and weakened as the day progressed as the second round of Brexit talks between David Davis and Michel Barnier got underway. There wasn’t any significant new updates to report and instead it’s expected that technical teams will carry on work behind the scenes to iron out the details for EU citizens’ rights in the UK with a further update to possibly come on Thursday.

This morning in Asia the tone for the most part has been modestly risk-off. The Nikkei (-0.62%), Hang Seng (-0.20%), Shanghai Comp (-0.32%) and ASX (-1.27%) have all weakened. This more than likely reflects a combination of news out of both China – where the banking regulator has imposed lower rates on wealth management products – and the news out of Washington that two more Republican senators have opposed the latest version of the health care plan. This doesn't look good for Mr Trump and his legislative agenda. US equity index futures are also in the red, while the USD has weakened -0.43%. Some of the macro data this morning has garnered some attention too. In Australia the latest RBA meeting minutes included a new reference to a neutral nominal cash rate which partly explains a +1.20% rally for the Aussie Dollar. Across the Tasman, New Zealand Q2 CPI disappointed (0.0% mom vs. +0.2% expected) which continues the theme of some disappointing global CPI reports in recent days. As we'll see in the data ahead it's the UK's turn this morning on inflation.

It’s worth noting that following the close last night in the US, Netlifx shares surged as much as 11% following the latest quarterly earnings report. While earnings were largely in line, revenue topped forecasts and subscriber growth surged more than expected. While Nasdaq futures have weakened overnight in line with other bourses following the latest health care developments, it’ll be interesting to see if the results help cap a full recovery in the Nasdaq which was down as much as 4% from the peak on June 9th to the lows on July 6th. It closed last night off just 0.40% from the highs so that Netflix boost might help sentiment in tech stocks again after a more difficult month or so. Moving on. Yesterday also saw a landmark day for the ECB as the CSPP holdings went above €100bn for the first time. To put things in perspective, a similar market cap company would be the 18th largest in the Stoxx 600 and 42nd largest in the S&P 500. It's also roughly equivalent to the annual national output of Kuwait - the 59th largest economy in the world as of 2016.

While we're on such comparisons, the entire ECB balance sheet now stands at €4.21tn, which now has the largest central bank holding in the World. This is comparable to the annual GDP of Japan (€4.30tn) - the 3rd biggest economy in the world and a decent distance ahead of Germany (€3.02tn) - the fourth largest. It's staggering to think of it in those terms.

Back to the more mundane, net CSPP averaged €286mn/day last week, well below the €365mn average since the program started. However last week saw European markets wind down a little with Bastille Day on Friday and the strong buying recently perhaps reflected a desire to front load ahead of what will now be relatively illiquid summer markets. The CSPP/PSPP ratio was 10.4% last week, which is below the long-term average (even before QE was trimmed in April). However the same ratio for the past two weeks is 13.4%. Indeed the evidence from the more than three months of purchases since QE was trimmed continues to be that the CSPP has been trimmed notably less than the PSPP (CSPP/PSPP ratio 13.6% since April compared to 11.6% before then).

Staying with bonds, it was interesting to note the various stories doing the rounds yesterday suggesting that Greece may be returning to the primary bond market for the first time since August 2014. Both Bloomberg and the FT are reporting that Greece is looking to bring a 5y deal to market this week or next following the repayment of a 3y bond yesterday. Notwithstanding the fact that debt relief debates are still yet to be concluded, with 3 bailouts in the last 7 years, and the fact that the country also came close to exiting the Euro, it would make for a fairly symbolic step.

Before we look at today’s calendar, a quick wrap up of the few data releases out yesterday post the China numbers. In Europe there were no surprises to come from the final June CPI revisions with headline CPI confirmed at 0.0% mom and +1.3% yoy respectively (unrevised) and the core confirmed at +1.1% yoy (also unrevised and up from +0.9% in May). In the US the NY Fed’s empire manufacturing survey for July dipped 10pts to 9.8 (vs. 15.0 expected), albeit still above the level seen in both April and May.

Looking at the day ahead now, this morning in Europe the early focus is likely to be on the ECB bank lending survey for Q2 which we are expecting to receive at around 9am BST. Shortly following that we’ll receive the June CPI/RPI/PPI data docket out of the UK where market expectations for headline and core CPI are expected to hold steady at 2.6% yoy and 2.9% yoy, respectively. Following that we’ll receive the July ZEW survey in Germany. Over in the US this afternoon we’ll get the June import price index print along with the NAHB housing market index reading for July. Earnings should be a decent focus for the market today too with Goldman Sachs and Bank of America the latest banks to report (both prior to the open), while Johnson & Johnson (pre-open) and IBM (post-close) are also scheduled.